Mr Sunak used today’s speech to outline the government’s three-pronged response to the financial challenges posed by Covid: protect livelihoods and jobs; fix the public finances; and build the economy for the future.
There is little doubt about the scale of the task ahead. Levels of government borrowing and spending are almost without precedent, with total fiscal support of £400 billion being provided over the next two years. Debt is set to peak at nearly 100% of GDP, around 700,000 jobs have been lost, and the economy has shrunk by around 10% over the last 12 months.
The Chancellor was keen to point out that the situation is not as bad as originally predicted by the Office for Budget Responsibility (OBR), which had anticipated even higher unemployment and a slower recovery. Mr Sunak puts the predicted swifter recovery and lower unemployment levels down to the decisive intervention the government has taken during the pandemic, which he considers to be the most generous amongst the UK’s peer economies.
However, none of this disguises the fact that there is still a mountain to climb before the UK economy gets back to pre-Covid levels.
The stark pandemic statistics, and the fiscal countermeasures taken, have put huge pressure on the public purse, and Mr Sunak announced some specific actions to start bridging the gap. These can be broadly grouped into tax raising measures on one hand, and business support measures on the other.
Starting with tax raising measures, the increase in corporation tax in 2023 from 19% to 25% stands out. This initially eye-watering 6% headline jump has however been significantly softened for most businesses with a “Small Profits Rate” of 19% for companies with profits below £50,000. This means that a majority of businesses are in fact unlikely to be impacted by the rate increase. In addition, for business with profits between £50,000 and £250,000, the rate is tapered, such that only the larger and more profitable companies will be subject to the full 25% rate. The Chancellor’s view is that only 10% of businesses will pay the full 25% - a rate in itself which is not out of kilter with comparable EU territories, and which is still more competitive than the other G7 economies.
As a counterpoint to the headline rate increase, there are some sweeteners in Mr Sunak’s package of measures for business. These include a 130% “super-deduction” for expenditure on qualifying plant & machinery, and a new 3 year loss carry-back option to crystallise tax refunds for businesses struggling under Covid19. The reduced 5% VAT rate for the hospitality sector has been extended for another 6 months, and will not climb back up to the standard 20% rate until April 2022. This, coupled with the cancellation of planned alcohol duty rates, and the continuing business rate freeze, should raise a cheer in a currently benighted sector.
So while it was clear that corporation tax was too easy a target for Mr Sunak to ignore, the other revenue raiser for the treasury was perhaps more subtle. Largely freezing income tax personal allowances thresholds until 2026 allows the Chancellor to hold true to the government’s stated intention of not increasing personal tax rates. However, we should be in no doubt that freezing personal allowances will have a comparable effect of increasing income tax burdens for many. Indeed, given how much income tax contributes to overall tax revenues, this measure should raise significant amounts.
Turning to today’s support measures, perhaps foremost among them is the well-publicised 6-month extensions to the furlough and self-employed schemes. These should help employers and employees alike, and will also enable the government to manage unemployment levels, although it will remain to be seen what happens when these support schemes finally end.
In addition to the existing furlough arrangements, the new Restart Grants and Recovery Loan Schemes, should also help ease businesses back into the saddle once restrictions lift.
Finally, the continuation of the enhanced Universal Credit payments, and the increase in the National Minimum Wage to £8.91 per hour from April will be welcomed. As always though, employers will have to consider the cost impact of this latter measure carefully.
In summary then, the increase in the corporation tax rate may grab the headlines, but we should not lose sight of the other significant support measures for business that were unveiled today.
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