The new chancellor will have a very busy few weeks ahead to implement Prime Minister Liz Truss’s policies on taxes and the cost-of-living crisis. An immediate announcement on the energy crisis is expected to be followed quickly by an Emergency Budget (or ‘fiscal event’), which is likely to focus on measures to help households and businesses through the winter months.
While these proposals have been discussed on her campaign trail, she has been non-committal about specifics. So, what can we expect from our new prime minister in the first days and weeks of her tenure?
During the leadership campaign, both candidates made promises on tax policy, and Liz Truss talked of making tax cuts to the tune of £30bn or more, with at least some reductions taking effect immediately. As always, it is hard to know whether these campaign-trail promises will be followed through, but where we can find proof of her views on tax is in Liz Truss’s voting record.
This demonstrates that she is firmly in favour of reducing corporation tax, so this may form part of her measures to help businesses with rising prices; she has spoken before about getting rid of the corporate tax increase planned for 1 April 2023.
While she has talked of boosting support for businesses in the UK, it is not clear whether there will be any specific changes to capital allowances, specifically whether the super deduction (currently due to expire when the corporate tax increase takes effect) will now be allowed to continue. With a wide range of organisations calling for some long-term stability in capital allowances to enable businesses to plan future investments, it is hoped that businesses will get clarity on the future direction of tax policy for investment soon.
Truss has also promised to remove much of the EU-derived ‘red tape’ that inhibits activity as part of her long-term plan for economic growth and, like many politicians before her, pledged to ‘overhaul’ business rates. This is intended to include a review of the IR35 rules with the aim of sparking a ‘small business and self-employed revolution’. Wider reform of the tax system is also on her agenda: during the leadership campaign she announced she would ‘have a complete review of the tax system’.
Similarly, her voting record shows that VAT has always been in her sights. She has always voted in favour of capping VAT rates, so it follows that she may turn to cutting VAT as a first port of call.
Truss has remained strongly in favour of increasing personal income tax allowances over the past few years, and there have been rumours that her team have been considering increases in personal tax allowances and the basic rate band as part of a cost-of-living support package (see below). Of course, this would be an expensive move and, notably, no direct mention of it was made during the campaign. However, her repeated commitment to reverse the April 2022 NICs increase for individuals and employers is highly likely to happen – perhaps as early as November – although whether this also means reversing the NIC threshold increases that took effect from 6 July (and took some low earners out of NIC altogether) is not clear.
Another late campaign commitment to ‘no new taxes’ when she is prime minister is the clearest statement of her views on tax policy: holding to that promise may be a difficult task for her new chancellor.
Truss has appointed former Business Secretary Kwasi Kwarteng as chancellor. He is a strong ally of Truss and is broadly aligned with her stated economic policies, including on windfall taxes, raising income tax thresholds and reductions in capital gains tax. As chancellor, Kwasi Kwarteng takes on a Treasury under immense pressure, with Truss’s proposed sweeping tax cuts leaving large holes in the public finances. Historically, he has been a proponent of low taxation and free markets, but when confronted with the growing calls for direct government intervention to support businesses and households through the current energy crisis, these leanings will be put to the test.
Former Chancellor Nadhim Zahawi has done some of his homework though; the Treasury has been working on options for the incoming government to consider and expectations are growing that the new chancellor will announce a Covid-style cost-of-living support package for families and businesses in a matter of weeks.
The energy crisis has had a huge impact on businesses across the UK, and it is by no means over. In part driven by the Russian invasion of Ukraine, short term solutions to the crisis are complex. The focus from the new PM has so far been mostly on supporting households through the winter, with measures for businesses less certain. So, what could a new support package look like?
Specific help on energy costs for ‘energy intensive’ businesses has been suggested, although how this would be implemented remains to be seen. Most businesses support the idea of imposing an ‘energy price cap’ on commercial energy sales but it is not clear how quickly this could be implemented even if the government adopted the idea. Suspending the climate change levy seems like a more practical option and in line with Truss’s tax cutting agenda.
A reduction in business rates for smaller businesses (for example, an increase in the small business rate exemption to cover properties with a rateable value of up to £25,000) and a possible extension of the existing 50% relief for retail, hospitality and leisure businesses are all also rumoured to be part of a Covid-style support package that is being considered. Similarly, a temporary reduction in the rate of VAT applied to hospitality and leisure sales may be announced to help support those sectors as struggling consumers cut back on leisure spending.
Businesses can expect to benefit from the reversal of the April 2022 NICs increase and some measures specifically targeting energy costs. Formal confirmation that the corporation tax rate will not rise to 25% in April 2023 (as previously planned) may also be a comfort, even if it provides little help in the short term.
