What the ‘mini-budget’ means for small businesses

Note to readers: This article was published on 26 September 2023 in reference to the mini-budget announced by then-Chancellor Kwasi Kwarteng on 23 September.

The majority of policies outlined below have since been reversed. You can read our latest article breaking down what Chancellor Jeremy Hunt's 2022 Autumn Statement means for small businesses.

Liz Truss’ new government has set out plans to achieve a steady 2.5% growth in the UK economy in the years to come. In what was described as a ‘fiscal event’ rather than a budget, Chancellor of the Exchequer Kwasi Kwarteng used his statement to the House of Commons on Friday 23rd September to announce a radical series of tax cuts and fiscal interventions.

So, following this raft of new fiscal measures, we look at the main plans that will affect small businesses and the self-employed.

Skip ahead:

• Corporation tax to stay at 19%
• National Insurance rise reversal
• Energy bills support
• Repeal of IR35
• The return of tax-free shopping
• Launching low-tax Investment Zones
• Changes to Stamp Duty
• Consequences of the mini-budget

A positive reception from the business community

The so-called ‘mini-budget’ has been broadly welcomed by the business community. Martin McTague, the National Chair of the Federation of Small Businesses (FSB) responded to what he called “pro-small business measures” and was encouraged that the new Truss government has “recognised that removing taxes on jobs, investment and entrepreneurs is essential for our economy.”

Shevaun Havilland, Director General of the British Chambers of Commerce (BCC) was also energetic in her support for the new measures, saying that “businesses across the UK will enthusiastically welcome the Chancellor’s pledge to focus on economic growth and speed up new infrastructure development.”

Criticisms and a lack of accountability

Elsewhere, the fiscal plans came under fire for:

• Disproportionately benefitting the wealthiest individuals and businesses
• Funding tax cuts through extensive borrowing, increasing national debt by an estimated £411 billion over four years
• Showing no sign of the transparent costing, forecasting and economic impact assessments that are usually published by the Office for Budget Responsibility (OBR) to accompany a major fiscal event

Kitty Ussher, Chief Economist at the Institute of Directors, commented:

We are concerned that the Chancellor had not asked the OBR to undertake its usual independent assessment of the impact of its proposals on government debt and the wider macroeconomy. Without this, neither businesses nor parliament have the reassurance that the scale of this intervention is affordable.

Corporation tax to stay at 19%

One of the most significant announcements for small businesses was the reversal of the planned hike in corporation tax. Back in March 2022, then-Chancellor Rishi Sunak announced that rates would rise from 19% to 25% for many businesses from April 2023.

Kwasi Kwarteng has argued strongly for keeping the low corporation tax rate of 19%, insisting that doing so helps the UK remain competitive in a global economy, attracting rather than disincentivising investment. It was therefore unsurprising that the new Chancellor axed Sunak’s proposal, in line with pledges made by Prime Minister Liz Truss during her leadership bid.

How does this change affect small businesses?

On the surface, scrapping a rise in corporation tax is good news for businesses, and the majority of UK firms will avoid paying a larger tax bill thanks to this policy reversal. However, the decision to axe the tax rise will cost the Treasury roughly £12 billion and will mostly benefit the largest businesses, particularly the top 10% most profitable.

Under Rishi Sunak’s original plan, business would pay:

• 19% on profits up to £50,000
• A progressive rate of between 19% and 25% on profits between £50,000 and £250,000

This means that only 10% of UK companies (those with profits over £250,000) would actually have been charged the full 25% rate and it is these companies who benefit most from the policy reversal announced this month. Meanwhile, almost 1 in 3 UK businesses post profits of less than £50,000 – meaning they’ll see no additional benefit.

Furthermore, analysis by the Institute for Public Policy Research (IPPR) suggests that the central assumption that lower corporation tax encourages investment and bolsters growth is not necessarily true in the case of the UK.

Back in 2019, the UK had the lowest level of business investment of the G7 nations, despite also having the lowest level of corporate tax. The IPPR suggests that incremental cuts to corporation tax in the UK over the last 15 years have not led to higher levels of investment and growth.

