Government Updates on Taxes, Education, Cyber Security, and Housing Targets

Welcome to our round-up of the latest business news for our clients. Please get in touch with us if you want to discuss how these updates affect your business. We are here to support you!

Chancellor’s Speech Paving the Way to a Potentially Difficult Autumn Budget

The Chancellor of the Exchequer, Rachel Reeves, addressed the House of Commons last week to detail the results of a Treasury spending audit. She has alluded to this in previous comments when making assessments of the public spending inheritance.

She claimed that the audit revealed £22 billion of unfunded pledges inherited from the previous government. These include commitments to the Rwanda scheme, the Advanced British Standard, and the New Hospital Programme. Shortfalls were also found from not increasing departmental budgets to cover public sector pay settlements.

As a start on dealing with the overspending, the Chancellor announced savings of £5.5 billion for this year, with a further £8.1 billion to come next year.

These measures include:

• Cutting winter fuel payments to only those who receive other state support. (Note that winter fuel payments are devolved in Scotland and Northern Ireland.)
• We are scrapping the Rwanda migration partnership and retrospection of the Illegal Migration Act.
• Cancelling the Investment Opportunity Fund and other small projects.
• Next year, the Advanced British Standard and unaffordable road and railway schemes will be cancelled.
• The New Hospital Programme will also be reviewed.

The Chancellor did confirm that the Independent Pay Review Body recommendations for pay uplifts for public sector workers have been accepted. These will average 5.5%.

New plans were outlined for Spending Reviews to be set every two years but over three years, so there is a one-year overlap with the previous Spending Review. This should allow for a more joined-up approach to public finance.

The Chancellor also committed to a single major fiscal event a year, as has been the case for the last few years. This will continue with the recent pattern of the budget taking place in the autumn, covering all significant tax and spending announcements. Any spring statement would respond to the Office for Budget Responsibility’s second forecast.

As part of her speech, the Chancellor also outlined tax plans that will be confirmed in the budget, which is scheduled for October 30. These include:

• Ending VAT tax breaks for private schools from January 1 2025.
• Replacing the non-domicile regime with a new residence-based regime (this was already planned under the previous government).
• Extending the Energy Profits Levy for one year to March 31 2030, tightening its investment allowances, and increasing the levy rate to 38% (from 35%) from November 1 2024.
• Closing the carried-interest loophole used by private equity fund managers to reduce their tax.

These measures have all been discussed in the Labour Party manifesto so there are no great surprises here.

Of course, you don’t need a calculator to see that the £22 billion shortfall in public spending will not be covered by the saving measures the Chancellor has already announced. So, it remains to be seen whether there will be any further ‘pain’ in the October Budget.

Alternatively, the Chancellor may be delivering all the bad news now, while it’s expected following the change in government, and she’s saving some good news for the budget. We will wait to see, but we will keep you posted on all the changes that may affect you. If you are concerned about how any of these measures affect you, please feel free to contact us; we will be happy to help you.

See: Chancellor’s Statement on Public Spending Inheritance

Bank of England Reduces Base Rate to 5%

As anticipated, the Bank of England reduced its base interest rate on August 1 from 5.25% to 5%. The decision was a close call, with a majority of five to four voting in favour of the cut.

The Monetary Policy Report accompanying the decision explains that while higher interest rates have helped return inflation to the Bank’s target of 2% and allowed them to make this cut, they are expecting a temporary increase to 2.75% later this year.

Why might inflation increase again?

The fall in household energy prices has been helping to bring inflation down. However, as energy prices normalise, their downward pull on inflation will end. Prices for services such as hotels and restaurants, insurance, and housing rents, on the other hand, continue to rise at rates well above their past averages.

In addition, demand for goods and services this year has been higher than expected, which may contribute to higher inflation.

However, the Bank considers this to be a temporary situation and expects inflation to fall back to its target level next year.

Is another cut likely?

The Bank is prioritising keeping inflation low and has said that it will not cut rates too much or too quickly. This suggests that a further cut when they next meet on September 19 is unlikely.

What should you do about the rate cut?

Regardless of future decisions, the cut to 5% is good news for borrowers but may be better for savers.

Commercial banks typically follow the Bank of England, but only sometimes, all to the same degree. If you have loan finance on variable interest rates, check to see that the interest rate reduces. Many loans and overdrafts have a rate tied to the Bank of England’s base rate, so these should be reduced automatically.

For savings, it may be worth shopping around to ensure you get the best market rates.

See: Monetary Policy Report

Abolishment of Furnished Holiday Lettings Tax Regime Confirmed

HM Revenue and Customs (HMRC) has published draft legislation and a policy paper outlining the proposal to abolish the furnished holiday lettings (FHL) tax regime. The previous government originally announced this, and any hopes that the new government may stall it are now laid to rest.

The new measures are proposed to take effect for income and capital gains tax on or after April 6, 2025, and for corporation tax from April 1, 2025.

