Chancellor of the Exchequer Rishi Sunak revealed the detail of his 2022 Spring Statement in Parliament earlier this week against a backdrop of rising inflation and high levels of post-Covid government debt. This gave him little room for manoeuvre to make the major tax cuts many were calling for to help the current financial pressures felt by many.
Inflationary pressures in the UK economy
All forecasts point to further pressure on the UK inflation rate, with rising energy, input and food prices. For example, over the last six months, fertiliser prices have increased three-fold, and it is very likely there will be further increases over the next six-month period. There is also no indication that gas prices have begun to stabilise or will do in the short term, perpetuating the problems being experienced.
There are now several differing forecasts for inflation over the coming months. According to the Confederation of British Industry (CBI), inflation is expected to rise above 8% by May (with inflation already at 6.2% in February 2022). However, the Office for Budget Responsibility (OBR) forecasts that inflation is likely to peak at 8.7% in the last quarter of the year and will average out at 7.4%. This may appear a little optimistic, particularly given the indications that there is likely to be no let-up over the next six months in higher energy prices. Noting the integrated relationships in supply chains, an increase in market prices in one sector as a result of reductions in available supply, for example, will inevitably impact other sectors and create a series of reactions. With the volatility of markets at present, which looks set to continue for the foreseeable future, it is likely that inflation will be higher than the OBR’s forecast.
Higher inflation leads to a squeeze on household spending and spending on other goods and services. For businesses, it will lead to added pressure for higher wages together with higher energy costs and other inputs. This will further reduce business margins unless businesses can optimise efficiencies.
In addition, this type of inflationary pressure will accelerate the need for higher interest rates to counteract inflation. According to the CBI, there will need to be between three to four 0.25% interest rate increases (+0.75% - 1.0%) over the next 24 months. The overall effect will reduce the ability of businesses to invest in the future.
However, the recent decision by the Bank of England on 17 March to raise interest rates by 0.25% to 0.75% suggests that rates may rise at a higher rate to counter the increase in inflation.
The Chancellor stated that his “overarching ambition was to reduce taxes by the end of this Parliament”. To demonstrate that, he announced that the basic rate of income tax would be cut by 1% to 19% in April 2024. But while he may have hoped this would provide favourable headlines, the small print says this is “provided that the fiscal principles […] are met in future”.
VAT for energy-saving materials
One cut that will be welcome news for members is the reduction in the VAT rate for energy-saving materials to zero until 31 March 2027. Previously, the installation of qualifying energy-saving materials (such as solar PV, solar panels, heat pumps, or insulation) in residential properties was subject to the reduced rate of VAT (5%). The reduced rate was subject to social policy or threshold conditions being met, which meant that many members did not qualify for this and had to pay the standard rate of VAT (20%). In addition, wind and water turbines are being added back to the list.
The CLA has called for the list of qualifying technologies to be extended and the conditions to be removed in our response to the consultation on Phasing out the installation of fossil fuel heating in homes. Read our response here. Members looking to decarbonise their homes or bring their let residential properties up to the required Energy Performance Certificate standards will now find they can get a saving of 20%.
For business premises, the Chancellor previously announced in the November 2021 budget that eligible green technology, such as solar panels, heat pumps, wind turbines, battery storage used with renewables and electric vehicle charging points would be exempt from business rates. This was due to commence in April 2023 but has been brought forward to April 2022.
National Insurance contributions
Changes to the thresholds for national insurance contributions (NICs) were widely predicted, to address the impact of the health and social care levy on the lower paid that commences on 6 April 2022. The increased thresholds of £12,570 applies to both Class 1 employee contributions and to Class 4 contributions that members pay on their business profits. This will come into effect from 5 July 2022. The two-month delay from the beginning of the tax year is to enable payroll software developers and employers to update their systems and implement the changes. From 5 April, self-employed members whose business profits (or share of profits) are higher than the small profits threshold (currently £6,515) but less than the lower profits limit (£12,570), will no longer have to pay any Class 2 NICs but can continue to build up National Insurance credits.
The Chancellor referred to his tax plan, which stated that the government’s goal is now to reform and reduce taxes. The announcements in the Spring Statement are the first part of this plan. The second part of the plan is intended to create “a new culture of enterprise” and boost growth and productivity. This has three main areas of focus with a view to cutting taxes and making long-term reforms:
- Capital – how the government can encourage firms to invest in productivity-enhancing assets that will help them grow. This means reviewing the current system of capital allowances.
- People – the government intends to explore whether the current tax system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in the right kinds of training.
- Ideas - continue to reform and improve the R&D tax reliefs at the next budget.
The government has reiterated its intention to make the tax system simpler, fairer and more efficient. It intends to use reforms made under the plan to simplify the tax system, which will also support the government’s intention to bring forward broad-based tax cuts in a fiscally responsible way.
Over the next few months, we can expect consultations and discussions with government on some of these issues, and the CLA will continue to make the case that unincorporated business and the rural economy must not be overlooked as they have a vital role to play to boost the economy as we outlined in our Levelling Up publication ‘Levelling up: Unleashing the potential of the rural economy’.