I’ve never been one for crystal ball gazing in public in respect of taxation announcements, as trying to second guess a budget speech is a good way to make yourself look foolish. However these aren’t normal times, and with an Emergency budget almost certainly on the horizon to both stimulate the COVID affected economy, and raise funds to pay for the costs incurred to date and going forward, speculation as to what changes may be on the horizon will swirl with ever growing intensity.
Income Tax and National Insurance
A Government looking to increase tax revenue has no stronger lever to pull than the one marked ‘Income Tax Rates’. However, the 2019 manifesto removes this from being available (in theory) by the commitment to not raise Income Tax or National Insurance in the current parliament. While most people could probably support the argument that this commitment belonged in a different time, the Prime Minister does seem to be standing by this. However, it is worth noting that from an election cycle perspective – it would be best to get this out of the way early in the term rather than later, if drastic measures do need to be taken.
However, while it is quite likely that the government will leave the main rates of Income Tax unchanged, it may instead reclassify how income should be taxed. The Chancellor made reference to this for the self-employed, when income support reliefs were introduced in April. I expect to see a greater push to bring more income sources to be taxed in line with the rates of Tax and National Insurance for employed workers – including the reintroduction of the off payroll working rules that were delayed for a year to April 2021.
In addition, I would expect a reintroduction of fiscal drag – a policy to prevent further increases in threshold values in line with inflation in future years, so that more taxpayers get captured in the higher rate bands.
Corporation Tax was not protected in the Conservative manifesto, and indeed saw an effective increase in the immediate post election period when the March budget cancelled the long-planned cut to 17% to retain the rate at 19%. Whether the effective rate will increase further will likely depend on steps taken by other economies; the government is very proud that the UK has the lowest rate in the G20 and will likely want to retain that badge.
As with Income Tax however, I’d anticipate measures that increase the Corporation Tax rate that are not in full sight, such as reducing the threshold values for loss utilisation (perhaps mirroring those which apply to banks) and interest deductibility. Media friendly headlines that sound like tax reductions (but don’t necessarily change behaviour) to “incentivise investment” such as a further increase in R&D relief, and the Annual Investment Allowance for Capital Allowances spend would seem likely.
We’ve already seen several EU jurisdictions cut VAT rates to stimulate consumer spending, and comments made by the Cchancellor suggest that (as in 2008) such a measure may be on the cards in the UK, and this could be the biggest driver to making an announcement before, rather than after, the summer recess.
Under current EU law, targeted measures to assist specific sectors are very complex/impossible to achieve. Introducing a new reduced rate (as requested by the hospitality and leisure industry) to stimulate that sector may have to wait until after the Brexit transition period has ended.
Throughout the early part of the crisis, I have been expecting an announcement from the government to relax the qualifying criteria, and potentially extend scope for relief from the EIS and VCT schemes to drive much needed funding into small and growing businesses who don’t qualify for the various loan schemes. However, EU State Aid rules do place significant limitations on what the government can do here, but the Commission is showing signs of reviewing these restrictions which gives hope going forward. However, I don’t anticipate that the most significant request from the various bodies – a doubling of the rate of Income Tax relief for investors – will be provided to the extent requested.
Possibly the most significant possible change here has already been made with the considerable reduction in the availability of Entrepreneurs’ relief in the March Budget. While there have been calls from various bodies to reintroduce the relief to stimulate investment in the post-crisis economy, I expect these to fall on deaf ears.
Inheritance Tax is ripe for reform, but arguably has been for the past 20 years. However, using this as a tool to significantly increase tax revenues is unlikely to be palatable for the core voter base for the government.
After an initial wave of interest, most commentators expect that the Housing market will be in the doldrums for some time, which has effects on a range of supporting sectors. Some form of reduction in SDLT rates, most likely targeted solely at owner occupiers may be on the cards. This also aligns with suggestions made by the Prime Minister, even before the Election. Here I will confess a personal interest, and deep disappointment that this wasn’t addressed in the March Budget, as my own house was on the market at the time…
Business rates were already in the spotlight as adversely affecting many retail and hospitality businesses before the crisis, and once the current reliefs expire, these are surely in need of significant reform to bring life back to the high street. In addition, the potentially permanent shift to greater working from home will likely result in many service businesses requiring smaller office space going forward, again reducing the tax take here. It is likely that this source of income will give rise to much reduced incomes for Local authorities which will require additional government funding if Austerity MkII is to be avoided.
New approaches to increase revenues from the longer term beneficiaries of this shift will likely be required. The nascent Digital Services tax is focussed very narrowly on large tech service providers operating overseas and the scope of this tax could increase, in addition to other tax increases focused on online businesses. However, any new taxes in this area are likely to require global co-operation to be truly effective without damaging UK businesses, and may take time to put in place.
Here I have the greatest certainty of an announcement being made.
“The Government will commit £XXX m to tackling tax avoidance and abuse, with a view to recovering £x bn of taxes unpaid by individuals and businesses who are not paying their fair share of taxes, and have unduly profited from this Crisis that has affected all ordinary hard working people”