The ongoing COVID 19 UK crisis combined with exit from the EU presents unprecedented modern economic challenges, uncertainty, and anxiety. I certainly would not want to be in the Chancellor’s shoes right now because whilst certain changes in our tax system are inevitable, the timing of such changes and the degree of change could be critical.
The ‘elephant in the room’ question is to what extent he will increase or reform taxation or will he retain the status quo for the time being? If he does seek to start a process of reform or increase what areas will he target?
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.
However, sooner or later there will have to be more substantial changes and areas of particular interest on Budget day could include:
- The future of National Insurance
- Tax Relief on Pension contributions
- Capital Gains Tax
- Inheritance Tax
- Corporation tax and VAT rates
- Business incentives
Why these areas?
On 26 March 2020 when the Chancellor introduced the Self-Employed Income Support Scheme his statement included the following:
‘But I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.’
This has been interpreted by many to mean that he will increase National Insurance contributions (NIC) for the self- employed. There may have been a manifesto pledge not to increase NIC but that was the world pre-COVID. Would such a measure in isolation really provide an equitable solution? Is a more radical reform of the NIC system long overdue?
A very recent report by the Institute of Fiscal Studies (IFS) (see here) states:
‘For a job generating £40,000, tax in 2020–21 is £3,300 higher if the job is completed through an employment contract rather than by someone who is self-employed, and £4,300 higher than if they work through their own company. This is mostly because employees’ salaries are subject to employers’ NIC whereas other incomes are not.’
A simple increase in the rate for the self-employed or increasing NIC for high earners which has also been mooted does not level the playing field unless the issue of directors avoiding NIC is also addressed. Any quick fix is likely to be controversial depending upon where you or your clients currently sit in the system. The real question is whether he will start the ball rolling on any significant reforms on 3 March 2021?
Tax relief and pension contributions
A frequently asked question in recent years before any annual Budget is whether higher and additional tax relief will be cut on pension contributions. Undisputedly there is a huge cost to the Exchequer of tax relief on pension contributions and the tax-free growth of pension funds. A reduction in income tax relief or a reduction in the Annual Allowance could both reduce this tax cost.
Speculation of a hike in Capital Gains Tax (CGT) rates (or an alignment with income tax rates) has been rife following the publication of the first report in November 2020 (see here) by the Office of Tax Simplification(OTS) into its review of CGT. The Chancellor asked the OTS to undertake this review in July 2020 leading to the speculation that CGT is one of his target areas for change. Currently, CGT raises just £8.3bn a year in the UK and from around 265,000 taxpayers, so whilst any such change would increase revenues in comparison with income tax (£195bn), NIC(£144bn) and VAT(£134bn) it is relatively small.
This review though is not simply about tax rates! It is far more complex. A similar review has also been undertaken by the OTS on IHT (in 2018 and 2019). In both cases it is clear, the structure of these capital taxes and their interaction needs to be reformed to prevent distortive behaviour in client decision making. Concerns about the future of valuable IHT reliefs like Business Property Relief create anxiety and uncertainty in planning. Any such reform needs to consider both areas and will require significant consultation and whether this Budget is the right time to start this process of reform is debatable but we will be keeping a close watch for any announcements.
The UK has seen a downwards trend on corporation tax rates for nearly 50 years but rumours in the national press suggest that the Chancellor may be considering reversing this trend. In a post BREXIT world, this appears to be at odds with keeping the UK competitive. A report in February 2020 by professional services firms Alvarez & Marsal Tax and Capital Economics (see here) stated ‘a combination of three high-impact measures – increased R&D incentives, creation of free ports, and a regional corporate tax system with lower average rates – could provide a 7% boost to GDP, amounting to £150 billion’ but that was before COVID took over. In a post COVID world, the need to recoup the enormous cost of COVID support schemes whilst at the same time supporting economic recovery for affected businesses and consumers will be a balancing act. Will successful companies therefore face an increased rate? Will there be more effective loss relief support for those that have incurred losses?
VAT has the last word
VAT revenue accounts for one fifth of tax revenue so protecting that stream in the longer term will be critical, however departure from the EU also provides flexibility and control over reduced VAT rates and who knows the Chancellor may use that in the short term to promote consumer spending post COVID in key areas.
Our team will be analysing, writing and presenting the key points from March 3 providing you with concise summaries, relevant blogs, accurate tax cards, and other useful products. Written by our expert technical team, we create summary content that is engaging and easily digestible, helping you to ensure your clients are fully up to date the day after the announcement.
Also the day after the announcement, our rapid response webinar provides an opportunity to hear a round up of the Budget 2021, covering the highlights of what Rishi Sunak said (or didn't say) in his Budget announcement.