New UK government announces tax-cut agenda

In brief

At a ‘fiscal event’ on September 23, UK Chancellor of the Exchequer, Kwasi Kwarteng revealed the new government’s agenda to achieve economic growth via reduction of taxes and simplification of the UK tax system. The Growth Plan 2022 includes cancellation of the planned increase in the corporation tax rate to 25%, scheduled to be effective April 1, 2023. The headline tax rate will remain at 19%.

Action Item: Taxpayers should monitor further developments and possible modifications to the September 23 Growth Plan. The tax changes in the new government agenda are expected to be included in a Finance Bill later this calendar year, which will need to go through the relevant parliamentary approval process. Based on a typical parliamentary timeline, this could result in enactment in the first quarter of 2023. The Chancellor is expected to announce the ‘Medium Term Fiscal Plan’ in November.

In detail

After winning the Conservative leadership race in early September, Liz Truss became the UK’s new Prime Minister. The UK’s fiscal event sets out the new government’s agenda for reduced regulation, tax cuts, and short-term support with energy prices. Key provisions of the so-called ‘mini budget’ are outlined below.

Corporation tax rate

The corporation tax rate would remain at 19% for all profits, scrapping the previously planned rise to 25%. In line with the freeze in the main rate, the Diverted Profits Tax rate would remain at 25%.

Income tax and withholding tax rates

The basic rate of income tax effective April 2023 would reduce to 19%. This would reduce the rate of withholding tax applicable to interest and royalties. The rate of Overseas Receipts in respect of Intangible Property (ORIP) also would fall to 19%, it is determined by the basic rate of income tax.

Alongside the changes it is impacting companies, certain taxes that impact individuals are to be reduced. In addition to the 1% reduction in the basic rate of income tax, the highest rate of income tax is being abolished as part of the overall strategy to incentivize growth in the United Kingdom and attract high earners.

Investment zones

The UK Government is introducing new designated investment zones. For more than 40 tax incentivized zones, there would be reduced planning regulation, no stamp duty land tax, no social security on the first £50k of new employees income, enhanced 100% capital allowances (tax depreciation) on plant and machinery, enhanced 20% capital allowances on buildings, and no business rates.

Capital allowances (tax depreciation)

Some of the technical provisions for the 130% ‘super-deduction’ for capital allowances would be amended given the planned corporation tax rate increase would not happen.

The 100% deduction for qualifying capital expenditure would be permanently set to £1m and not reduced to £200,000.

Repealing off-payroll working reforms

Repealing the IR35 reform from 2021 means companies no longer would be responsible for assessing whether contractors hired through personal service companies are employees or self-employed. From April 2023, workers across the United Kingdom providing their services via an intermediary, such as a personal service company, once again would be responsible for determining their employment status and paying the appropriate amount of tax and National Insurance Contributions (NICs).

The cancellation of the UK corporation tax rate increase is expected to be included in a Finance Bill later this calendar year and will need to go through the relevant parliamentary approval process. Based on a typical parliamentary timeline, this would result in enactment in Q1 of 2023.

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