With the Budget on the way on 3 March, we take a look at what the Chancellor of the Exchequer, Rishi Sunak, might have in store.
Budget 2021: What to look out for
After the Prime Minister's announcement of his roadmap for lifting lockdown restrictions in England, followed by the First Minister's announcements for Scotland, attention is now firmly focused on the support promised by the Prime Minister and to be delivered by the Chancellor in the Budget. The Government's ‘COVID-19 Response – Spring 2021’, published on 22 February, stressed that the Government will do “whatever it takes” to support the country through the COVID-19 pandemic. It seems that the Budget will primarily address the need for continuing support as the economy reopens and the Chancellor is likely to face significant challenges in meeting expectations. However, there are still suggestions that we will see some tax increases (partially through the freezing of allowances), with more to come over the remaining life of the Parliament.
With the confirmation of the new style ‘Tax Day’ on 23 March, we now have what may essentially be a three-step process:
- The Budget on 3 March, delivering both the details of the ongoing COVID-19 economic support and a high-level outline of the Chancellor's direction of travel on how he intends to progress tax policy. Announcements of measures to be legislated in the Finance Bill will be also made on Budget day.
- On 11 March, the publication of the Finance Bill providing the detail on tax measures to be implemented now.
- On 23 March, the publication of the detail of what the future is likely to hold in the form of a series of tax consultations and calls for evidence that would traditionally have been published alongside the Budget. Several of the consultations to be published will be an important part of the Government's 10-year tax administration strategy. This focuses on Making Tax Digital, real-time information, making tax payments on a more-timely basis and a new framework to make tax administration and compliance simpler for HMRC and taxpayers alike. We will also see a summary of responses to the call for evidence on the future of business rates. None of the announcements on 23 March will require legislation in the next Finance Bill.
The “elephant in the room” remains the likely response to the increasing level of government debt as a percentage of GDP. We see the Chancellor as likely to look to boost the economy but at the same time raise taxes in areas of the economy that he thinks can bear it.
A much-reported rumour is a rise in the headline rate of corporation tax. A one percentage point increase in the rate of corporation tax would still leave the UK's rate at the lowest (equal) rate in the G20. This position has been one that the UK government has fought hard for and this may therefore be a natural drag on the Chancellor's willingness to raise tax rates on corporates, at least at this stage. In addition, any increase in the tax rate may well be paired with an extension of the period for carrying back losses to three years, a firm favourite of Chancellors past when faced with recessions.
In any event, the Chancellor will want to announce measures that make it more attractive for overseas businesses to invest in the UK. These may not necessarily be tax measures, and the availability of grants or streamlining of regulations may play a significant part. But from a tax perspective, we may see a return to enterprise zones (alongside the promised Freeports), targeted outside the South East to help address the levelling up agenda – a key tenet of the Conservative manifesto. He may also look to R&D incentives, capital allowances and entrepreneurship grants to boost the economy and to incentivise businesses investment. All of these measures are likely to be accompanied by strict anti-avoidance legislation to stop any ‘secondary market’ in the allowances and ensure the reliefs work as intended.
To help stimulate investment and drive future growth, he could also choose to build on the government's ten-point plan for a green industrial revolution, with further announcements around specific measures and investments to drive this forward. Additionally, the Chancellor may be attracted to the idea of further specific reliefs for sectors which are feeling the impact of Brexit teething troubles, perhaps through additional grants or VAT holidays/deferments.
Finally, the Chancellor is likely to want to address a number of other elements in the world of tax and tax administration. The first will be to set out Britain's future outside the EU. In a post-Brexit environment, the indication so far is that the UK appears likely to shift its approach to one of aligning with wider global standards than following the direction of the European Union. This may be seen in the near term with a slow divergence as slightly different decisions are made in London and Brussels, rather than as a sudden change of direction.
This year, the UK has the presidency of the G7, something that it last held under David Cameron (then as the G8). Last time, the focus areas included government transparency and automatically sharing information between tax authorities. We may see the Chancellor taking the opportunity to encourage further international cooperation. Whilst the European Parliament has maintained its calls for public Country by Country reporting, the Chancellor may instead move more towards the more targeted tax reporting that has been the discussion in the World Economic Forum.