For households, while Liz Truss did eventually agree that direct cash ‘hand-outs’ to help families with energy costs are likely to be necessary, she has repeatedly said that she would rather cut taxes. However, it is now understood that measures similar to the Labour proposal of freezing the energy price cap are being considered alongside the existing package of direct support to householders with further help for households to come in the form of tax cuts.
Aside from reversing the April 2022 NIC increase, help may come in the form of major cuts to VAT. This could be actioned by removing VAT from energy bills as well as removing the green levy or may even include a significant reduction in the main rate of VAT (rumours suggest the headline rate could go as low as 15%). This would be a costly move and, of course, it would not address the energy supply shortages, but a VAT cut may just help to change ‘inflation expectations’ and have some short-term impact on family finances.
Another Truss proposal to help family finances relates to the transfer of personal allowances between married couples and civil partners. Currently, where an individual does not have enough income to fully use their personal tax allowance (currently £12,570), they can elect to transfer £1,260 to their spouse/civil partner. She proposed that the full allowance should be transferable to help couples where one spouse is the sole earner.
One of the key issues on the table for the new PM is not only tackling the energy crisis, but the growing public distaste for soaring energy company profits. While former Chancellor Rishi Sunak enacted a windfall tax on energy profits early in the year, Liz Truss has argued strongly against the windfall tax on energy companies and ruled out any extension of it.
Truss has argued that tax cuts will help to generate growth in the economy and therefore may pay for themselves in the long run – although it is widely accepted by economists that they will increase government borrowing in the short term.
She has also promised to squeeze out Whitehall waste, although it seems that a return to ‘austerity’ across all public finances (just so that tax cuts can be delivered) is not explicitly envisaged.
Many commentators suggest that that cutting taxes (and increasing government borrowing) at a time of high inflation is risky: the total national debt is already forecast to be 95.5% of the UK’s GDP in 2022/23, and interest costs on the debt will rise as interest rates are increased by the Bank of England to tackle inflation. As a parallel, few businesses would seek to invest during difficult economic times with many choosing to preserve cash balances and not take on new borrowing unless absolutely necessary.
In conclusion, this is a high-risk strategy for the economy and will give businesses much food for thought and cause to rethink their short and medium-term plans.
Note: this article was finalised on 6 August. At the time of going to press, an announcement on energy bills was expected on Thursday 8 August.
The new chancellor will have a very busy few weeks ahead to implement Prime Minister Liz Truss’s policies on taxes and the cost-of-living crisis. An immediate announcement on the energy crisis is expected to be followed quickly by an Emergency Budget (or ‘fiscal event’), which is likely to focus on measures to help households and businesses through the winter months.
While these proposals have been discussed on her campaign trail, she has been non-committal about specifics. So, what can we expect from our new prime minister in the first days and weeks of her tenure?
During the leadership campaign, both candidates made promises on tax policy, and Liz Truss talked of making tax cuts to the tune of £30bn or more, with at least some reductions taking effect immediately. As always, it is hard to know whether these campaign-trail promises will be followed through, but where we can find proof of her views on tax is in Liz Truss’s voting record.
This demonstrates that she is firmly in favour of reducing corporation tax, so this may form part of her measures to help businesses with rising prices; she has spoken before about getting rid of the corporate tax increase planned for 1 April 2023.
While she has talked of boosting support for businesses in the UK, it is not clear whether there will be any specific changes to capital allowances, specifically whether the super deduction (currently due to expire when the corporate tax increase takes effect) will now be allowed to continue. With a wide range of organisations calling for some long-term stability in capital allowances to enable businesses to plan future investments, it is hoped that businesses will get clarity on the future direction of tax policy for investment soon.
Truss has also promised to remove much of the EU-derived ‘red tape’ that inhibits activity as part of her long-term plan for economic growth and, like many politicians before her, pledged to ‘overhaul’ business rates. This is intended to include a review of the IR35 rules with the aim of sparking a ‘small business and self-employed revolution’. Wider reform of the tax system is also on her agenda: during the leadership campaign she announced she would ‘have a complete review of the tax system’.
Similarly, her voting record shows that VAT has always been in her sights. She has always voted in favour of capping VAT rates, so it follows that she may turn to cutting VAT as a first port of call.
Truss has remained strongly in favour of increasing personal income tax allowances over the past few years, and there have been rumours that her team have been considering increases in personal tax allowances and the basic rate band as part of a cost-of-living support package (see below). Of course, this would be an expensive move and, notably, no direct mention of it was made during the campaign. However, her repeated commitment to reverse the April 2022 NICs increase for individuals and employers is highly likely to happen – perhaps as early as November – although whether this also means reversing the NIC threshold increases that took effect from 6 July (and took some low earners out of NIC altogether) is not clear.
