The Chancellor delivered some clear messages in delivering his Budget statement on March 3rd. Significant elements of the speech concentrated on the economic challenges ahead and planned investment measures to drive the UK economy forward.
The critical question for many however is what tax revenue raising decisions will be made to start the process of repaying the ‘eye watering’ levels of borrowing incurred and still to be incurred to support the UK with the COVID -19 grants and loans. Maintaining balance whilst moving forward will be critical on this fiscal tightrope. From a taxation perspective it turned out to be tax tinkering not revolutionary but that does not mean to say that the revolution will not happen at some future point.
In my pre-Budget article, I said
Tax revenues can of course be increased without headline reform or increases in rates, the ‘tinkering’ approach. This can be achieved through restricting the increase in, reducing or freezing reliefs or allowances. For example, the personal allowance and income tax bands for 2021/22 are now confirmed and are only increasing for 2021/22 by 0.5% in line with the September 2020 Consumer Price Index.
It was therefore not unexpected that the tinkering approach has been adopted with personal allowances and some reliefs frozen until 5 April 2026. This means no further increase to the personal allowance, the higher rate threshold, the Upper Earnings limit/profits for National Insurance after 2021/22 for the next four years. The lifetime allowance for pension tax savings is also frozen at its current level but there are no reductions in pensions savings tax rate relief or the Annual Allowance. The capital taxes allowances such as the inheritance nil rate band, already frozen since 6 April 2009 will continue to be frozen until April 2026 along with the annual Capital Gains Tax (CGT) exempt amount.
This is, a method of increasing tax revenue imperceptibly, without breaking the triple lock election pledge (to not increase income tax, VAT or National Insurance). However, as the three largest sources of tax revenue, the sustainability of this policy in the longer term does not seem realistic.
Turning to the topic of capital taxes there were no announcements of any significance, no hike in CGT rates which has been widely speculated following the publication of the first report in November 2020 (see here) by the Office of Tax Simplification (OTS) into its review of CGT. A review undertaken by the OTS on IHT (in 2018 and 2019) has similarly to date not resulted in any significant technical changes. I indicated in my pre-Budget article that the structure of these capital taxes and their interaction is overdue for reform but like any complex recipe, attention to the precise blend and timing will be critical to avoid a bitter taste. Any reform process certainly needs to avoid a burn and crash approach, but one wonders whether that process will start with a call for evidence on 23rd March or whether it stays on the back burner until next year?
Tax consultations on 23rd March
The significance of 23rd March is that the government have announced that various tax consultations and calls for evidence will be issued at that time. Some we know about because they were announced at Budget, for example consultations on Research and Development Incentives and Enterprise Management Incentives. We may also get more detailed information on new tax developments covered at Budget (see later) but there may be more surprises. In addition, it is worth mentioning that the Finance Bill 2021 will be published on 11th March.
One emotive topic not mentioned at all at Budget is the thorny subject of National Insurance reform. It is probably too soon, given the Chancellor has further extended the two main COVID grant support schemes; the Job Retention scheme (JRS) (see here) and the Self- Employed Income Support Scheme (SEISS) to 30 September (see here). I will shortly do a separate blog on these extended schemes and other new schemes announced at Budget for our website.
But yet another major report has been published this week which considered this issue ‘Tax after Coronavirus’ from the Treasury Committee:
‘We strongly believe that a major reform of the tax treatment of the self-employed and employees is long overdue. The current system is confused, unfair and unsustainable. The review should incorporate the benefits which accrue upon payment of NICs and other taxes as well as the level, the incentives and the interaction of such taxes. It should look as far as is possible to eliminate the so-called ‘three-person problem’ altogether.’
The three-person problem referred to here are the employed, the self-employed and the personal service company. The full report can be accessed here. I view the silence at Budget 2021 to be akin to a stay of proceedings rather than a permanent postponement.
The UK had seen a downwards trend on corporation tax rates for nearly 50 years, but the rumours turned out to be true and successful companies therefore do face an increased tax rate of 25% from April 2023 for profits above £250,000. It is a significant hike but is still the lowest rate compared to other G7 countries. I always keep old tax notes in case obsolete tax law comes back into fashion and the archives will be getting a dusting off because whilst profits below £50,000 are set to remain at 19%, those between the limits of £50,000 and £250,000 will be using a marginal relief calculation. In the meantime, companies are being encouraged to invest in plant and machinery with the temptation of a ‘super-deduction’ capital allowance. All well and good for those businesses that have profited from the pandemic but what about the losers?
Pre-Budget I asked the question; ‘Will there be more effective loss relief support for those that have incurred losses?’ and the Chancellor was clearly telepathic. For those companies and unincorporated businesses currently incurring losses, a temporary extended carry back of three years will be allowed (see here). The level of losses which can be carried back is generous, but more information is expected on the detailed rules when the Finance Bill is published on 11th March. Other measures such as the extension of business rates relief will also provide some assistance to struggling businesses with premises.