The government’s goal is to reform and reduce taxes. They will do this through its tax plan, which contains 3 priorities. First, they are taking action to help families with the cost of living. Second, it intends to cut and reform business taxes, to help create a new culture of enterprise and the conditions for private sector-led growth. Finally, they will share the proceeds of higher growth fairly with working people. The government also intends to make the tax system simpler, fairer, and more efficient through this plan.
Helping families with the cost of living
The government has already provided significant support in response to the cost of living. The £9 billion package to help households with energy bills which was announced in February this year, the freeze of alcohol duty and fuel duty to keep the costs down, cuts to the Universal Credit taper rate, and increases to work allowances to make sure work pays.
The spring statement sets out additional support with the extension to household support funds a cut to VAT on installation of energy-saving materials and a 5p per litre cut to fuel duty which will be in place for 12 months.
As the fiscal position improves this allows the government to deliver on its commitment to reducing the tax burden on working people starting with the increase in the amount of money that can be earned tax-free.
The spring statement also announces an increase in the National Insurance Primary Threshold and lower profits limit from £9,880 to £12,570, aligning it with the income tax personal allowance from July. This is so software developers and employers can update their systems and implement the changes. It also announces that from April 2022 self-employed individuals with profits between the small profits threshold and lower profits limit will continue to build NI credits but will not pay any class 2 NICs. this will help meet the governments’ ambition to ensure the first £12,500 earned is tax-free.
Creating the conditions for the private sector-led growth
As set out by the Chancellor at the Mais lecture on 24 February, the government considers that a new culture of enterprise is essential to drive growth through higher productivity. While UK productivity is higher than the average across the OECD, it is lower than in some of the UK’s key comparator countries. In 2019, productivity was on average 16% higher in the US, France, and Germany than in the UK. Stronger growth in productivity will drive improvements in living standards and support leveling up across the UK.
The government wants to create the conditions for the private sector to invest more, train more and innovate more. This includes cutting and reforming taxes to support these aims.
The UK is behind its international peers in adult technical skills. 18% of 25-64 years old hold vocational qualifications which are a third lower than the OECD average. As a result of this, the government has increased the spending on skills in England by £3.8 billion by 2024-25 in the 2021 Spending Review.
With four in five of the UK’s 2030 workforce in employment, the government’s spending alone will not address this challenge. Training as part of work is essential, but UK employers spend half the European average on training their employees along with less than 10% of the spending from UK employers on training goes to high-quality formal training.
The transformation in apprenticeship levies, now means the largest UK employers contribute the most to the cost of training of the UK’s workforce. There will be a review to see how more flexible apprenticeship training models can be supported while ensuring the quality of training remains high.
Currently, the amount UK companies spend on training their employees remains relatively low in comparison to other countries, however, the UK tax system still provides the same level of reward. The government will consider further interventions to encourage incentivising businesses to invest in the right kinds of training.
Multi-factor productivity growth was faster in the UK than in the other advanced economies in the years preceding the financial crisis, but it has since slowed. The increased funding to R&D as announced in the August 2021 budget will help to deliver the government’s science superpower ambitions.
Programs like the British Patient Capital, the Future Fund, and the Future Fund Breakthrough, have allowed increased access to finance for innovative, high-growth, and R&D intensive companies. The government is also reforming listing rules to make it easier for companies to raise public funding.
Half of the UK’s fastest-growing businesses have at least one non-UK-born co-founder and non-UK-born staff account for around 40% of academic staff in engineering, technology, and biological, mathematical, and physical sciences at UK universities. Hence, the government is focused on creating a visa regime that will attract highly skilled and entrepreneurial individuals across the world.
The UK has one of the most generous R&D tax relief systems in the world, spending, as a percentage of the GDP, more than any other country in the OECD. Since 2007, spending has increased from 0.05% to 0.34% of GDP in 2019. However, the UK has not seen the intended results, with self-financed business R&D only rising from 1.0% to 1.2% of GDP, which is less than half the OECD average. HMRC evaluations suggest that the Research & Development Expenditure Credit (RDEC) stimulates between £2.40-£2.70 of additional private R&D expenditure for each £1 of tax relief claimed, while the SME scheme only stimulates £0.60-£1.28.
In November 2021, the government set out a series of initial measures to reform the R&D tax relief system. Measures included the expansion of qualifying expenditures to cover data and some cloud computing costs, as well as refocusing R&D relief on the activity carried out in the UK. 2019, showed UK companies claimed tax relied on £47.5 billion of R&D expenditure, however, the ONS estimated that businesses only carried out £25.9 billion of privately financed R&D in the UK. Spring statement announces further detail on these measures as well as some further changes.
The government has recognised that there are cases where it is necessary to undertake R&D outside the UK. The government will legislate so vital R&D undertaken by businesses based in the UK can continue to qualify for tax reliefs where there is a material or regulatory requirement for this work to be carried out overseas. All cloud costs associated with R&D in the scope of reliefs will allow companies to claim for costs related to the storage of vital data, supporting data-heavy research such as genomic sequencing. Spring Statement announces an expansion of the qualifying expenditure to include all mathematics, this will support AI, quantum computing, and robotics while also supporting strong sectors such as manufacturing and design. The legislation will also be published in draft before being included in a future Finance Bill, for these measures to come into effect in April 2023.
Sharing the proceeds of growth with working people
Increasing the NI primary threshold and Lower the Profits Limit will reduce the burden of tax on working people. The basic rate of income tax is reduced by 1% to 19% from April 2024, which works out to over £5 billion a year, meaning the Spring Statement delivers the biggest net cut in personal taxes in over a quarter of a century. This cut will not apply to Scottish taxpayers because this power is devolved to the Scottish Government.
Alongside cutting taxes for working people, the government will also consider where there is scope for the tax system to be reformed and improved.