Budget 2021 -Business news 28 October 2021
James Salmon, Operations Director.
Chancellor sets out ‘moral’ mission to limit state and cut taxes in Budget 2021. Business rates discount announced. Business lobby groups disappointed by Budget 2021. Minimum wage and public sector pay raised. Growth forecast encouraging amid inflation fears. And more business news.
Chancellor sets out ‘moral’ mission to limit state and cut taxes
The Chancellor was buoyed by a brighter economic outlook than expected as he delivered his autumn Budget 2021 yesterday. Rishi Sunak declared that the UK economy was entering a “new age of optimism” as he unveiled a high-spending Budget that will raise the UK’s tax burden to its highest level since the early 1950s.
In an attempt to ward off criticism of Britain’s high tax status, Mr Sunak reassured Tory MPs that he wanted to cut taxes before the next election saying there was a “moral dimension” to curbing the role of the state.
Once the economy had recovered from the pandemic, the Chancellor promised the Government would only borrow to invest in “future growth and prosperity”. He went on to announce a £150bn increase in spending across government departments over the course of this parliament, a series of tax cuts and a boost to benefits to help Britons with the cost of living.
Commenting on the spending hike Whitehall departments, the director of the Resolution Foundation a think-tank, Torsten Bell, warned: “What we’ve seen is a massive front-loading of spending during the immediate COVID-19 recovery period but that means things will get tougher towards the end of the spending period.”
Business rates discount announced
The Chancellor revealed on Wednesday that a new 50% business rates discount will apply in the retail, hospitality, and leisure sectors, with eligible businesses able to claim a discount on their bills, up to a maximum of £110,000. This will cost £1.7bn. From 2023, there will be revaluations every three years, a 12-month rate holiday on property improvements, and relief for business owners who install solar panels. The business rates multiplier, which is already frozen, will have its freeze extended until April 2023 costing some £4.6bn.
Many Tory MPs had been hoping for an across-the-board cut to business rates while Labour has called for a complete overhaul of the system.
John Boulton, director of policy at the ICAEW, said: “There are some businesses who may never be able to pay rates at the level they paid before the pandemic, and so a more meaningful reform of the system to reflect current trading conditions could have been a real help for many.” Retail and hospitality executives said the freeze in the multiplier was welcome but the cash cap of £110,000 per business on the discount meant many large companies would miss out. The High Street also criticised the decision not to immediately bring in an online sales tax, but Treasury documents stated that ministers will “continue to explore the arguments for and against” such a policy.
Business lobby groups disappointed by Budget 2021
Commenting on the Chancellor’s Budget 2021, Federation of Small Businesses national chair Mike Cherry said there were some measures that should help to arrest the current decline in small business confidence. “But, against a backdrop of spiralling costs, supply chain disruption and labour shortages, is there enough here to deliver the Government’s vision for a low-tax, high-productivity economy? Unfortunately not. Where inflation and forthcoming tax hikes are concerned, the clouds are gathering.”
The sentiment was echoed elsewhere, with critics describing Rishi Sunak’s measures as “piecemeal” and lacking coherence. Kitty Ussher, chief economist at the Institute of Directors, said businesses would not be left confident that future labour shortages would be prevented by Sunak’s “skills revolution”, while Tony Danker, director-general of the CBI, said: “This Budget alone won’t transform the UK economy for a post- Brexit, post-Covid world. Businesses remain in a high-tax, low-productivity economy with concerns about inflation.”
But Kevin Ellis, UK chairman of PwC, was more upbeat, saying the Budget addressed the challenge of labour shortages faced by many businesses with its emphasis on skills investment and helping the lowest-paid with a pre-announced 6.6% increase in the minimum wage. Elsewhere, Tim Sarson, head of tax policy at KPMG, said the Chancellor’s “tinkering with select areas of the tax system…left calls for fundamental reform to the tax system unanswered.”
Minimum wage and public sector pay raised
The Chancellor confirmed in his Budget that he had accepted a recommendation from the Low Pay Commission to increase the national living wage from £8.91 to £9.50 an hour for workers aged 23 and over. Mr Sunak also ended the year-long public sector pay freeze, but did not reveal whether the pay rises would be above inflation (currently 3.1%). He claimed there would be “fair and affordable pay rises” – but said it would be up to pay-review bodies to decide on the amounts.
Growth forecast encouraging amid inflation fears
The Office of Budget Responsibility forecast on Wednesday that the UK economy will grow by 6.5% this year, far higher than the 4% predicted in its March forecast. This will be followed by 6% growth in 2022 but far lower growth of 2.1% is expected in 2023,.
Growth of 1.3% is expected in 2024, and 1.6% in 2025.
Unemployment is expected to peak at 5.2% next year, lower than 11.9% previously predicted, while wages have grown in real terms by 3.4% since February 2020.
