Update 3 October 2022: Since this article was published it was announced that the proposed removal of the 45% additional rate tax band for individuals earning over £150,000 will not go ahead.
Labelled as a “mini-budget,” chancellor Kwasi Kwarteng’s emergency Budget of 23 September nonetheless includes tax cuts on a scale unseen for more than 50 years paid for by high levels of government borrowing.
Kwarteng prefaced the announcements by stating that the current global energy crisis – for which he directly blamed Putin’s actions in Ukraine – required the same urgency of reaction from the government as at the start of the Covid-19 pandemic.
Coming as the cost-of-living crisis looks set to worsen, the announced tax cuts for individuals and businesses are likely to be welcomed by many, including those in the design industry.
But the Budget has come under criticism for disproportionately benefitting the wealthy – protecting energy giants’ profits and lifting the cap on bankers’ bonuses – with little for the rest of the population beyond a 1% drop in the basic rate of income tax and temporary measures to mitigate against soaring energy costs.
The mini-budget has also been criticised for being fiscally irresponsible, with market reaction causing the pound to drop to an all-time low against the US dollar of $1.0327.
Energy Bill Relief Scheme
The first and most pressing item regarded the energy crisis. Parallel to the Energy Price Guarantee for households, it was announced that businesses, charities, and public sector will also temporarily see energy prices capped through the government’s Energy Bill Relief Scheme, running for an initial six months from 1 October 2022 to 31 March 2023. This is likely to be welcomed by design business owners but has limitations.
“A cap on energy bills for businesses will bring some certainty to soaring costs, although we’d like to see this benefit extended beyond six months,” says Deborah Dawton, chief executive of the Design Business Association.
Tax cuts for individuals and businesses
At the heart of the budget was a large package of tax cuts designed to make Britain more competitive and incentivise growth, factors which Michelle Denny-West, tax partner accountancy firm Moore Kingston Smith suggests “are key in the increasingly competitive design industry.”
Two changes to income tax will arrive in April 2023: the basic rate will be lowered from 20% to 19%, coming a year earlier than planned, and the additional rate tax of 45% for those earning over £150,000 will be removed. The National Insurance increase of April 2022 will also be reversed from 6 November 2022, and the proposed Health and Social Care Levy will be cancelled.
Among several tax cuts for businesses, most notable is the cancellation of the planned raise in corporation tax from 19% to 25% that was due to take effect from 1 April 2023.
Design Business Association chief executive Deborah Dawson welcomed the news: “We’re delighted that the planned corporation tax increase has been scrapped.
“Design businesses earning £1m plus should be making well over £50,000 profit, and so this would have affected a large proportion of the sector. This money can now be reinvested in the business or used to sure up reserves in light of a potential recession.”
Other tax cuts include increasing the limits for employee share schemes and venture capital schemes. While some of the proposed measures do little to help SMEs, Denny-West highlighted changes to the Seed Enterprise Investment Scheme (SEIS). From April 2023 eligible design businesses will be able to raise up to £250,000 under the scheme, a two-thirds increase on current levels, while the annual investor limit has been raised to £200,000. Those investing under the SEIS are entitled to generous tax reliefs, most notably 50% of the qualifying amount invested being offset against their tax bill.
“Young businesses in the design industry who are looking to raise finance for innovation and growth can only benefit from the increase in the SEIS investment limits. This is a very welcome measure.”
The planned rise from £200,000 to £1M of the Annual Investment Allowance a 100% capital allowance for businesses to invest in themselves, will be made permanent. Denny-West suggests, however, that “those in the design industry will see little benefit unless they were planning significant investment in plant and machinery”.
Missed opportunities for investment
Despite the chancellor saying that the government “won’t apologise” for focusing on growth, the potential of the creative industries was not targeted in the mini-budget.
Creative UK chief executive Caroline Norbury OBE suggests: “If the chancellor wants to boost economic growth, he should embrace the enormous potential of the UK’s highly innovative creative industries. They are growing at four times the rate of the wider economy – they are the bedrock of our global competitive advantage – and can play a vital role in this challenging economic climate.
“Modelling in 2021 revealed that, with the right investment, the UK’s Creative Industries could contribute £132.1 billion in GVA (Gross Value Added) and create 300,000 jobs by 2025 – enough to employ the working-age population of Hartlepool and Middlesbrough twice over.
“We look forward to the Government’s Creative Industries Sector Vision this Autumn and to further measures which encourage growth and ensure our world-leading Creative Industries can thrive and reach their undeniable potential.”
Moore Kingston Smith tax partner Michelle Denny-West highlighted the missed opportunity for investment in R&D (research and development): “To encourage innovation and investment in the design industry, arguably it would have been more beneficial to see increased availability of creative sector reliefs or a simplified R&D regime.”
She notes that some changes have already be seen, an idea also expressed by the Design Council’s chief executive Minnie Moll: “It’s encouraging that the review of R&D investments will continue, and we hope to see the UK’s R&D tax credit scheme expanded to include design. Design is a driver and accelerator of innovation, but we know that 32% of businesses still don’t use design.”
Reforms to IR35 will relieve freelancers
Set up to tackle “disguised employment” IR35 rules required some freelancers and contractors to pay the higher rates of tax paid by employees, but without receiving the added security of employment. These rules will now be removed as part of a plan to simplify tax, a move welcomed by design leaders.
The Design Business Association’s chief executive Deborah Dawton says: “Scrapping the IR35 rules in April next year alleviates the pressure on businesses of shouldering increased liability, which will pass back to freelancers. This supports the government’s promise to take some of the complexity out of tax, and that can only be a good thing.”
While there was little talk about “levelling-up”, Kwarteng announced a plan for low-tax investment zones, saying: “If we really want to level up, we have to unleash the power of the private sector.”
However, shadow chancellor Rachel Reeves argued that the plans would not achieve the intended results, instead having the effect of “moving growth around the country, not creating growth”.
Talks are underway with around 38 local authorities, with the chancellor mentioning Tees Valley, the West Midlands, Norfolk and the west of England, while also inviting devolved administrations to participate in the scheme.
For businesses in these zones there will be a 100% tax relief on investment in plant, machinery and new buildings. In addition, employers will pay no National Insurance on the first £50,000 of workers’ salaries.
Design Council chief executive Minnie Moll comments: “We welcome the government’s commitment to provide support to local economies, with new investment zones throughout the UK.
“The design sector contributed £97.4bn in GVA in 2019, growing at twice the rate of the UK economy in the last decade. This is an opportunity to support growth through the expansion of existing design businesses and the creation of new ones.”
Growth at the expense of the environment
Alongside these investment zones, the chancellor announced plans to deregulate local planning regulations in order to fast-track infrastructure and housing projects. This raises fears, however, that factors such as environmental impact may not be sufficiently considered.
This was a key point for the Design Council’s Minnie Moll: “As 40% of carbon emissions come from the built environment, it is essential that environmental impact is prioritised in the proposal for liberalised planning reforms.
“We need to ensure that design will protect bio-diversity in local areas and help deliver the government’s target for net zero by 2050.”
VAT-free shopping for international tourists will be reintroduced after it was scrapped by then-chancellor Rishi Sunak in 2021, a change that will be welcomed by the retail sector.
Stamp Duty will be permanently cut, meaning no tax will be paid on properties up to value of £250,000. The threshold for first-time buyers has been raised to £425,000
Banker’s bonuses will no longer be capped
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