How government u-turns will impact accountants

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Accountants react to the new Chancellor’s emergency statement reversing much of the recent ‘mini-budget’.

Following uncertainty and market turmoil in the wake of former chancellor Kwasi Kwarteng’s unsuccessful “mini-budget”, new chancellor Jeremy Hunt gave a television address summarising the main components of a brand-new budget, which is expected to be set out in full at the end of October.

The new budget, which was announced two weeks early in an attempt to bring stability back to the markets and the UK economy, reverses the majority of tax measures put forward by Mr Kwarteng including corporation tax, income tax, NI and IR35.  

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Under the initial plans set out by Mr Kwarteng, the increase in corporation tax from 19 to 25% was due to be scrapped from April 2023 along with abolishing the highest rate of income tax for those earning £150,000 and above. IR35 was also set to be reversed.

Following intense pressure, Mr Kwarteng reversed his own policy to abolish highest rate of income tax.

Highlights from Mr Hunt’s budget preview include:

  • Corporation tax — the previously planned increase to 25% from April 2023 is no longer scrapped but will be implemented.
  • Income tax  — the basic rate of income tax will remain at 20% indefinitely.
  • National insurance  — a planned increase from 6 November will no longer happen.
  • Stamp duty  — cuts to stamp duty will continue as planned.
  • Energy prices  —  The energy price guarantee promise for consumers was initially intended to last for two years but will now last until April 2023 and will be replaced with ‘targeted help’ for the most vulnerable.

So will these changes help or hinder accountants and their clients? And what impact has all this volatility had on year-end accounts? To find out, we asked accountants across the UK.

Constantly-changing policies make it extremely challenging to give comprehensive advice

Joanne Thorne, Technical Compliance Manager, SJD Accountancy

Limited company contractors are set to be hit hardest, with a triple whammy from higher dividend rates, the IR35 reform staying in place and the U-turn on Corporation Tax.

Corporation Tax cut was one of Lizz Truss’s flagship tax cut promises during the leadership campaign, so the decision not to scrap the increase is a huge U-turn.

We therefore revert to Sunak’s proposed corporation tax increase whereby a limited company that ends their financial year with profits over £50k will be faced with an increase in corporation tax from 19% to 25%. This assumes that the tapering tax charge will revert back to the previous tax rules, and won’t just be a blanket increase for all company profits earned.

There is still a huge amount of uncertainty, making it difficult for accountants to provide long-term tax advice and planning as policies are changing by the minute.

For example, clients who considered closing their limited companies due to IR35 may have been swayed by the potential of a repeal mentioned in Kwasi Kwarteng’s Mini Budget. However, now that it has been confirmed that the 2017 and 2021 IR35 reforms will remain in place, it will be challenging for accountants to give comprehensive advice with constantly-changing guidance.

Verdict: An accountant’s ability to provide advice is usually based on long-term legislation, but in this unpredictable time, accounting teams across the UK are being forced to react quickly to new information to ensure they provide the best possible guidance to businesses and individuals.

It’s difficult to make long-term investments based on the latest announcements

Laurence Field, Corporate Tax Partner, Crowe UK

Four chancellors have been in office since the beginning of July – Sunak, Zahawi, Kwarteng and now Jeremy Hunt. This suggests there is a fundamental lack of agreement on how to deal with the current economic situation.   We are basically back to where we started with tax policy with the reinstatement of the increase in corporation tax.

Businesses will need to look closely at any statements from the new team over the next few weeks, review their impact, but also consider whether any proposed changes will actually make it to the statute book. There will be a temptation for businesses to take a ‘steady as she goes’ approach given recent events and serious doubts about how long the current team will be in power. The reversal of the corporation tax cut increases the complexity of the tax system and many relatively modest-sized businesses will find themselves paying the 25% rate of tax.

Verdict: Whether it is prudent to make long-term investment plans on the basis of these latest announcements will depend on how companies view politics as much as the business environment.

Corporation tax increase is a double-edged sword for manufacturers

Jonathan Dudley, Head of Manufacturing, Crowe UK

After a period of extreme political turmoil, it’s vital for the good of business and the country that we get stability and certainty. Hopefully, the announcements made by Jeremy Hunt will achieve this.