The proposed revisions will remove the tax advantages that furnished holiday let landlords have over other property businesses, as follows:

1. Loan interest will be restricted to the basic rate for Income Tax.
2. Capital allowance rules for new expenditure will be removed and replaced with the replacement of domestic items relief available to other property businesses.
3. Capital gains tax reliefs based on disposing of a business asset will no longer apply to furnished holiday lets.
4. Furnished holiday income will no longer be included within relevant UK earnings when calculating maximum pension relief.

Some specific transitional rules will apply to these changes.

If you own properties that currently qualify for the FHL tax regime, we recommend that you review the effects of the legislation change to determine if you need to take any action. If you need help with this, please do not hesitate to book a free consultation, and we will be pleased to help you.

See: HMRC Furnished Holiday Lettings Tax Regime Abolition

VAT on Amazon Fees from August 1 2024

From August 1, 2024, Amazon’s selling fees charged to UK vendors will be subject to 20% VAT.

This change is due to a modification in the legal entity that charges the fees. Previously, fees were charged by Amazon Service Europe S.a.r.l (ASE), which did not have a UK establishment, so the fees were subject to the VAT reverse charge procedure. From August 1, Amazon EU S.a.r.l (AEU), which has a UK branch, will charge fees. This means that AEU must charge 20% VAT on fees.

Vendors who are VAT-registered will be able to reclaim the VAT, subject to the usual partial exemption rules. Those not VAT-registered will see their selling fees increase by 20% because they cannot claim the VAT.

Generally, such increases in VAT are primarily borne by the consumer, as vendors pass the increased costs onto their customers.

For more information, see Amazon Seller Central Forum

Changes to National Minimum Wage Recommendation Criteria

The government made changes last week to the Low Pay Commission (LPC) ‘s remit, which will now require it to consider the cost of living when recommending minimum wage rates.

The LPC has also been instructed to narrow the gap between the minimum wage rate for 18-20-year-olds and the National Living Wage. The long-term objective is to remove the age bands and have a single adult rate.

Each October, the LPC recommends to the government the minimum wage rates to apply from the following April. The new remit keeps this process and timeline in place, allowing businesses to plan for uplifts.

The LPC’s remit will continue to include the cost of living and its impact on business, competitiveness, the labour market, and the wider economy.

See: National Minimum Wage and National Living Wage: Updated Low Pay Commission Remit 2024

Changes to Non-Domiciled Tax Status to Go Ahead

The previous government included plans to end non-domiciled tax status in the Spring Budget and replace it with a four-year foreign income and gains (FIG) regime. The new government has now announced its intention to continue with these plans while ending some advantages for existing non-domiciled individuals.

What the Change in Tax Status Will Mean

Preferential tax treatment based on domicile status will be removed for all new FIG arising from April 6 2025. This means that foreign income and gains will all be taxable in the UK, where you are classed as residing in the UK, not just that included under the remittance basis.

A Relief Will Be Available for New Arrivals

New: New arrivals to the UK will have 100% relief in their first four years of tax residence, as long as they have not been a UK tax resident in any of the ten consecutive years before arriving.

Transitional Measures

As a transitional measure, the government previously announced a 50% reduction in foreign income subject to tax for the first year for those losing access to the remittance basis. However, the government has said this will not happen anymore.

The government has also outlined transitional arrangements to cover FIG that arose before April 6, 2025, and is remitted to the UK afterwards—it will be taxed when remitted as per the current rules. A new Temporary Repatriation Facility (TRF) will also be available, allowing for a reduced tax rate on remittance for a limited period after the remittance basis ends.

Changes to Inheritance Tax Included

The government plans to replace the existing domicile-based system for inheritance tax (IHT) with a new residence-based one from April 6 2025.

The basic test they propose for whether non-UK assets are within the scope of IHT will be whether a person has been resident in the UK for ten years before the tax year in which the chargeable event happens. A person will also be kept within scope for ten years after leaving the UK.

There are also plans to end the use of Excluded Property Trusts, which keep assets out of the scope of IHT. The budget on October 30 will confirm how the rules relate to this and how existing trusts are affected.

If you are concerned about how these changes will affect you and the tax you pay, please book a free consultation, and we will be happy to discuss this with you.

See: Non-UK Domiciled Individuals Policy Summary

VAT on Private School Fees: What That Means for You

Draft legislation has now been published for the government’s plan to end the VAT exemption for private school fees.

The government is also legislating to remove private schools from being eligible for business rates charitable rates relief. Because business rates policy is devolved, the change will only affect private schools in England. VAT policy, however, is reserved, and so the VAT changes will affect private schools across the UK.

The Current Situation for VAT

Currently, private schools, as regulated education providers, qualify as exempt from VAT. This means no VAT is currently charged on private school fees, and private schools cannot recover any VAT they incur on expenditures.

What Will Change?

From January 1 2025, all education services and vocational training supplied by a private school or a “connected person” for a charge will be subject to VAT at the standard rate of 20%. Any boarding services closely related to this supply will also be subject to 20% VAT.

