06/12/23

UK: UK Autumn Statement Offers Giveaways in a Quest for Growth

As published on: news.bloomberglaw.com, Tuesday 5 December, 2023.

Politics was front and center in the UK chancellor and prime minister’s objectives for the Nov. 22 Autumn Statement, in view of the impending general election that must be held by January 2025.

However, Prime Minister Rishi Sunak has recently made great play of taking “long-term decisions,” so there was still hope of good news and more long-term certainty for businesses over the UK tax environment.

Business Measures
The key announcement—that the favorable “full expensing” regime for capital allowances will be made permanent (and won’t expire in April 2026, as previously stated)—is good news for those planning long-term investments.

Because the shadow chancellor in the opposition Labour Party also supported the move, there is little danger of it being unwound, regardless what happens in the next general election.

In a similar vein, the chancellor announced that the tax advantages for businesses setting up in the new “investment zones”—social security relief, business rates relief, enhanced capital allowances for buildings, and stamp duty land tax relief—will now last for at least 10 years. So will the tax advantages for companies setting up in the UK’s freeports, which also offer customs duty advantages.

Doubling the time period for the tax breaks offers a much more attractive return on investment to businesses. Extending the life of the Enterprise Investment Scheme to 2035, and ongoing reforms to make UK real estate investment trusts more beneficial, should also bring certainty and help to boost business investment in the longer term.

We heard more about the chancellor’s bid to spread pension fund investment into wider areas of UK business. The announcement of a new growth fund (within the British Business Bank) that should give pension schemes access to opportunities in the UK’s most promising businesses is a start.

Guidance for the Local Government Pension Scheme in England and Wales will also be revised to encourage fund managers to invest up to 10% of the fund into private equity holdings—this may also help.

Just before the Autumn Statement, the chancellor announced that starting in 2025, the government intends to make £4.5 billion ($5.7 billion) in funding available for British manufacturing over a five-year period to support the automotive, aerospace, life sciences, and clean energy sectors. Of course, whether Jeremy Hunt is still the chancellor in 2025 remains to be seen.

While implementation of the OECD Pillar Two rules may not be welcomed by multinational groups, there was some good news on simplifying reporting in the transitional period, which will ease the compliance burden for businesses. The government also confirmed that it will repeal the existing anti-avoidance rules for offshore receipts in respect of intangible property in 2024.

Planning Rules
The chancellor announced proposals intended to speed up the UK’s planning system, which is often blamed for the glacial speed of development of new business premises, housing, and infrastructure projects.

The key idea of allowing developers to pay more to have planning decisions fast-tracked in a guaranteed time is designed to improve resourcing and address the lack of funding of local authority planning teams. However, we will probably have to wait several years for this even to be implemented, let alone be able to judge if it is an effective solution.

Individual Taxes
With an election approaching in 2025, it was no surprise there were more short-term measures to help put money in people’s pockets. Cutting national insurance contributions for individuals, to 10% from 12%, starting in January 2024 will strain the government’s finances over the longer term, but was signaled as the start of a return to tax cuts by the prime minister.

If employers were hoping to see slightly less pressure for wage rises as a result of this cut, public reaction to the cuts seems likely to rule that out.

The other key measure to put money into individuals’ pockets was inflation-busting rises in National Living Wage rates. People who are 21 or 22 will now be paid at the same rate of £11.44 as those 23 and over, representing a 12.4% increase (9.8% increase for the older age bracket). 

Those aged 18 to 20 will enjoy a 14.8% increase to £8.60 per hour, and apprentices under 19 will see a 21.2% rise to £6.40 per hour. 

This will create more financial pressure on employers with less-skilled and lower-paid workers, and it may be a key reason the chancellor extended the 75% relief on business rates for retail and hospitality sector businesses for another year.

This was presented as the “carrot” part of the government’s “back to work” plan. The “stick” elements of the plan include a targeted set of measures to tackle long-term unemployment, and will focus on those people claiming Universal Credit. The chancellor is also looking at a package of measures costing £1.3 billion over the next five years to help the long-term sick or disabled back to work.

Future Challenges
Many of the chancellor’s tax announcements will contribute to a greater sense of certainty in business tax policy. However, economic uncertainty is also a vital factor in business confidence and decision-making, as it informs the key decision of whether to invest for growth or not. The mixed reaction of economists to the Autumn Statement numbers suggests this will be a greater challenge for the chancellor.

The Office for Budget Responsibility has pointed out that the very tight future government spending projections represent “a very big fiscal risk,” as there are no detailed departmental spending plans past March 2025. The Institute for Fiscal Studies also commented that the implied future cuts look unrealistic.

While the Autumn Statement announcements may eventually prove to be a turning point for UK business investment, it’s hard to escape the conclusion that short-term political expediency could easily end up creating yet more economic uncertainty in 2024. This could undermine business confidence to invest in the short term and set back the government’s own growth agenda.

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UK Autumn Statement