Spring Statement 2022: the Chancellor's Tax Plan

For more fiscal and political analysis of the Spring Statement from our client insights lead, Andy Hartwill, see Spring Statement 2022: the fiscal and economic outlook.

World events and the rising cost of living have meant that today’s Spring Statement, scheduled simply as a response to the Office of Budget Responsibility’s (OBR) spring economic and fiscal forecast, was not an event that the Chancellor could simply let pass without further action to help households and businesses, including cuts to fuel duty and increasing NICs thresholds.

However, perhaps surprisingly, the Chancellor has also chosen this opportunity to publish a new, forward-looking Tax Plan - a Plan which, in truth, appears hastily produced and largely designed to promote the Chancellor’s tax cutting credentials, whilst remaining vague on what specific future changes may be introduced beyond a 1% cut in income tax from 2024. Perhaps more loose objective than plan then....

The Spring Statement

Higher global energy and goods prices have already led to an unavoidable increase in the cost of living in the UK. The repercussions of Russia’s invasion of Ukraine will add to these pressures and increase inflation further in the coming months. As a result, there is an unusual level of uncertainty surrounding the OBR’s spring economic and fiscal forecast. The government, however, has some headroom against its fiscal rules due to a quicker than expected recovery and higher than expected tax receipts and is using this headroom to provide some additional tax relief for households.

Firstly, the Chancellor announced a 5p cut in Fuel Duty with effect from 6pm today (23 March) which will last until March 2023.

Secondly, the Chancellor announced that he would introduce a zero-rate of VAT on a range of energy saving materials (ESMs) and the installation of those materials for five years from 1 April 2022. The measure will introduce a zero-rate of VAT for the installation of certain ESMs in residential accommodation in Great Britain until 31 March 2027. A 5% rate of VAT will apply from that date. It also permanently brings wind and water turbines back into scope of the relief in Great Britain. (Due to the operation of the Northern Ireland Protocol, these changes cannot be made in Northern Ireland).

The UK was previously required to limit the reduced rate of VAT (5%) on installations of ESMs to supplies to individuals who met certain social conditions as a result of the judgment in European Commission v United Kingdom (Case C-161/14). The UK was also required to exclude wind and water turbines from the list of qualifying ESMs. As a result of the UK exit from the EU, the UK is no longer bound by those restrictions and the Chancellor has taken the opportunity to both remove these restrictions and introduce a zero-rate of VAT.

Thirdly, the Chancellor is bringing forward the government’s commitment to equalise the employee NICs threshold with the income tax personal allowance. From July 2022, the employee NICs threshold will increase to £12,570. Of course, there had been calls for the government to delay the introduction of the NICs surcharge of 1.25% (on employers and employees) due to be introduced from April 2023 to help increase NHS and care spending. That would have been politically difficult and so it appears that the increase in the employee NICs threshold has been brought forward as an alternative which, to some degree, achieves the same effect. In fact, the Spring Statement claims that 70% of workers will actually pay less NICs as a result of these changes even taken into account the NHS and Care levy. In addition, the Chancellor also announced an increase in the Employment Allowance for smaller businesses – again a measure that will help offset the increase in NICs for smaller employers from April 2022.

The Tax Plan

Alongside the Spring Statement, the Chancellor has also published a longer-term Tax Plan, setting out his “vision for a lower tax economy”. Though calling this slim 12 page document a Tax Plan seems a somewhat grandiose title for what largely amounts to a number of smaller specific measures, a restatement of the government’s focus on productivity and a speculative cut in income tax.

The Tax Plan covers three broad areas of policy:

• Helping families and businesses with the cost of living crisis
• Boosting growth and productivity by focussing on capital, people and ideas
• Letting people keep more of what they earn.

Cost of living

The main elements of the Chancellor’s plan to help households with the cost of living crisis are the reduction in fuel duty and the increase in NICs thresholds.

