It’s easier to look back on tax changes than know what’s on the horizon. But our Head of Tax, Chris Riley, makes some predictions.
Later on in this edition, my fellow Tax Partner, Howard Jones summarises recent changes that have taken, or will take, effect (and in some cases, won’t!). But there’s also a budget on the horizon, and another promised in November, what changes to the tax system affecting brokers do we think we’ll see? And which do we hope for?
Is capital gains tax (CGT) rising?
It’s been impossible to avoid media coverage on potential increases to capital gains tax. The rumours follow the big change that cut availability of entrepreneurs’ relief to £1m of gains in 2019 and changed the name of the relief to business asset disposal relief (BADR). One thing we learned last year was that the Government wasn’t shy to make a shock change, with the reduction taking immediate effect rather than at the end of the tax year.
So, in case the rate of CGT increases significantly, brokers in the process of selling their business should make sure the transaction concludes for tax purposes before 3 March 2021. While some media comments imply that any bad news will be deferred until the economy is back on its feet in November, 99% of people do not pay CGT and it is only paid on gains realised. So, the suggestion that CGT rates could increase to align with income tax rates is unlikely to upset them. For that reason, I’m not sure the argument to delay any such change stacks up politically.
What I would hope, however, is that if CGT rates do change in line with income tax, there might be some compensation by improving BADR. Even if we retain the current relief of £1 million of gains taxed at 10%, the CGT system for many business owners will be more aggressive than at any time since 1998. And this would affect the retirement plans of many brokers.
The effect on employee shareholders
If CGT rates are aligned with income tax, we’d hope to see parallel measures to keep share incentive arrangements relevant, since a key benefit is access to lower rates of CGT on sale. The enterprise management incentive (EMI) scheme ensures that BADR is available to qualifying shareholders. But access to this scheme is limited to certain businesses. Brokers and MGAs do qualify in principle, though many are prevented from issuing options due to the size cap. Since 1 January 2021, the UK has greater flexibility on state aid rules than before, which may allow the Government to remedy this position.
Unless some tax benefits remain available to employee shareholders, we would at least demand a loosening of the complex (and expensive when things go wrong) employment related securities (ERS) regime. This exists primarily to prevent converting income tax into CGT for employees, and there’s no reason to do that if the rates are aligned.
What’s fair for corporation tax?
As with CGT, an increase in corporation tax rates appears to be a question of when, rather than if. It’s also unclear what that future rate will be. The media has suggested every possibility between 23% and 28%.
What’s more, just like CGT, the average voter sees corporation tax as someone else’s problem. They may consider it fair that any increase is being paid by those businesses that have made profits during the pandemic. So, I wouldn’t be surprised to hear the announcement of an increase, albeit perhaps from next year, to provide better optics of supporting business.
Will VAT and IPT stay the same?
All signs are that the Government will stick firmly to its manifesto commitments not to increase VAT, income tax or national insurance, so I would not expect significant changes in VAT.
Insurance premium tax (IPT), whose rates have been increasing for years and have doubled since 2015, is considered a stealth tax. But with a hardening market it may be the case that a rise in IPT would have a disproportionate impact on struggling small businesses. So, it may not be the time to increase the rate further.
New freedom for EIS
As with the EMI scheme I mentioned above, the enterprise investment scheme (EIS) has so far been limited by EU state aid rules. So let’s hope the Government applies the new flexibility to provide better access to relief for those in the insurance intermediary sector. But we must also recognise that such changes are unlikely to be specifically targeted, and may take time to introduce to the benefit of all UK businesses.
There’s been significant lobbying to clarify the treatment of insurance intermediaries for EIS purposes, with many start-ups encountering a hit and miss approach when seeking HMRC approval. Resolving these challenges would help many brokers to access the relief. In turn, they could grow their businesses, employee base and tax revenues. And, in the long term, that would benefit the Treasury itself.
If you’d like to discuss your tax affairs, please get in touch.