Flexible monthly business insurance
On Thursday 17 November, Chancellor Jeremy Hunt gave a speech to the House of Commons unveiling the 2022 Autumn Statement.
Delivered against the backdrop of a nationwide cost-of-living crisis, soaring interest rates and record-breaking inflation, Hunt’s speech recognised that the UK is now in a recession. He attributed the UK’s economic position to “unprecedented global headwinds” such as the Covid-19 Pandemic and the war in Ukraine, while critics have blamed the Conservatives' September mini-budget for deepening the estimated £55 billion “black hole” in the country’s finances through unfunded tax cuts and increased borrowing.
The chancellor’s speech laid out a plan to prioritise “stability, growth, and public services”, stating that the government’s proposed policies are intended to achieve “a shallower downturn; lower energy bills; higher long-term growth; and a stronger NHS and education system.” But he also said that achieving these goals would require “difficult decisions”.
The result was a raft of measures including reassessed tax rates, adjusted allowances and frozen thresholds. But how do these plans affect small businesses and the self-employed? Read on to find out:
- Business rates relief expanded
- Capital gains tax allowance reduced
- National Insurance freeze extended
- VAT registration thresholds stay the same
- IR35 rules to stay in place
- Company dividends tax-free allowance reduced
- A new approach to Investment Zones
- Reforms to research and development tax credits
- Summary and impact
Business rates relief expanded
A particularly welcome element of the Autumn Statement for a large number of Britain’s SMEs is the news that the system of business rates relief – which was vastly expanded during the Covid-19 pandemic – will not be scrapped as previously suspected. The relief scheme will continue beyond April 2023 and will also be increased.
Coming at an estimated cost to the Treasury of almost £14 billion over the next five years, business rates relief will increase from 50% up to 75% for the retail, hospitality and leisure sectors, for the 2023/24 fiscal year, up to £110,000 per business. The business rates multiplier that is set by the central government in Westminster will also be frozen for another fiscal year (up to April 2024).
In addition, the chancellor announced that downward transitional relief caps would be abolished. In simple terms, this means that there will be no limit on how much a firm’s business rates could go down in the event that the rateable value of their premises decreases. This will come as good news to many of the businesses that operate out of the roughly 2.1 million properties in the UK that are liable for business rates.
The property consultancy firm, Allsop, estimates that when commercial properties rateable values are reevaluated in April 2023, the retail industry is expected to see “significant reductions”. The abolition of the downward relief cap means that retailers will see the full benefit of the drop straight away.
On the flip side, Allsop anticipates that businesses in the logistics and industrial sectors will likely see the biggest rate increases in 2023 and neither of these sectors are eligible for the 75% rates relief outlined in the Autumn Statement.
Capital gains tax allowance reduced
Part of the chancellor’s plan to plug the estimated £55 billion “black hole” in the UK’s public finances involves roughly £25 billion in tax increases, including a raft of so-called "stealth" tax rises to be implemented by cutting or abolishing certain tax-free allowances.
Individuals and business owners currently enjoy a tax-free allowance of £12,300 on their liability for capital gains tax (CGT) – the levy charged on profits made when you sell or dispose of an asset. This currently means that small business owners that sell assets (or even their entire business) for financial gain would not pay capital gains tax on their first £12,300 of profit.
However, the Autumn Statement outlines a two-phase reduction in the tax-free allowance down from £12,300 to £6,000 in April 2023, then down again to £3,000 in April 2024. This means that from April 2024, individuals and businesses selling assets will pay up to an additional:
- £930 for those on the basic rate (10%)
- £1,860 for those on the higher rate (20%)
The higher rate of capital gains tax is paid by those with an overall annual income above £50,270.
Many more individuals and business owners that make capital gains of between £3,000 and £12,300 will be dragged into paying capital gains tax that were previously exempt. Indeed the Office of Tax Simplification estimates that an extra 235,000 individuals will be forced to report taxable gains because of the changes. The changes are, however, projected to raise £1.6 billion for the exchequer over the next five years.
Craig Beaumont, Chief of External Affairs at representative body the Federation of Small Businesses (FSB), commented that due to the extra burden of capital gains tax:
We will see more and more business owners looking for the exit [before the changes take effect], which is exactly the worst thing to do when we need employers driving growth. The government cannot talk about wanting to make the UK a home for enterprise and then make enterprise much more expensive.
