“Turn it off and start again” – The Chancellor’s Fiscal Update

Chris Sanger, EY’s Head of Tax Policy, comments on the Chancellor’s Fiscal Statement:

“The Chancellor today looked to reset expectations of the UK, with a wholesale reversal of most of the tax policies that were part of his predecessor’s mini-Budget less than a month ago. This “turn it off, and start again” approach, familiar to anyone who has ever had a computer crash, was designed to address the financial turmoil that the UK has faced over the last three weeks.

“It looks like the update to the Medium Term Fiscal Plan scheduled for 31 October will take a more familiar approach than September’s announcement, with expected further changes to fiscal policy matched with an economic forecast from the Office for Budget Responsibility. The Chancellor may well be hoping that the country resets and forgets the mini-Budget of his predecessor.

“The increase in the corporation tax rate from April next year will mean that the UK will no longer have the lowest rate in the G20, and will mean that the UK will need to rely more on offering incentives to maintain and build the investment needed for growth. This will be easier in an environment of economic stability, a clear factor in any investment decision.

“The Chancellor also reversed the 1.25 percentage point cut in Dividend Tax rate, leaving the increase that was introduced when the Health and Social Care Levy was announced. This was originally introduced in order to treat those who pay themselves through dividends in the same way as those who are self-employed or on the payroll, so leaving this in place seems anomalous rather than coherent and consistent.

“But today went beyond reversing the largesse of the previous Chancellor – it also reversed the proposed pre-election giveaway announced by Rishi Sunak and accelerated by Kwasi Kwarteng. In keeping the basic rate of income tax at 20%, rather than dropping by one pence from April 2023, the Chancellor has reinforced the message that the cupboard is bare and needs to be restocked before further is available.

“The maintenance of the IR35 provisions, which put the onus on businesses that were hiring workers via their own personal service company to judge whether these workers should be considered to be employees (and operate withholding on payments) or consultants, may yet show a further element to the new Chancellor’s approach. The previous changes were driven by an intention to reduce the burden on businesses, even if there was a negative impact on public finances. In contrast, this approach seems to herald the re-emergence of the supremacy of public finances over other priorities.

“On the reversal of VAT-free shopping for overseas tourists, the Chancellor’s move is perhaps more surprising. Designed to be a measure to attract travellers to the UK and boost spending both at ports and high streets, this could have provided a welcome boost to the economy. This might be something that the Chancellor returns to in the future.”

Overall financial impact

Overall, the Chancellor noted that these reversals would raise about £32 billion per annum.  Whilst final costings will await Halloween, the estimate from today is as follows: