Sunak employs Thatcher-like tactics with taxation shift

UK Prime Minister Rishi Sunak revealed his plans for a ‘gear shift’ in taxation in an interview with The Spectator this week.

Sunak’s strategy is to control spending and welfare to pave the way for tax cuts in the coming year. “We are in a position to be able to do all that because we have got inflation down,” he said. “The economy has turned a corner and that means that there can be a gear shift in how we approach taxes.”

This approach echoes the fiscal policies of Margaret Thatcher, focusing first on reducing inflation before implementing tax cuts.

Sunak stressed his priority moving forward would be to control spending and welfare in order to cut taxes in the months ahead.

Economic impact

Sunak’s tax initiatives come at a time when the UK’s tax burden has reached a record high due to the economic impact of the Covid-19 pandemic and the war in Ukraine.

However, Sunak defended his record, stating that critics focusing on the rising tax burden rather than recent tax cuts are taking a glass-half-empty approach. “Why is the tax burden as high as it is? It’s because we had a once-in-a-century pandemic and we had a war in Ukraine, both of which necessitated an enormous response from the government,” he explained.

Sunak’s tax initiatives are not just about economic recovery, but also about political strategy. With the Conservatives preparing for a tough re-election battle, Sunak’s tax cuts could be a key campaign message.

He criticised the Labour party’s plans to borrow up to £28 billion a year for its green investment plan, stating, “A Labour party that wants to borrow £28 billion a year is not going to control welfare or public spending. A Conservative party is going to do those things – and cut your taxes instead.”

This is not the first time in recent weeks the UK PM has put tax cuts firmly on the agenda.

In a speech on November 20, Sunak declined to give any specifics but stressed the focus was “very much the supply side” of the economy in a signal that business tax cuts are more likely than personal ones.

Now that inflation had been halved, he said, the government would take “five long-term decisions” as part of the “next phase” of the government’s economic plan after a fall in inflation to 4.6% in October.

He listed them as: reducing debt, cutting tax and rewarding hard work, building domestic and sustainable energy, backing British business, and delivering world-class education.

Sunak said the government would cut taxes in a “serious, responsible way” based on fiscal rules to deliver “sound money and alongside the independent forecasts of the Office for Budget Responsibility”.

“And we can’t do everything all at once. It will take discipline and we need to prioritise. But over time, we can and we will cut taxes,” he said.

The Autumn Budget: Tax in focus

The UK’s 2023 Autumn Statement introduced several key tax measures:

1. Research & Development (R&D) Tax Reliefs: Enhanced support for R&D intensive small or medium enterprises (SMEs) was announced. Eligible loss-making companies can claim a higher payable credit rate of 14.5%. The intensity threshold for this support will be reduced from 40% to 30% from April 2024, with a one-year grace period under certain conditions.
2. Restricting Nominations and Assignments for R&D Tax Credits: Changes will be made to stop payments being made to third parties for R&D tax credits, ensuring payments go directly to claimants from April 2024.
3. Reform of Audio-Visual Creative Tax Reliefs: Film, TV, and video games tax reliefs will be converted to refundable expenditure credits from January 2024. Animated films and children’s TV programmes will be eligible for a 39% rate.
4. Pillar 2: Multinational Top-up Tax and Domestic Top-up Tax Amendments: These amendments reflect internationally agreed guidance and consultation feedback, affecting accounting periods beginning on or after December 31, 2023.
5. Investment Zones: Tax relief for Investment Zones has been extended from five years to 10 years, until 2031.
6. National Insurance Contributions (NICs): From January 6, 2024, employees’ NICs will fall from 12% to 10% on income between certain thresholds. Class 4 NICs for the self-employed will reduce from 9% to 8% from April 6, 2024.
7. Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT): These schemes will be extended until April 6, 2035.
8. Full Expensing for Businesses: Companies can now obtain 100% tax relief on qualifying main rate plant and machinery expenditure. This measure is permanent to drive business investment.
9. Simplification of R&D Reliefs: The SME and large company R&D Expenditure Credit schemes will be merged into a single regime from April 1, 2024.
10. Audio-Visual Creative Tax Reliefs: These will switch to expenditure credits from January 1, 2024, with varying rates for different sectors.
11. Other Measures: These include a consultation on the taxation of remote gambling, freezing alcohol duties, extending business rates relief, and changes related to pension scheme tax charges.