National Insurance freeze extended
In another move dubbed a “stealth” tax rise, the Autumn Statement confirmed that the thresholds for paying National Insurance will remain frozen until April 2028.
This freeze is set to raise £1.26 billion for the Treasury over the next five years and will ultimately lead to higher National Insurance bills for both employers and employees. This is due to an economic phenomenon known as “fiscal drag”, whereby inflation and income growth move taxpayers into higher tax brackets.
The move has been heavily criticised, with the FSB's Policy and Advocacy Chair Tina McKenzie saying:
Freezing the employer National Insurance threshold will push up employment costs even further. This is a stealthy Jobs Tax and also the single biggest revenue raiser in the Budget – this is small employers picking up the tab for the extra spending announced by the Chancellor.
However, the blow appears to have been cushioned by maintaining the current rate of Employment Allowance, which allows eligible employers to reduce their annual National Insurance liability – with McKenzie calling the move “the only saving grace”.
VAT registration thresholds stay the same
The threshold at which businesses are required to register for VAT is being frozen at £85,000 and will not change until April 2026.
The effect of this policy on small businesses is that as turnover increases as prices rise with inflation, more businesses will be dragged into a position where they have to be registered for VAT, even if their turnover doesn’t increase in real terms. This is another example of the phenomenon of ‘fiscal drag’, similar in nature to the freezing of National Insurance contribution thresholds.
This policy gives a level of certainty to business owners and entrepreneurs currently on the borderline of registration or deregistration as the thresholds will remain the same for more than three years.
Despite being a so-called ‘stealth tax’ that will increase the number of businesses having to register for VAT, the government was quick to point out in their Autumn Statement publication that the existing threshold of £85,000 is “more than twice as high as the EU and OECD averages”.
If your small business has a turnover approaching £85,000, then you will need to prepare to register for VAT if you haven’t already and you can read more about the process in our article on registering for VAT.
IR35 rules to stay in place
Dictating the rules on off-payroll working, IR35 was originally introduced back in 2000 as an anti-tax avoidance measure. It was amended in both 2017 and 2021, but the amendments were said to be poorly rolled out and overly complicated.
While much of the September mini-budget came under fire, one of the more welcome aspects was Chancellor Kwarteng’s plan to repeal these 2017 and 2021 changes to IR35. Although it made little difference to small businesses that were never affected by the amendments, the reversal was seen as good news for contractors, freelancers and many larger businesses that struggled with the complexity of IR35.
Just a month after Kwarteng’s repeal, Hunt scrapped the plan and announced that the 2017 and 2021 changes to IR35 would stay in place after all. And he didn’t budge in Thursday’s Autumn Statement.
Many contractors and businesses affected by IR35 were left disappointed by this silence – with one commentator saying “if the chancellor thinks he’s put the issue of IR35 to bed, he’s mistaken” and predicting that “calls for a review are likely to grow louder.”
Company dividend tax-free allowance reduced
The rate of tax payable on company dividends had already risen by 1.25 percentage points in April 2022, but another significant change to dividend payment was announced by Chancellor Jeremy Hunt in the 2022 Autumn Statement. The tax-free allowance for dividends currently stands at £2,000 per year, though this is set to be cut to £1,000 in April 2023 and then again to just £500 in April 2024.
The move to squeeze those who receive company dividends further will be a particular blow to self-employed freelancers working through their own limited companies. This group disproportionately receives income in the form of dividends from their own business rather than through a salary. Andy Chamberlain, Director of Policy at the IPSE (Association of Independent Professionals and the Self-Employed), commented:
After the financial damage of the pandemic, exclusion from support, the changes to IR35 taxation, the recent tax hike on dividends and the impending corporation tax hike, this latest attack is further salt in the wound for anyone working through their own company. Time and again it seems our very smallest businesses are the first targets.
This reduction in the tax-free allowance will mean that from April 2023, according to calculations by the FSB, a business owner earning £40,000 a year via dividends takes home more than £500 less than an employee on £40,000 on PAYE tax and National Insurance.
A new approach to Investment Zones
In his September mini-budget, then-Chancellor Kwasi Kwarteng announced a plan for 200 low-tax, low-regulation Investment Zones intended to drive growth in the chosen areas.
Kwarteng’s plan for Investment Zones was one of the only aspects of his mini-budget to survive after he was replaced by Hunt – yet in Thursday’s Autumn Statement, the current chancellor unveiled a change in direction. Confirming that existing expressions of interest will not be taken forward, Hunt said the new approach “will now focus on leveraging our research strengths, to help build clusters for our new growth industries”.
