Tax Talk: Should businesses prepare for a Budget tax shock?

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The Sunday Times front page on 30 August terrified the business world. It claimed Rishi Sunak was planning major tax rises for his November Budget. Though now postponed to next year, could the Budget still present a real challenge? Our Head of Tax, Chris Riley, reports.

That headline, ‘Rishi Sunak plans triple tax raid on the wealthy’, produced the most dramatic client reaction to a tax news story that we have ever seen. The subject still comes up on many client calls. These are the UK tax rises rumoured to be planned:
  • Increase in the rate of Corporation Tax from 19% to 24% from 1 April 2021
  • A ‘simplification’ of Inheritance Tax, generally assumed to mean an increase
  • Alignment of Capital Gains Tax (CGT) with Income Tax rates.
The expected CGT change has been the most significant concern, so it is where I’m focussing my thoughts.

Blunt tools at the wrong time?

Taken together, without the wider context of a Budget speech, these proposals were projected to raise over £20bn a year in additional taxation to help fund  the increased debt from the Coronavirus pandemic. 

Since they relate to tax generally believed to apply only to the wealthy (though there is much debate as to who really bears the burden of Corporation Tax), the Government could argue that the cost of the pandemic would be borne by those who have lost out the least.

What’s more, the 2019 Conservative manifesto may have forced the Government’s arm, with promises not to increase the most significant revenue-raising taxes of Income Tax, National Insurance and VAT.  Many would argue this was a manifesto for a different time. But raising these taxes during an economic shock, particularly for lower earners, would likely hinder any recovery.

Although the planned November Budget was postponed to next year because of the health crisis and expected economic impacts over the winter, it’s likely all these options remain on the table.

Should I sell my business now?

This is the number one question clients have asked me since the article was published. In the past, tax increases have been signposted well in advance. This encouraged taxpayers to maximise gains and income before the rate rise.

But this practice changed last March when, although we knew that Entrepreneurs’ Relief would be reviewed, significant changes were made with no notice at all, with some having retrospective effect.  That’s why a sudden shock change in March 2021 cannot be ruled out.

But tax is only one factor in determining the value you receive when selling your business. If you sell today, will the market value of that sale be depressed by the current economic difficulties? Also, are you denying yourself income from profits that would otherwise arise in the period between sale and the date you originally planned to sell?

Although the coming months may be a good time to sell your business, beware doing so purely to achieve a lower rate of tax on disposal. And if you do decide to sell, consider the transaction (and the alternatives) holistically, so that any potential tax savings more than offset potential lost opportunity costs. Bear in mind, too, that tax rates may not increase, or at least not immediately.  

Should I restructure my business ownership?

Another question from those owning businesses, who do not plan to sell in the near term, is whether you can change the ownership structures to lock in gains today, or move assets offshore to prevent further increases in value being subject to higher rates of UK tax.

There is much anti-avoidance legislation that will tackle artificial transactions or movement of assets to a low tax jurisdiction, where there is no wider commercial purpose than to avoid tax now or in the future. If you’re advised to enter this kind of structure, we strongly recommend seeking independent professional advice. Always ask yourself whether the proposal sounds too good to be true.

But if genuine succession planning is your priority, this may be the right time to consider ownership options, particularly regarding longer term estate planning and handing the business to the next generation. My colleague Shaharan Deen will contribute a piece on this next month.

What about employee incentive schemes?

My final thought concerns employee share incentives. As well as their genuine commercial purpose to incentivise staff, they also benefit from CGT on disposal, giving a lower rate of tax on exit. Several business owners have suggested that if the CGT rate converges with that of Income Tax, why bother?

In my experience, share-holding employees see tax benefits as secondary to the potential to participate in the growth of the company – even though economically the outcome may be the same.

Depressed values and cash flow concerns may mean that now is absolutely the right time to consider incentivising key staff through share-based payment structures.  And one would hope that in any higher CGT world approved tax advantaged share schemes, like the Enterprise Management Incentive scheme and others, would be altered so they remain relevant in the future.

I’ve grown rather tired of saying that we live in uncertain times, but there’s no denying that we do. And tax risks may be on the horizon. But taking action (or not) purely based on rumoured tax changes, without considering all possible impacts, is potentially the greatest risk of all.