On NICs, the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs will be increased from 6 July 2022, aligning them with the personal allowance for income tax at £12,570 per annum. These thresholds will then remain aligned. From April 2022, there will also be a reduction in Class 2 NICs liabilities to nil on profits between the Small Profits Threshold (SPT) and LPL.

In addition to the reduction in fuel duty and increase in the employee NICs threshold from July, the Tax Plan announces that the government will help smaller businesses by increasing the Employment Allowance from £4000 to £5,000 from April 2022. The Employment Allowance allows businesses with Class 1 NICs of less than £100,000 to reduce their Class 1 NICs liability. This will go some way to offsetting the increase in employer NICs from April 2022 as a result of the NHS and Care Levy.

Boosting growth

Like many Chancellors before him, Rishi Sunak laments the UK’s poor figures for investment, productivity and innovation compared with some other leading economies and despite generous tax allowances intended to facilitate progress in these areas. The Tax Plan, therefore, sets out the Chancellor’s intention to revisit some of these issues.

On capital, businesses can currently benefit from the enhanced capital allowances for their capital expenditure from 1 April 2021 up to and including 31 March 2023. These take the form of first-year allowances of 130% for new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances and a first-year allowance of 50% for new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances. These enhanced capital allowances were introduced in part to offset the announced increase in corporation tax rates to 25% from 2023, of course.

The Tax Plan announces that the government wishes to “cut and reform taxes on business investment” but recognises that the “challenge now is to find the most effective way to cut taxes on investment while ensuring value for the taxpayer”. There is to be a process of engagement with business, with the government intending to confirm any plans that arise out of that engagement in the Autumn Budget. There is no indication at this stage, however, as to what types of measure the government are considering.

On people, there is recognition that low levels of qualifications and low levels of spending on training are holding back the UK economy. As a result, the Tax Plan announces that the government will look to “encourage businesses to offer more high-quality employee training and explore whether the current tax system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in the right kinds of training”. No specific time-frame appears to have been set for this review, however.

Thirdly, on innovation, the Tax Plan sets out its ambition to increase the amount of business spending on R&D in the UK. In truth, however, the measures supposedly announced in the Spring Statement had largely already been announced in the Autumn Budget and were already expected to be included in the Finance Bill 2022/23, including the extension of R&D tax reliefs for data and cloud computing costs and refocusing relief
on R&D undertaken in the UK - though it is not entirely clear if applying R&D tax reliefs to “R&D supported by pure maths” is a further extension. Beyond that, the Tax Plan somewhat vaguely announces that the government will “continue to reform and improve the R&D tax reliefs at the next Budget”.

Letting people keep more of what they earn

Politically, at least, perhaps the most important aspect of the Tax Plan for the Chancellor is his commitment to cut taxes as and when it is fiscally prudent to do so. To this end, as an “expression of the government’s values”, the Chancellor announced his intention to cut the rate of income tax from 20% to 19% from 2024.

The announcement comes with a range of caveats, however. It is dependent on the government’s ability to “manage public finances”, “maintain spending discipline” and requires “the economic outlook to hold up”. You don’t need to have lived through a pandemic to realise that many things can change in the course of two years - which perhaps makes the announcement look somewhat speculative. It may also herald a period of public sector unrest as the government seeks to restrict public spending in the face of the highest rates of inflation for 30 years. Or, a cynic might say, it could be setting things up for a General Election and pointing the direction of future travel in the pre-election Budget.

It is also worth noting that it was only as recently as the 2021 Spring Budget that the Chancellor announced that income tax thresholds, including the personal allowance and basic rate limit, would be frozen until 2026, along with a range of other thresholds such as the pension lifetime allowance. Seen in this context, the Chancellor may be accused of sending out mixed messages!

Finally, the Tax Plan sets out its aim to make the tax system “simpler, fairer and more efficient”. However, this appears to largely involve a further review of the “over 1,000 tax reliefs and allowances in the tax system” on the basis that many of these reliefs and allowances are “costly and complex”.