This move is likely to be a blow for local authorities that invested time and resources into bids to host zones, as well as for local businesses that hoped to benefit from reduced tax burdens and relaxed planning regulations.
On the other hand, Hetan Shah, Chief Executive of the British Academy, was more optimistic about the change in direction, saying “there is enormous potential to be found in collaborations between businesses and universities”.
Reforms to research and development tax credits
Hunt shut down speculation that the government would be cutting the UK’s research and development (R&D) budget, confirming a £20 billion increase in public funding for R&D by 2024/5. But while the UK’s overall R&D budget is set to grow, support for small businesses is about to become a lot less generous.
Citing “concerning reports of abuse and fraud”, the chancellor announced a series of upcoming changes to the R&D tax relief scheme for SMEs, which incentivises innovation and development activities by reducing a company’s Corporation Tax bill. From April 2023:
- The deduction rate will drop from 130% to 86%
- The credit rate will drop from 14.5% to 10%
- The separate R&D expenditure credit will rise from 13% to 20%.
Currently, the scheme is said to be worth up to 33p for every pound spent on qualifying expenses. But the government’s proposed changes represent a significant decrease in support, with one commentator arguing that small and medium-sized businesses will receive 30% less tax benefit.
Despite Hunt insisting that “the OBR have confirmed that these measures have no detrimental impact on the level of R&D investment in the economy”, the plans have proved to be highly unpopular among tax experts and industry bodies.
Penny Simmons, Legal Director at Pinsent Masons, described the move as “hugely disappointing” explaining that R&D tax reliefs are “a vital source of financing to start-ups” since they provide a cash repayment. She said:
Without access to the cash repayment, many start-ups may struggle to secure adequate funding to progress R&D and ultimately new UK based innovations. Reduced tax reliefs may prove to be an insurmountable stumbling block.
Her concerns were echoed by Martin McTague, National Chair of the FSB, who warned “gutting the R&D tax credit scheme will crush innovation and growth, resulting in tens of thousands fewer R&D-intensive small businesses”.
Summary and impact
Generally speaking, the chancellor’s Autumn Statement has seen a mixture of positive and negative reactions from the business community. The retail, hospitality and leisure sectors have warmly welcomed the expansion of business rates relief, while independent contractors have shown intense disapproval at the decision to reverse the scrapping of IR35 rules announced just weeks ago by the previous chancellor.
Industry bodies have generally responded with restrained criticism or muted approval. The head of the Confederation of British Industry (CBI), Tony Danker, spoke to the BBC in the wake of the statement, welcoming the stabilising effect of the new fiscal policies, but criticising the lack of a plan for growth, saying:
There was really nothing there that tells us the economy is going to avoid another decade of low productivity and low growth.
As for the markets, the pound fell by roughly 1% against the dollar in reaction to the statement, but this was only a small dip when compared to the extreme plummet in value that was seen after Kwasi Kwarteng’s mini-budget back in September. The FTSE 250, meanwhile, traded slightly lower in the immediate aftermath of the announcement but has since largely recovered.
With the UK now officially in a recession that is forecast by the Bank of England to be the longest lasting since the global financial crisis, the economic outlook is challenging for both businesses and individuals, but the Autumn Statement looks set to go some way towards stabilising the economy in the wake of the turmoil caused by the mini-budget.
The general consensus amongst business advocacy groups and industry bodies appears to be that 'stabilising the ship' is a first concern and that this budget goes some way to achieving that. However, many businesses are sceptical that this statement offers any real prospect of significant longer-term growth and innovation, with small businesses bearing the greatest burden of the tax rises.
This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
We've made buying insurance simple. Get started.
- 17 March 202314 minute read
What the 2023 Spring Budget means for small businesses
On Wednesday 15 March 2023, Chancellor Jeremy Hunt made his highly anticipated Spring Budget speech. We explore what the his proposals mean for businesses around the UK and how they've been met by the small business community.
- 16 January 20238 minute read
How can small businesses cope with increased energy prices?
Wholesale energy prices rose significantly between 2021 and 2022, affecting many UK SMEs, despite the introduction of government support. Here’s our guide to what small businesses can do to tackle higher energy costs.
- 25 October 20222 minute read
Survey - residential landlords and rising interest rates
With mortgage interest rates rising, Superscript carried out research to find out how they're reacting.