With the announcement last month of the temporary increase to National Insurance of 1.25% from April 2022 (temporary only in that it will be replaced with the Health and Social Care levy, at the same rate, from April 2023) and corresponding increases in the Dividend tax rates for individuals, the implied suggestion in some government messaging was that the phase of raising taxes post-Pandemic is now complete. However, many are not so sure, and even if the Chancellor does not wish to increase the total level of taxation, there will always be scope to adjust how funds are raised, and make technical changes to the tax system.
So where might we see changes?
The introduction of the Health and Social Care levy most likely puts to bed any suggestion that the government could justify breaching its’ manifesto commitment not to raise Income Tax by reference to the Pandemic. In fact we’re likely to see no significant action on Income Tax at all in my view – although some commentators are noting to “watch out for Fiscal Drag” in the Budget (where allowances and thresholds are not increased with inflation so that more income is drawn into higher tax bands. In the March budget a freezing of all Income Tax allowances and bands through to April 2025 was announced, but it is rather implausible that they would be frozen further into the future at this time.
The one area of income tax that could change materially is in respect of Pension Tax Relief, where there’s been frequent speculation over recent years that higher rate relief could be scrapped in favour of a single flat rate of relief that would apply regardless of income levels. However, such a change has now been predicted (and denied) prior to the Budget for so many years now that it would be a brave person to bet on it happening this October, or indeed prior to the next General Election.
National Insurance – given the changes in September, I’d be amazed to see anything fundamental happen in this area. The transfer of IR35 obligations from contractor to “employer” is still in its infancy having only taken effect in April 2021, and so it is too early to consider alternative measures to tackle false non-employment, in my view.
Similarly in respect of Corporation Tax – a significant future rate increase to 25% and the super deduction for capital expenditure were only announced 7 months ago, and so any seismic developments here would seem unlikely. However, we may see the outcome of consultations to require large companies apply higher levels of Transfer Pricing records and documentation.
Again, manifesto commitments, together with concerns regarding inflation, are likely to rule out changes in the headline rate of VAT. However, some changes could occur – such as extending the temporary reduced rate of VAT for hospitality, which increased from 5% to 12.5% on 1st October, and is currently planned to revert to the standard rate in April 2022. Could we also see a temporary cut in VAT for energy bills, to provide some respite from these costs which are rocketing for many – or would that give the wrong message in the run up to COP26 in Glasgow?
In respect of the Capital Taxes, primarily Capital Gains Tax and Inheritance Tax, speculation is once more building regarding significant reform in these areas, following various reports commissioned in recent years. However, aside from the March 2020 cut in Entrepreneurs Relief (and frustratingly, its renaming as Business Asset Disposal Relief, which I believe I will never get used to) nothing has come to pass. We will hold our breath at this stage in the Chancellor’s speech, and on behalf of many of clients, hope that if the headline rate of CGT increases from 20%, some further reliefs are applied to incentivise true entrepreneurs.
Finally, one tax that is often forgotten is the tax that everyone incurs but never pays for directly. Some years ago I had a small bet with Luigi Lungarella, our VAT director, that the rate of Insurance Premium Tax would one day align with VAT having seen frequent increases in the rate. However, this was in June 2017, when the general rate increased to 12% and has not further increased since. IPT was forecast to raise £6.3bn in the 20/21 tax year and so this is a significant revenue earner for the Treasury, with scope to raise more. However, if the rate were to align with VAT for all types of insurance (some IPT is already charged at 20%) the argument to instead charge VAT on UK insurance contracts, to permit input VAT recovery for UK Insurance sector businesses (in particular, those in the Insurtech community, who suffer a proportionally higher burden) will surely grow.