The new Chancellor’s first Budget last week was anything but mini. In trying to achieve the government’s goal of stimulating the economy despite increasing interest rates, high inflation and fears of a recession, Kwasi Kwarteng appeared to be leaving no tax stone unturned. With promises of further tax cuts next year, commentators are now wondering what could be left to announce in the main Budget in a few months’ time.
Putting aside the very knotty matter of how all this will be paid for, the big question is whether the policies will translate into improved consumer and business confidence. Have they gone far enough to help with increasing costs so that individuals feel they are keeping more of what they earn, and businesses feel able to expand and invest?
For dealers there were many positive points, but these must be tempered by the reality of the wider business and economic environment, including rising interest rates and uncertainty over energy costs once the initial six month’s support has ended. So what changes are likely to be most relevant to you?
With effect from 6 November 2022 the temporary NI increase of 1.25% which would have eventually become the Health and Social Care Levy has been removed. The new rate applies from this date – there is no retrospective saving – and directors and the self employed who use an annual earnings period for NI, will be subject to a blended rate for the year. Average savings for individuals will be £330 a year, but this is skewed by the large positive effect on higher earners. Basic rate taxpayers will only see a saving of about £175, which may be easily swallowed up by general cost increases and therefore unlikely to make them suddenly splash out on a new vehicle.
For businesses, the average saving is £9,600, with more workforce intensive sectors naturally benefitting the most. In fact, retail trade and the repair of motor vehicles and motorcycles were specifically mentioned in the briefing note.
Motor retailers pay a variety of different types of NI in addition to those on salary. Class 1A on benefits on kind can be a sizeable cost and for this tax year an average rate of 14.53% will apply when you file your P11Ds next July. Many of you enter into PAYE settlement agreements as well, and Class 1B will be set at the same rate.
These changes also affect the taxation of dividends, as the 1.25% increase to each rate for this tax year, will be removed from next April. In addition, the tax paid on overdrawn directors’ loan accounts, will reduce by 1.25% to reflect the amendment to the dividend rates.
Income tax
The planned 1% cut to the basic rate of income tax has been brought forward by 12 months to April 2023. Please note these changes do not apply to Scottish taxpayers. We wait to see the reaction from the devolved government, who are unlikely to want England to become a tax haven for Scots!
The combination of this income tax reduction and the NI change means that careful consideration should be given to the remuneration strategies for both staff and shareholders. If you are due to pay a bonus, a short delay until November will provide NI savings, and if dividends can be delayed until next tax year, personal tax savings could result.
Corporation tax and capital allowances
As expected, the increase in corporation tax to 25% next year has been cancelled, leaving the tax rate at 19%. This 25% rate would have applied to profits over £250,000 with marginal rates for profits between £50,000 and the £250,000 limit. This is a very welcome measure as many dealers have group structures for purely business purposes which would have triggered the higher rates in spite of them not seeing any real increase in profits.
A number of manufacturers have launched new corporate identities over the last few months, which will gradually be rolled out across their networks. If tax relief can be obtained through capital allowances, this can reduce the real cost of this non-discretionary spend to you.
The limit for the Annual Investment Allowance, which provides 100% tax relief on qualifying capital spend, was due to fall from its current level of £1million to £200,000. If you consider the average cost of a CI upgrade, this limit could have been easily breached, delaying the timing of tax relief. The Chancellor has announced that the limit will now permanently be set at £1 million. Although unlikely to influence whether to invest in capital assets, this announcement provides certainty over the availability of relief. It does not however remove the need to identify qualifying spend in the first place, and it is important that you keep your tax advisers fully informed of projects you may be undertaking.
It is not unusual for dealers to have non-employees performing roles such as valeters, cleaners and drivers. The Chancellor has reversed regulation changes from 2017 and 2021 which placed the onus on the business contracting the service to assess whether the individual involved should actually be taxed as an employee.
This does not mean that you can stop performing employment status checks on individuals, but if they provide their services via a company, it is their responsibility to ascertain the correct taxation treatment of their income.
These zones are meant to encourage investment and new economic activity through a combination of more relaxed planning processes and special tax reliefs. More detail is due to be provided, but these reliefs will include business rates and stamp duty relief, enhanced capital allowances including a very generous increase to Structures and Buildings relief on build costs to 20% and a zero rate of employers NI on new employee earnings up to £50,270 per annum.
The government wants these areas set up as soon as possible and is opening discussions with 38 local authorities to gauge their interest. If you are considering relocating your dealership and an investment zone is within your existing geographical area, this could provide enormous tax savings. Of course, a site move or expansion into a new area can only be undertaken with manufacturer approval, and it will be interesting to see their reaction to this measure.
Has the Mini-budget benefited dealers?
Whenever we have tax announcements I always consider two factors – will it save you money directly and will it create an environment where people want to buy vehicles? This mini-Budget certainly contains a lot of tax savings for both individuals and dealerships. The NI and CT changes will provide a direct tax saving to you, and individuals will see a reduction in their tax burden from November and continuing into next year. We do however have other factors at play. Firstly, as most vehicles are now purchased via some kind of financing, and even servicing is starting to evolve in this direction, the rise in interest rates has to be a concern. It will make it more expensive for customers to acquire vehicles, plus will generally impact their purchasing power through increased mortgage costs. This will be an additional factor for consumers to consider when they are thinking about changing vehicles.
Businesses are not immune from this increase in cost of borrowing, and most auto retailers I know have multiple sources of funding which will need to be carefully managed.
Exchange rates could also cause problems. If the pound remains weak could this eventually have an effect on the cost of new cars?
Finally, all the tax measures do not remove the overriding issue that it is still difficult for many franchises to obtain new vehicles, and this doesn’t look set to improve for a while.
Whatever changes lay ahead, we will be here to interpret the new legislation and ensure you are up to date with all the opportunities and risks there may be.
If you would like to discuss how the announcements affect you and your motor business, please contact me at michelle.malone@armstrongwatson.co.uk
