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The Chancellor of the Exchequer (the Chancellor) yesterday announced his Spring Statement.
Rishi Sunak has been clear that the public need to understand the true economic cost of the pandemic. And so whilst committing to do whatever it takes to support people and businesses throughout the pandemic, he has not shied away from highlighting the "enormous toll" this has had on the economy and our public finances.
The Office for Budget Responsibility had previously estimated that borrowing would be £394 billion for the current fiscal year-the highest figure since World War II. Yesterday, the figure referred to was £355 billion borrowed this year. So whichever number you go for, it’s still an enormous sum. How exactly is it going to be repaid? And when?
In announcing an increase to corporation tax on company profits of 6% from April 2023 (which does not apply to companies with profits below £50,000), the Chancellor has made clear his message to businesses. He is looking to profitable businesses to bear the brunt of the repayment. To assist them in delivering these much needed profits, the Chancellor announced a number of new initiatives, designed to encourage investment, and deliver growth and jobs.
For SMEs, the Chancellor has introduced a £520 million “Help to grow” digital scheme to help boost productivity through software and tech training. The digitisation of business processes has been significantly expanding and this scheme will be welcomed by SMEs to help them recognise and manage the growing digital risks.
The Chancellor is seeking to encourage investment by holding the annual investment allowance at £1 million until 31 of December 2021, and with the introduction of a new tax relief - the “super deduction” tax relief allowing companies to off-set their tax liabilities by claiming back 130% of eligible investment in plant and machinery over the next two years.
The Chancellor’s focus is very much on the COVID-19 measures of support that will be maintained or put in place until the UK exits the current lockdown. This includes extending furlough, business rates review, the universal credit uplift, and the self-employment income support scheme.
In addition, business interruption and bounce back loans will be replaced with new state-backed “recovery loans” which come into force on 6 April 2021.
Given that only 8% of all tax collection by HMRC is corporation tax, with the vast majority being PAYE and national insurance contributions, it makes perfect sense for the Chancellor to focus the budget on boosting employment and jobs. In addition, the right investment in technology and skills has a significant impact on improving productivity, and thus is key to delivering growth. We can therefore see throughout the budget a range of initiatives being deployed to encourage growth, and provide that much needed boost to the economy.
The Chancellor has not tackled the bigger question of repayment or particularly made any significant changes to our tax system. Many had feared that this was " coming down the line", with a concern over threatened changes to the Capital Gains Tax regime and ongoing financial uncertainty appearing to prompt the sale and closure of many businesses.
Instead, the focus has been on short-term issues that are more likely to be well received by the public and which will help bring back the "feel-good factor" to support the recovery of the economy.
Figures from the Gazette, the public record for the UK, found that 3,126 businesses voluntarily appointed liquidators during the third quarter of 2020. This was the highest for any quarter since 2000, and was up 52% on the same period in 2019.
This begs the question of whether the two year grace period will be sufficient for businesses to recover and build the resilience required before the corporation tax increase bites? Especially when the future of the economy is unknown, the future of the City and competition is unclear and we do not yet know the full impact of Brexit on supply chains.
For now, the Chancellor has chosen to continue to support businesses, workers and those on furlough into the autumn and to stimulate spending in the economy. However, the government will have to take the inevitable tax measures at some point soon to balance the books. Consultations are due to start at the end of this month on what those tax changes might be, and it will be important for business owners to engage in those consultations, if they want their voices to be heard.
The road ahead continues to be bumpy and whether this strategy will pay off remains to be seen.
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