For parents, this means a likely 20% increase in private school fees beginning next year. However, since private schools can now claim back the VAT on expenditures they incur, this might provide some latitude for the school to absorb some of the increase.

What if the Local Authority is funding a Pupil?

In some cases, pupils are in a private school because their needs cannot be met in a state-run school, and the Local Authority funds this. Where this is the case, the Local Authority will be compensated for the VAT they incur. If this is your situation, then you should see no change.

Can I Pay Fees in Advance to Save VAT?

Unfortunately not. As an anti-forestalling measure, any fees paid from July 29 2024, that relate to the term starting in January 2025 and onwards will be subject to VAT.

Does This Apply to Nurseries?

The intention is that nurseries, whether standalone or attached to a private school, will remain exempt from VAT. The fees for children who turn compulsory school age will become taxable. So, this means that VAT will start to apply when a child begins their first year of primary school.

How About Sixth Form?

Education and vocational training provided by standalone private sixth-form colleges or ones attached to a private school will also be subject to VAT. However, further education colleges classified as public sector institutions will not be subject to VAT.

Is There Any Change for State Schools and Academies?

No, state schools, including academies, will continue to be exempt from VAT for education and boarding.

How About Other Goods and Services Supplied by Private Schools?

Outside of boarding, a private school often provides school meals, transport, books, and stationery. The government has confirmed that other closely related goods and services other than boarding, which are for the direct use of the pupils and necessary for delivering education to the pupils, will remain exempt from VAT. This opens the possibility that a school might limit the amount of VAT they charge by assigning a high value to these VAT-exempt goods and services and a low value to the VATable education and boarding services.

However, the government has confirmed their awareness of this, and any such practice will be challenged.

The additional issue with having a mixture of taxable and exempt supplies is that it can affect the amount of VAT the school can recover on its expenditure. Partial exemption calculations are needed, and HM Revenue and Customs (HMRC) have said they will provide specific guidance for schools on how to do this.

It’s also been confirmed that VAT will need to be charged on any education provided after school hours or during the holidays. However, before—or after-school childcare or childcare holiday clubs that just consist of childcare will remain exempt from VAT.

When Will Private Schools Need to Register for VAT?

Private schools that are not already VAT-registered will need to register from January 1, 2025. Schools that don’t already make any taxable supplies will be able to register from October 30. Schools that do currently make taxable supplies, such as hiring out facilities, can choose to register voluntarily early.

If you are involved in running a private school and would like help understanding what these VAT changes will mean to you or would like advice on how to deal effectively with VAT, please book a free consultation. We would be happy to help.

See: VAT on Private School Fees: Removing the Charitable Rates Relief for Private Schools

IPO Issues Warning About Misleading Invoices

The Intellectual Property Office (IPO) has issued a warning for businesses to beware of unsolicited payment requests. There has been a recent upsurge in the number of these bogus requests reported. The unsolicited requests may ask for payment for trademarks, designs, or patent services. Following payment, the ‘services’ may not be provided or may not benefit the payer.

Invoices may also request payment for services at a much-inflated price that are available directly from the IPO at a much lower amount, or even free of charge. The IPO states that the payment request will usually come from an organisation you do not recognise and may be accompanied by a copy of a fraudulently signed agreement designed to get accounts departments to automatically approve payment.

The IPO has released examples of misleading invoices and published a list of names currently known to be used by these organisations. If you receive such an invoice, you should not pay it and should report it to the IPO immediately. If you believe you have been a victim of fraud, you should report this to the police.

For more information and links to example invoices, see: IPO issues fresh warning to beware of misleading invoices

Cyber Security and Resilience Bill to Help the UK’s Critical Systems Stay Online

The widely reported IT outage in July caused significant disruption worldwide. In this case, the fault was due to a bug in a security update rather than a cyber-attack, but it demonstrated the vulnerability of networks.

During the King’s Speech, the government announced its plan to introduce a Cyber Security and Resilience Bill. The National Cyber Security Centre (NCSC) reports that the threat to services we all rely on, such as water, power, and healthcare, is under increasing threat. Both ransomware actors and state or state-aligned groups have shown interest in targeting these systems.

The NCSC has welcomed the prospect of the new Bill, which they say will make it harder for weak points in the UK’s critical national infrastructure to be exploited.

For more information, see Legislation to help counter cyber threat to CNI

New Mandatory Housing Targets for Councils

The government has announced an overhaul of the housing planning system, with all councils in England being given new, mandatory housing targets. These targets aim to achieve the new government’s pledge to deliver 1.5 million more homes.

The reforms include making brownfield development much more accessible to grant. Councils must also review their green belt land and identify and prioritise ‘grey belt’ land if necessary. A definition for this has been provided and includes land on the edge of existing settlements or roads, as well as old petrol stations and car parks.

Land safeguarded for environmental reasons will continue to be protected. Any land released in green belt areas will need to provide 50% affordable homes as part of the development.

These reforms should create opportunities for all construction-related businesses.

For more information, see: Housing targets increased to get Britain building again