Increase to UK corporation tax rate cancelled to ‘support economic growth’

The reversal of the policy is one of the “widespread tax changes affecting business” set out in today’s government ‘growth plan' (42 pages / 1.35MB PDF).  The changes are being made in an effort to “support investment, innovation and economic growth.”

“Labelling this as a ‘mini-budget’ couldn’t be further from the truth,” said Eloise Walker, corporate tax expert at Pinsent Masons. “The cancellation in the increase to corporation tax had already been leaked but there were a number of surprise tax announcements that businesses need to be aware of.”

“The permanent increase in the annual investment allowance to £1 million is likely to be welcomed by business, as will the cancellation to the increased rate of corporation tax (and other related taxes). However, it will be interesting to see if the forecast £19 billion in tax savings announced today translates into £19bn of increased UK investment spend,” she said.

An annual investment allowance (AIA) is available to each company allowing full tax relief for expenditure on qualifying plant and machinery. The AIA had been set to reduce from £1m to £200,000 on 31 March 2023. The government has said that increasing the AIA will “support business investment, provide businesses with more stability, and make tax simpler.”

Changes to the IR35 employment tax rules introduced in April 2021 will also be repealed from April 2023, to shift responsibility for compliance back to individuals rather than their employers, the chancellor announced.

“At first sight, this might sound like great news for businesses – that is if you haven’t already spent time and money complying with the rules and now have to unwind these changes,” Walker said. “Businesses also need to be aware that the government has said that it will keep compliance under review, so we may well see further changes. There is also uncertainty for businesses that are currently deal with compliance enquiries by HMRC.”

To increase private sector investment, changes are also being introduced to the Seed Enterprise Investment Scheme (SEIS). The maximum amount of investment will increase to £250,000 from £100,000. The gross assets test threshold will also be increased to £350,000 and the maximum age limit raised to three years, allowing more business to qualify. These changes are forecast to help over 2,000 companies a year that use the scheme to grow. 

Tax expert Peter Morley said: “The chancellor was clear today that tax incentives will be at the forefront of the Growth Plan and it is positive news for those seeking investment that the SEIS, EIS and VCT regimes will continue at a time when the cost of borrowing is increasing leading businesses to look at a range of funding options.”

“Businesses will also welcome the changes being made to share incentives - to the Company Share Option Plan (CSOP). For many years the value of shares under a CSOP has been restricted to £30,000 at the date of grant which over time has limited its use.  Doubling the limit to £60,000, alongside a relaxation of certain restrictions on share classes, will make CSOPs more accessible,” he said.

In a further surprise announcement, the chancellor announced that the Office of Tax Simplification (OTS) will close and its role replaced by a “mandate to the Treasury and HMRC to simplify the tax code”.

The OTS, which was established in 2010 and made a permanent independent office of HM Treasury in 2015, is a statutory body, and so its closure requires primary legislation. The OTS confirmed that the closure would take effect at Royal Assent of the next Finance Bill.

“As recently as July this year, the (previous) Financial Secretary to the Treasury acknowledged the contribution of the OTS in identifying areas of complexity and contributing the government’s aim of simplification, stating that it was looking forward to continuing to work with the OTS,” said Walker. “The government has never been obliged to adopt the outcomes and suggestions made by the OTS but has done so numerous times over the years, most recently in relation to reforms of capital gains tax administration.”

“While it did not have power to change the law, the OTS has been widely viewed as a useful check and balance on the Treasury, identifying areas of complexity but also making specific recommendations for reform without the constraints of the political trade-offs that must inevitably be made. It is difficult to see how a mandate for already stretched HMRC and HM Treasury staff to focus on simplification is going to have the same effect,” she said.

Ahead of the closure the OTS will continue to gather evidence on its review of hybrid and distance working, which is currently open, and it expects to publish its report on the taxation of property income in October, it said.