It has corresponded with the news that manufacturing output is shrinking and it’s no surprise given the uncertainty around how manufacturers will pay their power bills when the promised energy business support package ends in the spring; as well as spiralling costs caused by interest rates, wage rise demands and steel ‘safeguarding’ quotas.

At least the removal of the additional NIC seems to be sustained. Effectively a tax on employment, it is hugely inflationary and otherwise would have certainly ‘influenced’ key business decisions.

The confirmation of the corporation tax increase is a double-edged sword for manufacturers; it means that future investment, innovation and R&D will obtain a higher reward in terms of tax incentives.

That all said, I’d really like to see more enhanced reliefs for investment in ‘green’ technologies and processes. This is strategically essential if investment is to be made in the UK, but likely to be expensive.

Verdict: Corporation tax increase is a double-edged sword but future investment will create higher reward for tax incentives.

Given the uncertainty, its crucial businesses are cautious with investment plans

Richard Godmon, Tax Partner, Menzies LLP

The political and economic uncertainty of recent weeks has done nothing to aid businesses and accountants, and the confusion has hindered their ability to plan. When the tax changes were first announced, many will have started to make plans that would benefit their business. Now, with most of these measures unwritten, businesses and accountants will likely be reverting to their original plans.

The rise in corporation tax is a massive set back to businesses who may have been hoping to increase growth-driving activities such as increasing staff and pay or investing in machinery or equipment, but this may now be put back on hold.

However, in times of turbulence, maintaining a positive cashflow remains the most important factor for any business. Considering the level of uncertainty business owners have faced, ensuring that any potential investment plans fit safely within the business’ afforded budget is crucial as they prepare for the rise in corporation tax. Having a strong understanding of where the business is now, and where it is likely to be in six to twelve months’ time remains crucial as this will give owners the clearest outlook on their finances.

Verdict: Ongoing economic confusion has hindered ability to plan but maintaining positive cash flow remains essential.

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Corporation tax increase will exacerbate the strain on businesses

Lee Murphy, The Accountancy Partnership

Never have businesses been forced to keep up with such rapidly changing government leadership and fiscal policy. While some of the changes announced never actually came into practice, businesses will have still altered their strategies based on the terms set out by each chancellor.

Deciding to U-turn on the September mini-budget and increase corporation tax to 25% is going to exacerbate the strain placed on businesses. This is going to be very unpopular amongst businesses of all sizes and will likely encourage many businesses to consider moving offshore. Businesses facing financial strain are unlikely to be able to afford to continue to operate fully in the UK, adding to the number of companies filing for insolvency – now at the highest rate since 2009.

This change is going to squeeze profit margins even further, but there are steps businesses can take to make savings. It is now more important than ever that businesses are on top of tax deadlines. Missing deadlines can be very costly for businesses and can lead to paying more tax than is necessary. Companies should also be re-evaluating their overheads and budgets to reveal where any savings could be made. This might involve anything from changing office space to reconsidering suppliers.

Verdict:  Corporation tax increase will exacerbate existing strain on businesses and squeeze profit margins further.

AAT members must be brave and evidence-based in their advice

Christina Earls (FMAAT), AAT President

AAT members want to give strong advice to help businesses stay afloat in these difficult times and be sustainable into the future. This is very challenging when there is so much instability.

The disruption is going to last longer than this reversal by the new Chancellor because people making investments will wait and see what the lasting impact is on confidence.

There will be a degree of people holding their breath until the statement in a fortnight’s time.

I have a lot of sympathy for our colleagues working in the public sector and local government who may face new financial pressure – both on pay and service levels.

There is no more fat to cut. Balancing the books is going to involve hard decisions. AAT members working in this environment have an unenviable task. But they also have a vital role to play. They must provide full evidence-based professional advice to the decision-makers. It is then up to them to choose between a rock and a hard place.

It may mean reappraising priorities, such as long-term investments in wind farms and solar energy. AAT members need to be brave enough to point out when the evidence shows decisions need to be revisited or new options considered.

Annie Makoff is a freelance journalist and editor.

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