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The Chancellor faced a difficult task before delivering Spring Statement 2022. Rishi Sunak is charged with balancing the UK’s books having dealt out billions of pounds worth of Covid support measures to individuals and businesses, whilst simultaneously under pressure to address the soaring cost of living.
With inflation at a 30-year high, it was confirmed by the Bank of England just days ahead of the Statement that interests rates have increased for the third time in four months to 0.75% from 0.5%, now at the highest level since March 2020. The Ukraine conflict has compounded matters, with an indefinite impact on food, fuel, and energy prices.
With widespread speculation that the Chancellor could reduce tax on fuel and energy, despite only recently announcing a direct support package for households facing increased fuel bills, it was also suggested he might U-turn on the planned increases in National Insurance contributions (NICs), due to come into effect on 6 April 2022.
Here, we recap some of the key announcements made by Rishi Sunak during his Spring statement and how they might affect SME businesses.
The Chancellor announced plans to improve energy efficiency, keep energy costs down, and reduce carbon emissions by extending the VAT relief available for the installation of energy saving materials to 0% for the next five years. This is a welcome relief but still requires investment which many individuals and businesses are not in a position to make, as rising costs put pressure on cashflow.
Fuel duty
For motorists and transport and logistics companies, there was some good news as fuel duty has been cut for only the second time in 20 years – and the biggest cut to fuel duty rates ever at 5p per litre. This comes into effect immediately and will remain until March 2023 as pump prices continue to increase to record levels. However, whilst the relief is welcome, the Government was able to deliver the cut and still earn more per litre in tax than in previous years due to the rate at which fuel prices are rising. In real terms, the cut will take £3.30 off the cost of filling a typical 55-litre family car. Savings for larger vehicles will be higher – but you will still be paying much more to fill up than ever before.
The Chancellor announced that the Government will raise the threshold for the amount people can earn before they pay NI by £3,000, making it equal to the current £12,570 personal tax allowance. For employees, this represents a tax cut worth £330 a year. However, many businesses were hoping for a complete U-turn on the planned increase in NICs to 1.25% from 6 April 2022, which many believe could have been achieved after the Government revealed record tax receipts across the board for 2021. The increased threshold reduced the amount on which NICs are due – but all contributions will still be made at the higher rate as planned.
Rishi Sunak also announced the first cut to the basic rate of income tax in 16 years – from 20% to 19%. However, this will have no immediate impact with unclear timescales and a pledge to introduce the cut ‘by the end of Parliament’ in 2024. Another welcome announcement that will do little practically to address the rising cost of living in the immediate and short-term future.
We welcome the Chancellor’s promise to cut tax rates on business investment in his Autumn Budget 2021, with SMEs having a significant role in driving the UK’s economic recovery from the pandemic, despite ongoing disruption to supply and rising costs. Within this, the current research & development (R&D) tax credit will be reformed, and the R&D expenditure credit could be made more generous. However, existing schemes such as the super-deduction have so far been underutilised and extended incentives for investment in key areas such as R&D, innovation, and technology would have a much large impact if introduced sooner rather than later.
The Chancellor also announced that the Government is bringing forward to 2022 the introduction of targeted business rate exemptions for eligible plant and machinery used in onsite renewable energy generation and storage. This could help construction companies innovate and solve some of the costs of rising prices – most notably fuel – but does require up-front investment.
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Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551