National Insurance rise reversal

Back in March 2022, Rishi Sunak introduced an increase in National Insurance contributions (NICs) of 1.25 percentage points for 12 months, followed by the permanent introduction of a 1.25% Health and Social Care Levy. This additional revenue would be ring-fenced to help the NHS and social care sector recover following the Covid-19 pandemic.

Under the new government’s mini-budget plans, both the Levy and increase in NICs have been scrapped, returning National Insurance rates payable by employees, employers and the self-employed (classes 1, 1a, 1b and 4) to their previous levels.

The government estimates that roughly 920,000 firms across the UK will get a tax reduction of nearly £10,000 thanks to the reversal in policy, while analysis from the Daily Telegraph at the time of the initial rise found that reducing class 1a and 1b NICs from 15.05% back down to 13.8% will save the average firm roughly £3,000 per year.

Because employers must pay NICs for each of their staff, regardless of whether the business is profitable, many small businesses will see this as a welcome intervention. However, the major downside of this decision is that the roughly £13 billion a year expected to be generated by the Health and Social Care Levy will no longer materialise, forcing the government to borrow further to maintain their commitment to ring-fencing funding for the care sector.

Energy bills support

One of the most pressing issues currently facing small businesses is the spiralling cost of energy bills, which historically haven’t been covered by a price cap in the same way as household energy bills.

The government will intervene to cap the price of commercial energy tariffs for six months from October 2022. With a cut of nearly 50% compared to the price that energy was expected to reach this winter, businesses will pay no more than:

• Gas: 7.5p per KWh
• Electricity: 21.1p per KWh

There is a general consensus among businesses that this intervention is timely and hugely important for helping small firms survive the winter. However, it is worth noting that because energy prices were expected to rise so significantly, many firms will still end up paying more than they currently do.

Furthermore, at an estimated cost of £29 billion for the next six months, the move to support businesses with the cost of electricity and gas will add significantly to UK government borrowing in the years to come.

Repeal of IR35 off-payroll updates

IR35 was originally introduced back in 2000 as an anti-tax avoidance measure to ensure the correct tax was paid in contracts between independent contractors and clients. Contractors had to assess and declare whether their contract with a client was:

• Inside IR35 – meaning they were employees and should be taxed on a PAYE basis
• Outside IR35 – meaning the contractor would be responsible for their own tax and National Insurance

It was amended in 2017 and again in 2021 with so-called ‘off-payroll updates’. This meant that the client business was now responsible for determining the IR35 status of every new contract with an independent contractor. The result was that businesses became more cautious about hiring freelancers and independent contractors.

Kwasi Kwarteng announced in his mini-budget statement that the government will be repealing the 2017 and 2021 updates to IR35 after complaints that the update itself was poorly rolled out and was “a mess” and “confusing”.

For many small businesses, the repeal will make little difference as they were never affected by the IR35 changes.To be subject to the updates, businesses had to meet two or more of the following criteria:

• An annual turnover of more than £10.2 million
• A balance sheet total (assets in the company’s balance sheet, before deducting liabilities) of more than £5.1 million
• More than 50 employees

This repeal will be seen as good news for many larger businesses that have struggled with the complexity of the new regulation and the excessive time and money that has to be sacrificed to be compliant.

The return of tax-free shopping

In a move estimated to cost £1.3 billion in 2024-25, the mini-budget sees the return of tax-free shopping for international visitors. Since it was scrapped in 2020 by then-chancellor Rishi Sunak, retailers have been calling for the return of the VAT refund scheme. They argued that the UK was the only European country without a scheme of its kind, which put the country at a competitive disadvantage and led to tourists spending more money elsewhere.

While many aspects of the mini-budget have proved highly controversial, the decision to reintroduce tax-free shopping has been widely welcomed by retailers and the hospitality industry. Helen Dickinson, chief executive of the British Retail Consortium, predicted the move “will boost sales and bring the UK back in line with other European nations”.

