The UK Spring Budget 2023: A focus on the four E’s
16 March, 2023
The state of the UK’s economy? Not too bad all things considered. GDP hasn’t dipped as expected in recent months and it looks like technical recession will now be avoided. Perhaps more importantly, the rampant, economically damaging inflation which has been in the headlines for many months now seems to have peaked and is on the way down from a November high of 11.1%. The Bank of England expects the rate to be back to a more sustainable 2.9% by Q4 of 2023 and to fall further still thereafter. However, economic conditions are still difficult and the key challenge will be to deal with the weak productivity which has seen the UK’s economy effectively stall post-Covid.
In response to this challenge, the focus from the Chancellor, Mr Hunt, is a Budget aimed at stimulating growth via a focus on the 4 E’s; Employment, Enterprise, Education, and Everywhere.
A growth agenda
The first two of these headings are perhaps the most significant. On Employment, boosting the labour supply is seen as the key to accelerating productivity. The focus is on those over-50 years old who have left the workplace (largely since the COVID-19 pandemic) and parents. Mr Hunt announced pension reforms designed to encourage over-50s to keep building an increased pension pot and childcare measures designed to ensure that parents with young children are better off in work than relying on state aid. There was also a nod to overseas workers, with changes announced to simplify short term business visitor rules. For Enterprise, the key is to encourage business investment and here, tax changes were confirmed with a programme of enhanced capital allowances and improved Research and Development credits for certain businesses investing in high tech sectors.
The similarities to the Isle of Man’s own position are marked. Economic growth is the key to delivery of the island’s long-term strategy with the generation of new, well-paid jobs. The Department of Enterprise has recently launched a consultation around the work permit system with a view to attracting workers to the island and discussion continues around potential tax initiatives which might attract new entrepreneurs and businesses, and encourage existing businesses to invest. Perhaps the UK Spring Budget will prove to be a call to arms in this regard as so far we have seen little in the way of tax initiatives to encourage business investment in the island. Remember that despite the island’s zero percent corporate tax rate, corporate tax incentives are still important as for locally owned businesses, corporate profits are taxed when distributed to shareholders. The battle to attract employee and entrepreneurial talent is heating-up and the Isle of Man should be mindful of the close competition.
Other tax measures
Of the other tax measures announced, perhaps the most eye-catching from an Isle of Man point of view is the confirmation that the UK government will continue working with industry stakeholders to consider possible reforms to simplify the VAT treatment of financial services (FS). The aim will be to reduce ‘inconsistencies’ in the treatment of FS businesses, providing them with greater clarity and certainty. Any measures announced will directly translate to the Isle of Man VAT treatment of FS businesses and so this is an area to watch closely.
Under the heading of ‘Tackling the Tax Gap’, the Budget mentions measures designed to deter those who promote or pursue tax avoidance and fraud. This will include anyone engaged in offshore avoidance or fraud. The UK government will consult shortly on the introduction of a new criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme. They will also consult on expediting the disqualification of directors of companies involved in promoting tax avoidance including those who exercise control or influence over a company. Further, prison sentences for the most egregious forms of tax fraud will double from 7 to 14 years.
In summary
From an Isle of Man perspective this was a relatively quiet UK Budget. The focus on the domestic economy is to be expected in these difficult times particularly as the next UK general election approaches. Perhaps though, the messaging delivered around driving growth will serve to encourage the Island to look more closely at its own strategic approach and how our tax system can help to attract the talent and investment needed.
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