Meanwhile, borrowing as a percentage of GDP is forecast to fall from 7.9% this year to 3.3% next year. As a percentage of GDP, borrowing will then fall in the following four years to 1.5%.
The OBR went on to warn that inflation would rise much faster than it previously estimated, hitting 4% this year as a result of restricted supply chains and global energy prices. Rishi Sunak acknowledged the “challenging backdrop of inflation” and warned pressures would take months to ease.
Commenting on this theme, Jon Holt, UK chief executive of KPMG, said: “The problem of rising inflation, supply chain shortages and interest rates remains a real risk to the economy and it does cast a shadow over the budget.”
UK manufacturing lobby knocks ‘piecemeal’ approach to investment
UK manufacturers have said the Chancellor’s decision in Budget 2021 to extend the £1m annual investment allowance by 15 months fails to provide incentives to businesses with a five- to 10-year planning cycle.
Rishi Sunak seeks to boost R&D with overhaul of UK’s tax relief system
Budget 2021 saw the Chancellor commit to making R&D tax reliefs fit for purpose. Rishi Sunak said the Government will maintain its target to increase R&D investment to £22bn, but here would be a focus on bringing more investment back to the UK.
The ONS estimates that just over half of the £47.5bn of British privately financed R&D was in the UK, which it explained in part by companies being able to claim for activity taking place overseas. The scope of the reliefs would be expanded to include cloud computing and data costs, Mr Sunak added.
Rachel Moore, innovation incentives partner at PwC, said this would probably be paid for through the exclusion of overseas costs from R&D claims, something which could significantly impact large global groups. Chris Sanger, head of tax policy at EY, points out that the “definition of overseas activities could have an impact on whether key industries continue to see the UK as a great location in which to develop global centres of excellence and expertise.”
HMRC builds war chest in battle against tax avoidance
HMRC will be given an extra £292m in funding over three years to tackle tax avoidance and evasion, the Government announced on Wednesday. There will also be legislation giving the tax office powers to seize the assets of foreign firms promoting tax avoidance through UK-based entities. HMRC will be able to target the UK associates of promoters by hitting them with fines, freezing their assets and shutting down their businesses. The Government said it would set out separate plans to combat abuse of R&D tax reliefs “later in the autumn”.
Share dividend raid will cost investors £3bn over the next five years
Treasury papers show the 1.25% increase in dividend tax will cost investors more than £3bn over the next five years. The rise, which comes into force from April, will see basic rate taxpayers pay dividend tax at 8.75% and higher rate taxpayers at 33.75% on dividend income of more than £2,000. Additional rate income taxpayers will now pay 39.35% on dividends, up from 38.1%. An entrepreneur taking £45,000 per year in dividends is likely to see their tax bill increase by £378, while a small business owner receiving £75,000 in dividends could pay an extra £753.
UK drinks trade welcomes alcohol duty overhaul in Budget 2021
The Chancellor announced the most radical changes to alcohol duty for 140 years on Wednesday stating: “Our new system will be designed around a common sense principle: the stronger the drink, the higher the rate.” From February 2023, taxes on low-strength wines, such as rosé and prosecco, beers and ciders will be lowered while the cost of higher-strength beverages will rise. Alcohol duties will be frozen for a year from February 2022 – a move described by the Wine & Spirit Trade Association as a “huge relief”. The British Beer and Pub Association also welcomed the freeze, but pointed out that the overall beer duty rate in the UK remains among the highest in Europe. A cut in duty rates for draught beer and cider will shave 3p off a pint while a 28% duty premium on sparkling wines will be scrapped.
Sunak reduces cost of domestic flights, but long-haul now costlier
The Chancellor yesterday cut air passenger duty by half to £6.50 per passenger for domestic flights from April 2023, offset by higher levies have been imposed on long-haul services. The move sparked outrage among climate change campaigners who accused Rishi Sunak of undermining the UK’s response to the climate emergency. The boss of IAG, the owner of British Airways, was equally unimpressed arguing that increasing APD on long-haul flights “will penalise Global Britain” and will “limit the airlines’ ability to invest in green technologies”.
Tax surcharge on UK bank profits cut to 3% in Budget 2021
Rishi Sunak confirmed during his Budget speech yesterday that the “bank surcharge” on profits would be slashed from 8% to 3% in 2023 – the same year that corporation tax rates for all businesses rise from 19% to 25%. He added that the profit threshold at which banks will start paying the top-up would rise to £100m from £25m in order to help smaller challenger banks and increase competition. David Postings, chief executive of UK Finance, said that the intervention “recognises the importance to the UK of an internationally competitive sector which supports growth, jobs and innovation across the UK”. Nevertheless, he noted that banks would still pay more tax than other sectors. Anne Boden, chief executive of Starling Bank, added: “Let’s be honest – a tax cut for banks is never going to win widespread support. But by reducing the bank surcharge and increasing the threshold at which banks have to pay it, the Chancellor is recognising the fact that challenger banks such as Starling are elevating standards in consumer banking.”
