Could this be the biggest U-turn in British economic history?

Today, the new chancellor Jeremy Hunt delivered the news that the IR35 repeal has now been scrapped.

Alongside this, the chancellor is reversing almost all tax measures from the Mini-Budget in September that have not started parliamentary legislation.

Roughly £45bn of unfunded tax cuts has in just 3 weeks and 3 days seen a £32bn reversal.

What stays?

  • Cuts to stamp duty
  • The cuts to National Insurance

What goes?

  • Dividend tax cut – No longer proceeding with the cuts to dividend tax rates. Dividend tax rates will remain with the 1.25% increase applied (8.75%, 33.75%, 39.35%)
  • IR35 rule changes – No longer reversing off-payroll working reforms
  • No longer proceeding with the new VAT-free shopping scheme for non-UK visitors
  • No longer freezing alcohol duty rates
  • Planned 1p cut in Basic rate of income tax. This will remain at 20p indefinitely. The chancellor said it was not right to borrow to fund this tax cut and will remain at 20p to the pound (not 19p as previously announced), until economic circumstances allow it to be cut
  • Energy price guarantee will no longer last 2 years – A Treasury-led review will take place to look at how households and businesses are helped with energy bills from April new year. Support being provided from now until then will not change, but beyond that date there will be changes. This is to design a new approach to save taxpayers money while targeting support to those most in need.
  • Business support will go to those most affected and will incentivise energy efficiency.
  • Corporation tax will increase to 25% as originally planned

How the market has responded to the Hunt statement

In short, positively.

After the new chancellor’s statement, the pound rose and government borrowing costs fell as investors welcomed the news that almost all tax measures set out in the mini-budget were to be reversed. Sterling extended early morning gains against the dollar – that is now trading at around $1.13.

The news has also seen the interest rate (or yield) on UK government bonds fall. The yield on bonds, which is due to be repaid in 30 years, dropped when markets opened this morning, then fell further after Jeremy Hunt’s statement to 4.35%.

The yield on bonds due to be repaid 5 years’ time, which underpins the cost of new five-year fixed rate mortgages has fallen to 3.86%.

The drops suggest the financial market is welcoming the changes.

IR35 – What this means for contractors and businesses

IR35 rules will remain as they currently are, with no changes from 2023. In positive news, this means that contractors will be able to continue working as they have done since April 2021, with the duty to determine IR35 status remaining with the corporate end user.

The reforms were introduced in 2021 to the private sector, with the responsibility for assessing whether a contractor is self-employed or employed now being with the end client rather than the contractor themselves.

The liability was transferred to the party paying the wages. The changes were unpopular and confusing for many.

The controversy surrounding the changes prompted Sajid Javid to pledge a review of IR35. This was part of the Conservative party’s manifesto in the lead up to the general election.

From there, the former chancellor (as of last week) Kwasi Kwarteng pledged to repeal the reforms. However, they will not remain as there were.

Those who are genuinely self-employed and operate outside IR35 have nothing to worry about and continue to work as they are used to now.

Why did we get a new chancellor?

On Friday, Jeremy Hunt was confirmed as the new chancellor of the exchequer. This was after Kwasi Kwarteng was sacked on the same day, after 38 days in the job.

The Prime Minister, Liz Truss, replaces him after weeks of financial market turmoil in reaction to the “Mini-Budget”, which was announced in September.

Within the mini-budget, £43bn in unfunded tax cuts were announced and the markets quickly reacted, with the sell off of bonds causing a sharp rise in gilt yields.

This caused havoc for mortgage holders and lenders, and the pound dropped to historic lows, before the IMF warned the UK to scrap tax cuts.

What next?

For now, we have the clarity needed on what the landscape looks like until the next Budget, but we will be keeping a close eye on any further changes that clients of Gorilla will need to be aware of and that will affect them.