Representing luxury brands and retailers such as Alexander McQueen, Burberry, Harrods, Rolex and Rolls Royce, CEO of Walpole Helen Brocklebank commented:

I couldn’t be happier that the government has announced the return of tax-free shopping for visitors to the UK. The £30 billion luxury tourism sector supports a wide ecosystem of manufacturers, retailers, cultural institutions, hotels and restaurants. This decision will ensure the future of many small businesses and create jobs.

Launching low-tax Investment Zones

The mini-budget also unveiled plans for low-tax, low-regulation Investment Zones across the UK, intended to attract businesses and drive growth in the selected areas. The government is currently in talks with 38 local authorities, with 24 areas already earmarked as prospects.

While details will be ironed out on a case-by-case basis, Investment Zones could see reduced tax burdens for both businesses and individuals living and working in the areas, including:

• 100% business rates relief on newly occupied and expanded commercial premises
• Full Stamp Duty relief on land bought for commercial or residential developments
• 100% first year enhanced capital allowance relief for plant and machinery
• Zero rate employer NICs on new employee salaries up to £50,270 per year.

The chosen areas will also see relaxed planning regulations – thought to include removing restrictions on height limits, dropping requirements for affordable housing, and the watering down of environmental protections to allow for new developments.

The cutting of red tape and slashing of taxes could remove potential barriers to establishing or expanding a business in the areas selected to become Investment Zones – but the plans have received a mixed response.

Ben Houchen, Conservative Mayor of Tees Valley, welcomed the plans:

As well as greater tax incentives to attract businesses . . . they also reduce the bureaucracy and protracted planning process which often stops investments from happening all together.

Meanwhile Paul Monaghan, Chief Executive of the Fair Tax Foundation, accused the government of setting up "another race to the bottom", which will mean “businesses relocate just over the line, so there’s an area of depressed economic activity around it.”

Changes to Stamp Duty

In a bid to stimulate activity in the housing market, the government cut Stamp Duty in England and Northern Ireland. The following rates now apply:

• 0%: £0 to £250,000 (or £425,000 for first-time buyers)
• 5%: £250,000 to £925,000
• 10%: £925,000 to £1,500,000
• 12%: £1,500,000+

The move has received a mixed response. While many will save thousands of pounds on Stamp Duty, industry figures have warned that these savings are likely to be cancelled out by rising interest rates.

Furthermore, no change has been announced for additional property surcharges. This means that anyone who buys a second property, including buy-to-let landlords, will still have to pay an extra 3% on top of the standard Stamp Duty rates.

Consequences of the mini-budget

Over the weekend, the reaction from the political world has been swift, with a mixture of praise for bold and decisive action and criticism for the lack of forecasting and excessive levels of borrowing. The reaction of the markets has been significant, with the value of the pound slumping to an all-time low against the US dollar, a result that the Financial Times labelled “as bad a verdict as any chancellor could fear”.

Faisal Islam, the BBC’s Economics Correspondent, expressed worry that the fallout of the mini budget was causing a concurrent rise in interest rates and a rapid drop in the value of the UK currency, commenting:

It is an unusual and concerning sign that these borrowing costs are going up at the same time as the value of sterling has fallen sharply.

For small businesses, the upshot of a sudden and dramatic slump in the value of the pound means that the cost of importing goods or raw materials from neighbouring countries will rise as the UK currency falls, relative to the euro. Furthermore, the Organisation for Economic Co-operation and Development (OECD) has warned that it expects the UK economy to completely flatline in 2023 with zero growth. This will likely create an economic climate in which smaller businesses may struggle to grow.

In summary…

The markets’ reaction to the Chancellor’s mini-budget has been increased volatility, accompanied by long-term concerns about the affordability of the policies as well as credible accusations that fiscal policy has been leveraged to largely benefit the wealthy.

However, the general reaction of the small and medium-sized business world has been one of cautious optimism. The return of VAT-free shopping, the freezing of corporation tax and the repeal of the confusing IR35 tax rules have been particularly welcomed. Furthermore, the creation of Investment Zones has the potential to stimulate growth and small business opportunities, while acknowledging there are significant concerns over environmental protections associated with the policy.