Budget housing package criticised as ‘vague’ and underwhelming
Developers with profits over £25m will be charged a rate of 4% to help pay for unsafe cladding to be removed from high-rise buildings, Rishi Sunak said in his Budget. The Chancellor also announced £11.5bn to build up to 180,000 affordable homes, and an extra £1.8bn to bring 1,500 hectares of brownfield land into use. But Mr Sunak’s new housing package was described as “a bit of a damp squib” by David O’Leary, policy director at the Home Builders Federation, who warned the measures are unlikely to meet Boris Johnson’s target of building 300,000 homes a year due to the additional costs being faced by builders. EY’s Maheshi Gourlay commented: “Given the intention is for the [Residential Property Developer Tax] to come into force from April 2022, clear guidance from HMRC on how the tax will operate in practice will be essential.”
Pensioners to lose £2,600 from triple lock suspension
The suspension of the state pension triple lock will result in pensioners missing out on an average of £2,600 each over the course of five years. Even though the triple lock is expected to be reintroduced for 2023-24, the knock-on effect of the one-year suspension next year will continue, saving the Treasury a total of £30.5bn. Raj Mody, a partner at PwC, said: “Although the triple lock has so far only been suspended for one year, of course that year’s lower increase will feed through forever, so there’ll be a cumulative effect over time. This will affect current pensioners as well as those who have yet to reach state pension age. It remains to be seen whether the government will suspend the triple lock for a second year in a row.”
Brexit
The U.K. government hit back at France over its proposed retaliatory measures in a dispute over fishing access, as post-Brexit tensions between the two countries rose further.
Prime Minister Boris Johnson’s office said in a statement “France’s threats are disappointing and disproportionate,” after a French government spokesman said they may disrupt the flow of trade with Britain and energy supplies to the Channel Islands due to a lack of fishing licenses given to French boats since Brexit.
“The measures being threatened do not appear to be compatible with the trade and cooperation agreement and wider international law,” Downing Street said, referring to the post-Brexit trade deal signed on Christmas Eve last year. The measures “will be met with an appropriate and calibrated response.”
GlaxoSmithKline
GlaxoSmithKline expects to match 2020’s annual payout after a strong third quarter, with both turnover and profit up. The Brentford-based pharmaceutical company reported pretax profit of £1.75 billion in the three months to September 30, up 4.8% from £1.67 billion a year ago. Revenue increased by 5.0% to £9.08 billion from £8.65 billion last year.
Hydrogen
BP and Daimler Truck are to partner on the development of hydrogen infrastructure and the introduction of hydrogen-powered trucks in the UK, the two companies announced Wednesday. The agreement will see the two firms aim to introduce a hydrogen network, supporting the roll-out of technology for the decarbonisation of UK freight transport.
Shell
Royal Dutch Shell reported a jump in third-quarter profit as higher oil and gas prices bolstered performance. For the third quarter, adjusted earnings swelled to $4.13 billion from $955 million year-on-year.Total production fell to 3,068,000 from 3,081,000 barrels per day, partly due to the impact of Hurricane Ida.
Lloyds
Lloyds Banking Group has posted a pre-tax profit of £2bn in the third financial quarter, a significant improvement on the same time last year. The bank – Britain’s largest mortgage lender – reported a profit before tax of £5.9bn for the first nine months of the financial year.
WPP
WPP raised its full-year outlook after reporting higher third-quarter revenue as demand for marketing continued to increase, particularly in digital media and e-commerce services. For 2021, like-for-like revenue less pass-through costs growth was now expected in the range of 11.5% to 12.0%, up from 9-to-10% growth previously.
Meggitt
Meggitt warned on profit owing to supply chain disruptions and softer backdrop in the defence industry.For the full year, underlying operating profit was expected to be in a range of £170 million to £190 million and revenue to be 4% lower than 2020 levels.
DS Smith
DS Smith reported said first-half performance remained in line with its expectations as ‘very positive’ box volume growth, and price hikes more than offset rising input costs. For the half year ending 31 October 2021, the fast moving consumer goods sector, accounting for well over 80% of the company’s volume, had been ‘particularly strong, with continuing gains with large multinational customers,’ the company said.
Inchape
Inchape upgraded its outlook on annual profit following stronger-than-expected third-quarter results as higher margins offset a weaker sales amid a supply shortage. During the quarter, revenue increased 10% year-on-year.
Oil
Oil slumped to its lowest in two weeks after official figures showed a surprise jump in US inventories of crude, and rising cases of Covid-19 in Europe, Russia, and some outbreaks of infections in China dented hopes for an economic recovery.
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