With only a few days to the next budget, Chris Riley looks at the current rumours about what may lie in store.
It’s impossible to avoid headlines telling us the Treasury needs, over time, to recover the huge deficit it faces after the amount it spent during the pandemic. That was not only to support businesses and individuals but also to help fight the virus itself. And all at a time of reduced tax take while the economy struggled.
I haven’t seen any commentator contradict the view that the ‘Big 3’ taxes of income tax, national insurance and VAT are off the table for wholesale increases. The Government is surely planning to stay true to its manifesto commitment, although there’s a strong argument that this was a manifesto for a different world. But the closer we get to the 2024 general election, the more I’d expect the Government to hold firm.
The consensus seems to be that 3 March is too early to raise any taxes and that increases are for the autumn, when the outlook is clearer, with the focus on spending and recovery in the near term. I’m sympathetic to this view. But the two main competitors for significant increases – capital gains tax and corporation tax – are payable only where profits arise, and most voters see them as taxes that ‘other people’ pay. So I wouldn’t rule out announcements to increase rates on these taxes in March, albeit, for corporation tax at least, perhaps signposted for the future.
New taxes on the wealthy?
There was much interest in a report published at the end of 2020 on how a UK wealth tax could be designed and implemented. That said, we’d probably have predicted the outcome, given that the report was published by the independent Wealth Tax Commission. It seems unlikely that a Conservative chancellor would implement such a change, but the proposals did perhaps receive broader support than anticipated. So it may not be completely off the table.
One key point identified by the report, though, was that the success of any such tax relies on surprise implementation (immediately or in retrospect) without consultation, to short-circuit opportunities for avoidance.
A more modest move towards the taxation of wealth has also been mooted. A restructure of the stamp duty and council tax system to replace these with a single (higher) charge based on value of residential property. But there’s a downside. One of the key issues with higher council tax charges is the potential impact on the asset-rich cash-poor elderly who happen to be traditional Conservative voters. In any event, a change how to tackle online businesses
More likely I think is, ultimately, a rebalancing of the tax system to resolve the inequality between online and traditional businesses. In particular, a re-evaluation of the business rates system. This would require new mechanisms to calculate tax for online businesses. Â The UK has already taken steps in this direction in a cross border context, with the digital services and diverted profits taxes. And, with these, have come varying degrees of success and challenge.
Whichever way, like the other measures suggested, changes would have a systemic impact on the tax system that could not be implemented quickly. So, until any new system is designed, I think an announcement is more likely to be of a consultation on the future direction of the tax system, with the introduction of further short term reliefs on business rates. here would likely not be overnight. Changes to inheritance tax can’t be ruled out either but, again, perhaps not this year.
How to tackle online businesses
More likely I think is, ultimately, a rebalancing of the tax system to resolve the inequality between online and traditional businesses. In particular, a re-evaluation of the business rates system. This would require new mechanisms to calculate tax for online businesses. Â The UK has already taken steps in this direction in a cross border context, with the digital services and diverted profits taxes. And, with these, have come varying degrees of success and challenge.
Whichever way, like the other measures suggested, changes would have a systemic impact on the tax system that could not be implemented quickly. So, until any new system is designed, I think an announcement is more likely to be of a consultation on the future direction of the tax system, with the introduction of further short term reliefs on business rates.
A bonfire of reliefs?
Although access to Entrepreneurs’ Relief (re-named Business Asset Disposal Relief) was already reduced in 2020 from £10m of lifetime gains to £1m, the potential to scrap the relief remains in the spotlight. But I’d be surprised about any further alterations outside a more wholesale change to capital gains tax.
I would also hope, if CGT rates do significantly increase to align with income tax rates, that genuine entrepreneurs receive some additional relief. Otherwise the incentives in the tax system look weaker than I’ve seen at any point in my career, and would impact significantly on the retirement plans of many.
Changes for pensions tax relief?
Speaking of retirement, the suggestion of removing higher rate relief for pension contributions and replacing it with a flat rate of 25% has been ongoing for over 10 years. And this relief is extremely expensive to the Treasury. For high earners, access to higher rate relief has been repeatedly curtailed in recent years. That means a complex and unpredictable position for many. NHS doctors, for example, refused to work additional hours at one point, because of the punitive effect on their tax position. If the time hasn’t now come for a fundamental change in pensions tax relief, it possibly never will under a Conservative government.
Reliefs for business growth
So if we’re looking at rebuilding, we would assume the Chancellor will not only consider abolishing some reliefs, but enhancing those reliefs which help businesses to grow. And that, in turn, will bring employment opportunities and future tax revenues. The enterprise investment scheme (EIS) incentivises individuals to invest in growing businesses, and its time has surely come. Providing share incentives is a key tool to enable businesses to retain and recruit staff when cash flows are tight, and the enterprise management incentive scheme (EMI) is a valuable tool to many companies.
But their use is restricted by legislation, much of which was a consequence of adhering to EU state aid rules, and it meant they were out of reach for many businesses. With some of these restrictions now lifted, I hope to see refinement and improvement of the rules in these two key areas. And that will mean they remain as relevant as possible to growing businesses who will, after all, be the future of our economy.
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