Insights

Summer Economic Update 2020

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  • Published: Wed, 08 Jul 2020 19:35 GMT

On Wednesday 8 July the Chancellor gave an economic update to Parliament, with details of further support for the economy. This was principally focused on improving employment, but included two cuts to SDLT and VAT, and the introduction of the furlough bonus scheme. You will find details of the principal announcements below.

He also confirmed that the next Budget will be in the Autumn, and noted that he would deal with “the challenges facing our public finances”. We expect further, more substantial changes to be announced at that time.

Temporary cut to Stamp Duty Land Tax (SDLT)

SDLT has been temporarily reduced for all residential property purchases in England and Northern Ireland. The reduction will apply until 31 March 2021.

The nil rate band for SDLT on residential properties has been increased from £125,000 to £500,000, effective immediately. Prior to the announcement, the portion of the property price between £125,000 and £500,000 had been subject to SDLT at between 2% and 5%. For the purchase of a new main residence worth at least £500,000, the temporary cut will generally result in a tax saving of £15,000.

Our comment

Based on the limited information published to date, this measure appears to be widely available providing a welcome boost to the property sector that has suffered various false starts in recent months. It should be noted, however, that the inherent complexities of the SDLT legislation means that other factors may impact the overall position for a buyer. For example, first-time buyers already enjoy an SDLT exemption for purchases of up to £300,000, so this new announcement is of limited benefit to them. Also, those purchasing a second property who are not replacing their main home will still be subject to the additional dwelling supplement, meaning a 3% rate below £500,000 rather than 0%. The rate cut does not apply to purchases of commercial property, nor does it apply in Scotland or Wales. It will be interesting to see if the Scottish and Welsh Governments follow suit and announce similar cuts to Land and Buildings Transaction Tax and Land Transaction Tax respectively.

When will it apply?

These measures take effect from 8 July 2020 and will cease to apply on 31 March 2021.

Food, drink and accommodation supplies to be subject to a reduced VAT rate of 5% to drive the economy

The Chancellor has announced that a reduced rate of VAT at 5% will apply to certain supplies of food, drink, accommodation and attractions in the hospitality and tourism sectors, effective from Wednesday 15 July 2020. Importantly, alcoholic drinks are excluded from the VAT rate reduction and will continue to attract VAT at 20%. The applicable VAT rate will return to 20% from 12 January 2021.

Our comment

There are a number of issues that business need to consider when implementing a VAT rate change. Businesses need to be ready to respond to issues such as:

  • systems and software changes including Point of Sale till systems;
  • changes to the pricing of products;
  • bookkeeping adjustments;
  • decisions around timing of sales and invoicing;
  • transactions which span the VAT rate change
  • specific VAT accounting changes such as flat rate schemes and adjusting payments on account;

The VAT rate change could lead to potential cashflow issues for some businesses that are required to pay out 20% VAT on purchases leading up to the date of change in the rate, while only collecting VAT only at the new lower rate of 5% from their customers. We recommend businesses review cash flows and particularly the timing of purchases and sales. The Government may introduce anti-forestalling legislation to ensure that businesses are not able to use artificial arrangements to advance sales and purchases to take advantage of the reduced VAT rate on goods or services.

When will it apply?

These measures take effect from 15 July 2020 and will cease to apply on 12 January 2021.

Job retention bonus

A job retention bonus has been announced for employers who retain furloughed staff

Businesses can be paid a £1,000 bonus for every furloughed employee who is brought back to work post-furlough and who remains continuously employed until the end of January 2021.

For a business to be eligible, the affected employees must earn above the lower earnings limit (£520 per month) for the three-month period between November 2020 and January 2021.

Our comment

There is clearly a concern that the furlough scheme will have the effect of delaying redundancies, rather than its intended effect of avoiding redundancies altogether. The job retention bonus should encourage employers to retain staff where possible, rather than simply making them redundant as soon as Government support ends.

When will it apply?

The bonus payments will be made from February 2021 with further details about the scheme to be announced by the end of this month.

 

Kickstart scheme

A new fund has been established to create jobs for young people at risk of long-term unemployment

The £2bn Kickstart scheme will subsidise six-month work placements for people on universal credit aged between 16 and 24, who are at risk of long-term unemployment.

Employers will be able to offer a six-month placement for people aged 16 to 24 who are on universal credit. The placements must be additional to the existing payroll, must be for a minimum of 25 hours per week, and must pay at least the national minimum wage.

The Government will cover 100% of the national minimum wage for each employee for up to 25 hours per week. Employers will be allowed to top up the employees’ pay.

Our comment

The Chancellor acknowledged that under-25s have been hit particularly hard by the impact of coronavirus on the jobs market. Young people are more likely to work in sectors which have been severely affected by the coronavirus. The Kickstart scheme is a welcome attempt to prevent them falling into long-term unemployment.

When will it apply?

Employers can apply next month, and the Kickstart workers are expected to be in their new jobs this autumn.

New funding for traineeships and apprenticeships

The Government will make subsidies available to encourage employers to create new traineeships and apprenticeships

In addition to the Kickstart scheme, the Government is introducing several initiatives to encourage employers to bring young people into the workforce. £111 million will be available as a subsidy to employers to increase the number of available traineeships. Business will be offered payments of £1,000 per trainee, with the grant capped at 10 traineeships per firm.

In addition, for the next six months, the Government will pay businesses up to £2,000 for every new apprentice under 25, and £1,500 for every new apprentice above 25.

Training costs for apprentices will be paid out of Apprenticeship Levy fund, a tax on firms with annual wage bills of £3m or more equal to 0.5pc of their payroll.

Finally, additional funding of £32m over the next two years will be made available to the National Careers service and the number of work coaches will be doubled.

Our comment

As with the Kickstart scheme, this is a welcome attempt to help young people get into the workforce. Funding is also available for new apprentices aged over 25. However, the costs of training an apprentice to an advanced level can be very high and concerns have been raised that the funding available may not go far enough.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

NTAJ14072084

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