Tax cuts for businesses in Chancellor’s ‘fiscal event’

Kwasi Kwarteng

Chancellor of the Exchequer Kwasi Kwarteng promises a “a new approach for a new era” as he cuts taxes for business and stamp duty on house purchases.

New Chancellor Kwasi Kwarteng has announced tax cuts and policy cancellations to help businesses and stimulate demand the day after the Bank of England raised interest rates again to subdue demand and bring down inflation, now at almost 10%.

It is unusual to see the Bank of England monetary policy at odds with the government’s fiscal policy, and many economists are interested to see if what is already being called Kwasi-economics can deliver both growth and lower inflation.

It might, because the inflation rate is more about supply side price increases – led, as ever, by fuel prices – than excessive demand, although demand, buoyed by billions of pounds from the government in Covid support, has been strong.

The tax cuts are designed to benefit businesses – which pay for everything through profits and dividends, salaries/wages or tax.

Kwasi Kwarteng was keen to present his ‘fiscal event’ on 23 September (a Budget that avoided the name to dodge any criticism from the Office for Budget Responsibility) as setting out the free-market credentials of the government under Liz Truss, although it is difficult to see what increasing the national debt by subsidising fuel prices has to do with free markets. However, the Chancellor expects the move to cut five percentage points off peak inflation.

The Chancellor described the tax cuts, which he believes will increase tax yields by encouraging growth and increasing productivity, as “a new approach for a new era”.

While business benefits, life is going to be harder for benefit claimers, with the government determined to "make work pay", as the Chancellor put it, by reducing benefits and making it harder to get them. High earners, meanwhile, get the increased benefits of an end to the 45p top rate of income tax, so the top rate is now 40p in the pound, and bankers have the cap removed from their bonuses, while at the lower end of income tax there is a 1p in the pound reduction to 19p in the pound.

This year's temporary 1.25% increase in National Insurance is being brought to an end on 6 November and its change to a Health & Social Care Levy that was due to start in April next year has been scrapped. Some describe National Insurance as a tax on jobs. The proposed rise in corporation tax, due to increase from 19% to 25% in April next year, has also been binned. It will now stay at 19%.

The 2017 and 2021 changes to IR35 off-payroll working rules are being repealed, which will please many as they are chaotic. From April, workers providing their services via an intermediary “will once again be responsible”, said the Chancellor, for determining their employment status and paying the correct tax and National Insurance.

Planned increases in alcohol taxes have also been binned to ease the pressure on pubs and restaurants that have been concerned about their heating bills this winter, even though the government is planning to subsidise fuel prices for at least six months from October for businesses in line with the subsidies for consumers (although for consumers they are for two years).

The Chancellor said the £1million threshold for the Annual Investment Allowance will be maintained instead of being reduced to £200,000 in April next year as previously planned, although the super deduction of 130% on capital expenditure did not get a mention and looks as if it will end as planned at the end of March.

The Chancellor confirmed the Government is in early discussions to create 40 ‘investment zones’ that actually cover most of England. They will offer a freeze on rates for businesses moving on to the sites and no National Insurance on the first £50,000 a new employee earns. There will be no stamp duty on the purchase of land in the sites, either.

The investment zones are presumably in addition to the free ports the government announced under the ‘levelling up’ programme to alleviate some of the difficulties associated with Brexit, although they were not mentioned by the Chancellor. The government also plans to publish a list of infrastructure projects it will support.

The levelling up programme received a brief mention from the Chancellor, although only to say the best way of levelling up is to free the markets.

Stamp duty on housing is being cut, which will offset some of the increase in the cost of mortgages due to the rise in the base interest rate, which is now at 2.25% following the seventh increase since December with more expected in the months ahead.

Planning restrictions will also be eased, even though planning authorities have always maintained that planning is not what caused the government to miss its now abandoned 300,000-a-year house-building target.

Nathan Reilly, Director of Customer Relationships at Twenty7tec says of the move: “By cutting stamp duty to energise the housing market the Chancellor is borrowing from the Rishi Sunak playbook. When we saw this in 2021, we had incredible volumes of new business in the housing sector, and some of the busiest times in living history for mortgage advisers and lenders.

“The context is clearly different this time – with a different macroeconomic picture for both interest rates and inflation – but Kwarteng and Truss will be hoping that the house buying market can play a major role in the UK’s near-term economic growth.

“The mortgage market is currently increasingly reliant on the re-mortgage market, and a stamp duty change is likely to rebalance this back towards a purchase-driven market again.”

In the current system, there is no stamp duty to pay on the first £125,000 of a property’s value. That is doubling to £250,000. First time buyers currently pay no stamp duty on the first £300,000, which is increasing to £425,000. The value of property on which first time buyers can claim relief goes up from £500,000 to £625,000.

The Chancellor says these steps will mean 200,000 more people will be taken out of paying stamp duty altogether.

The initial reaction of the markets to Kwasi Kwarteng’s fiscal event was to sell pounds, with the exchange rate with the dollar falling to a new 37-year low of $1.09 and to an 18-month low against the Euro of €1.12.

To read the whole of the Chancellor's speech, click here