Another late campaign commitment to ‘no new taxes’ when she is prime minister is the clearest statement of her views on tax policy: holding to that promise may be a difficult task for her new chancellor.
Truss has appointed former Business Secretary Kwasi Kwarteng as chancellor. He is a strong ally of Truss and is broadly aligned with her stated economic policies, including on windfall taxes, raising income tax thresholds and reductions in capital gains tax. As chancellor, Kwasi Kwarteng takes on a Treasury under immense pressure, with Truss’s proposed sweeping tax cuts leaving large holes in the public finances. Historically, he has been a proponent of low taxation and free markets, but when confronted with the growing calls for direct government intervention to support businesses and households through the current energy crisis, these leanings will be put to the test.
Former Chancellor Nadhim Zahawi has done some of his homework though; the Treasury has been working on options for the incoming government to consider and expectations are growing that the new chancellor will announce a Covid-style cost-of-living support package for families and businesses in a matter of weeks.
The energy crisis has had a huge impact on businesses across the UK, and it is by no means over. In part driven by the Russian invasion of Ukraine, short term solutions to the crisis are complex. The focus from the new PM has so far been mostly on supporting households through the winter, with measures for businesses less certain. So, what could a new support package look like?
Specific help on energy costs for ‘energy intensive’ businesses has been suggested, although how this would be implemented remains to be seen. Most businesses support the idea of imposing an ‘energy price cap’ on commercial energy sales but it is not clear how quickly this could be implemented even if the government adopted the idea. Suspending the climate change levy seems like a more practical option and in line with Truss’s tax cutting agenda.
A reduction in business rates for smaller businesses (for example, an increase in the small business rate exemption to cover properties with a rateable value of up to £25,000) and a possible extension of the existing 50% relief for retail, hospitality and leisure businesses are all also rumoured to be part of a Covid-style support package that is being considered. Similarly, a temporary reduction in the rate of VAT applied to hospitality and leisure sales may be announced to help support those sectors as struggling consumers cut back on leisure spending.
Businesses can expect to benefit from the reversal of the April 2022 NICs increase and some measures specifically targeting energy costs. Formal confirmation that the corporation tax rate will not rise to 25% in April 2023 (as previously planned) may also be a comfort, even if it provides little help in the short term.
For households, while Liz Truss did eventually agree that direct cash ‘hand-outs’ to help families with energy costs are likely to be necessary, she has repeatedly said that she would rather cut taxes. However, it is now understood that measures similar to the Labour proposal of freezing the energy price cap are being considered alongside the existing package of direct support to householders with further help for households to come in the form of tax cuts.
Aside from reversing the April 2022 NIC increase, help may come in the form of major cuts to VAT. This could be actioned by removing VAT from energy bills as well as removing the green levy or may even include a significant reduction in the main rate of VAT (rumours suggest the headline rate could go as low as 15%). This would be a costly move and, of course, it would not address the energy supply shortages, but a VAT cut may just help to change ‘inflation expectations’ and have some short-term impact on family finances.
Another Truss proposal to help family finances relates to the transfer of personal allowances between married couples and civil partners. Currently, where an individual does not have enough income to fully use their personal tax allowance (currently £12,570), they can elect to transfer £1,260 to their spouse/civil partner. She proposed that the full allowance should be transferable to help couples where one spouse is the sole earner.
One of the key issues on the table for the new PM is not only tackling the energy crisis, but the growing public distaste for soaring energy company profits. While former Chancellor Rishi Sunak enacted a windfall tax on energy profits early in the year, Liz Truss has argued strongly against the windfall tax on energy companies and ruled out any extension of it.
Truss has argued that tax cuts will help to generate growth in the economy and therefore may pay for themselves in the long run – although it is widely accepted by economists that they will increase government borrowing in the short term.
She has also promised to squeeze out Whitehall waste, although it seems that a return to ‘austerity’ across all public finances (just so that tax cuts can be delivered) is not explicitly envisaged.
Many commentators suggest that that cutting taxes (and increasing government borrowing) at a time of high inflation is risky: the total national debt is already forecast to be 95.5% of the UK’s GDP in 2022/23, and interest costs on the debt will rise as interest rates are increased by the Bank of England to tackle inflation. As a parallel, few businesses would seek to invest during difficult economic times with many choosing to preserve cash balances and not take on new borrowing unless absolutely necessary.
In conclusion, this is a high-risk strategy for the economy and will give businesses much food for thought and cause to rethink their short and medium-term plans.
Note: this article was finalised on 6 August. At the time of going to press, an announcement on energy bills was expected on Thursday 8 August.
