Autumn Statement – Report Back

Looking at the CHANCELLOR’S AUTUMN STATEMENT with Adrian Young, Tax Partner of Hurst

8 December 2023

We always like to know where our guest speakers are coming from; Adrian Young was too modest to tell everyone that by rights he should be addressed as “Doctor,” but he has a PhD from the University of Bradford and a Masters from Leeds, all in modern languages. 17 years at PwC gave him his thorough tax grounding followed by three years with the EG Group (forecourts owned by the Issa brothers who are about to open a new one on the Chapel bypass) led to a partnership at Hurst Accountants Ltd in Manchester in January 2020, just before Covid and lockdown.

He offered us first a look at the economic headlines based on the Office of Budget Responsibility (OBR) assessment of November 2023, then took us through key tax measures announced by the Chancellor on November 22nd and previously.  It’s a wider picture of “slower growth from a higher starting point” said Adrian compared with earlier forecasts; the direst estimates showing that the UK economy had not yet recovered to pre-Covid levels had turned out too pessimistic, with substantial revisions from earlier reports. In fact by November the economy was already 1.8% larger than in 2019, with predictions for GDP growth at 0.6% in 2023, 0.7% in 2024 but with better prospects of 1.4% in 2025, 1.9% in 2026 and 2.0% in 2027. You could argue that’s not bad for a mature economy still emerging from both lockdown and Brexit. You could also argue that we should be aiming at much higher growth, giving us more leeway for the pressing demands ahead. But our task here is to see what’s on offer right now, and to adjust our business plans accordingly.

Inflation has been the other grim story of recent times with double digit price increases of 11.1% in 2022; the OBR expects it to fall to 2.8% by the end of 2024. That means many prices will stay high (and we have shrinkflation too, as the contents of packets at the same price are reduced). It’s not expected to drop to the Bank of England’s 2% target till mid-2025, and that means that interest rates are expected to stick at about 4% for some time. I’d guess that the days of sub-1% interest rates are well and truly over, given the disincentive to saving that they represent; many businesses which borrowed freely at the lowest rates have been brutally reminded that nothing is forever. But, said Adrian, “In the northwest, banks still want to lend and businesses still want to expand; there is a lot of money out there looking to invest.”

That applies to government too. The OBR told us that the Budget deficit – the gap between public spending and income – is 4.5% of GDP in the tax year 2023-24 and it all costs a lot more than it did a few years ago. “Borrowing in the next five years is not expected to change much,” as the headline debt is at 94% of GDP – better than many countries (Japan 255%, Italy 142%, France 111%) and worse than others (Germany 66%, Sweden 30%). But stability is the last thing we can expect with conflict still raging in Ukraine and now in the Middle East.

So, on to the key Tax Measures announced by Jeremy Hunt in November. Hunt is on record as saying that when he was in commerce before he entered Parliament, the taxes he most hated were those he had to pay even when a business was loss-making – business rates and taxes on employment. So perhaps we should not have been taken by surprise that the rate of employee NICs was cut from 12% to 10% with almost immediate effect (6 Jan 2024) impacting 28 million people, saving them an average of £450 pa. Plus another 2 million self-employed also benefited from the abolition of Class 2 NICs, and Class 4 NICS cut by 1%, together worth £350 pa. Hunt has previously resisted calls to reduce self-employment taxes, as they were treated generously during Covid despite paying less into the coffers, but that seems a long time ago now.

The overall effect, said Adrian, is to shift the burden from the employee to the employer, as employers’ NICS went up last year to help pay for social care. Of course this also adds to the cost of public employment – the NHS, railways, councils….

Then the Chancellor announced increases in benefits by 6.7% including the triple-locked pensions; the issue of people who have never returned to work after Covid is tackled by obliging benefits claimants to do mandatory work experience if they have no job within 18 months.

Yet he made it more expensive to employ anybody by increasing National Living Wage from April 2024 to £11.44, and extending it to 21-year-olds. Good news for the lowest paid, but tough again on employers especially in hospitality and the care sector. It also ensures that inflation will persist, though it might spur some employers to try and increase productivity through better training and AI.

On business tax we have “some genuine good news.” In what was billed by his office as the “Largest Tax Cut in modern history,” the Chancellor made capital expensing permanent: that means, full tax relief in the year when the money is spent. And £4.3bn of business rates discounts were announced for hospitality retail and leisure. R & D Tax Credit schemes are to be merged from April, with other changes designed to encourage take-up. The idea is to encourage real spending on real business assets. If you’re into these, you need a really good accountant.

Following a “refocus” of the idea of Investment Zones in Spring 2023 with enhanced tax-reduction powers, new ones were announced including one in Greater Manchester and one in Wrexham, which are “intended to grow the economy by focusing on places with significant unmet productivity potential and building on their existing strengths.” The idea is to create mini-Canary Wharf areas, but their success will depend on the level of enthusiasm and investment each can attract over the years to come  (I’ve checked since and the announcement was for £160 millions of government money over 10 years for the ID Manchester development – which was supposed to link up with HS2. Ah well).

And then as always we come to compliance, with, Adrian said, “a strong element of simplification” running throughout the Chancellor’s statement, making life easier for both business and HMRC. The emphasis is to be on fraud (instead of chasing small businesses) with tougher penalties for the promoters of tax avoidance including a new criminal offence and disqualification against directors of promoters. But all this was before Mr Bates vs The Post Office, and I wonder how heavy-handed HMRC is likely to be in future. Kid gloves, perhaps?

What Hunt did not do was index the allowances against income tax, so that a great deal more tax is being taken overall through what’s dubbed “Fiscal Drag.” Since 2021 the number of taxpayers finding themselves in the higher rate tax band has increased by around 40%, with estimates suggesting that alone is bringing in additional tax revenues of up to £40bn per year. So what’s been cut with NICS has increased with income tax, all with the Chancellor doing very little.  “The Largest Tax Rise in living memory..?” Perhaps.

In his summary, Adrian quoted the Telegraph which might have been expected to praise the Chancellor, but which instead disliked “compulsive tinkering and inveterate dithering” resulting in “a patchwork of rules and varying thresholds that can be wildly unfair.” So .. nothing much changes.

And finally, given that 2024 is an election year, Adrian speculated discreetly about what the future might hold. Looking at the statements of the two sides may give some clue (but don’t hold your breath). Come the next Budget(s) the Conservatives might reduce the basic rate of income tax, or of corporation tax, or reduce fiscal drag, or raise the VAT threshold, or abolish Inheritance Tax, or..

Labour have stated they would be friendly to business, that there will be no wealth tax, no increase in tax for “working people,” that they will scrap the non-dom scheme, increase stamp duty and land tax for foreign buyers and force private schools to pay VAT and business rates. None of that will bring in very much. Rachel Reeves has said they’d oppose any reduction in Inheritance Tax, while refusing to guarantee that a future Labour government would restore the tax if abolished. In principle, of course, an Opposition will say very little, as any good wheeze will be promptly taken by the Government, while over-enthusiastic spending plans can lose them the election, as previous Leaders have discovered.

An excellent clear presentation from a speaker who is new to Business Club but did a fine job in a field of great complexity. I was left reflecting that after the turbulence of recent years, a period of calm with very few tax and economic changes might be greatly welcome, with businesses left alone to attend to their customers, re-establish supply links, look after their workforce and compete with their rivals. A chance to do just that would be a very fine thing.