The Chancellor’s options for tax rises may be restricted by the Government’s commitment to its ‘Triple Lock’; its promise not to raise rates of income tax, national insurance or value added tax.
While raising inheritance tax (IHT) and capital gains tax (CGT) rates may make little difference to the significant fiscal deficit as a result COVID-19, they would be perceived by some as addressing the imbalance of wealth in the UK. Targeted tax rises could be portrayed as sending a message to the electorate that the Government is serious about the redistribution of wealth.
There has been much interest in the report by the Office of Tax Simplification (OTS) issued in November 2020. That report set out a framework of policy choices that could remove distortions, with most attention being focused on the “doubling of the rate” (by aligning CGT rates with income tax rates) and the £14 billion that might in theory be raised, assuming no change in behaviour. Other suggestions included reducing the amount of the Annual Exempt Amount (AEA), currently £12,300 and a review of the treatment of share-based remuneration and the accumulation of retained earnings within smaller owner-managed companies. The report also linked into the earlier OTS report on IHT which recommended that, where a relief or exemption from IHT applies, the Government should consider removing the capital gains uplift on death for assets transferred to beneficiaries.
If the concern of the Chancellor is to raise money to fund COVID-19 debts, CGT is an unlikely place to start. However, CGT is used by governments to stimulate desired behaviour and we expect the Chancellor to look critically at the OTS suggestions and consider what might be viable. It seems likely that at least some of these ideas, such as the cut in the AEA, might make their way into a Budget in the near future, or at least be put forward for more detailed consultation. We may even see new life in the discussion of some of the ideas covered in the OTS proposals on IHT (such as updating the IHT reliefs and the operation of the potentially exempt transfer rules), which with Brexit and COVID-19 have stalled.
Separately, the “Wealth Tax Commission” (a non-governmental group of academics and practitioners) has looked at the benefits of the introduction of a one-off wealth tax to help bridge the gap in public finances after COVID-19. The tax they considered would be a one-off wealth tax which would:
- Be paid by any UK resident (including ‘non-doms’ and recent emigrants) with personal wealth above a set threshold.
- Include all assets such as main homes and pension pots, as well as business and financial wealth, but minus any debts such as mortgages.
- Be payable in instalments over five years.
The paper did not suggest when the tax should be implemented or recommend specific tax rates or thresholds but does provide a range of options. The headline option was for the tax to be payable on all individual wealth above £500,000 and charged at 1% a year for five years, raising £260 billion. The report suggests this is the equivalent of a rise in 9p in the basic rate of income tax over the same period.
In July 2020, before the full extent of the COVID-19 economic crisis was apparent, the Chancellor said “No, I do not believe that now is the time, or ever would be the time, for a wealth tax”. Notwithstanding the constraints put on him by the Triple Lock commitment, we see any changes as being more likely instead to be the reform of existing taxes on wealth as discussed above.
Finally, there are two complex areas – pensions tax relief and national insurance contributions (NICs) – where the Chancellor may see the need for reform in the longer-term but where wide-ranging changes may be too much to contemplate at present.
Pensions tax relief has been a target in recent Budgets for revenue raising with reductions in the annual allowance for pension contributions and related restrictions in terms of tapering tax relief for high earners. Targeting of tax relief away from high earners may be popular in terms of getting value for the tax incentives involved but would need to avoid reopening recent issues (such as those with the NHS) or complicating the pensions tax regime still further. We may however see a move to resolve the issues associated with pension tax relief for lower paid workers (covered in the Conservative manifesto).
In considering any national insurance reforms, the Chancellor is likely to be mindful of the categories of ‘workers’ that have been hit hard by the effects of the pandemic but been unable to benefit from many of HMT’s stimulus packages. Once seen as a likely area of focus, given the relative generosity of the Self Employed Income Support Scheme (SEISS) compared to the Coronavirus Job Retention Scheme, the continued gaps in the coverage may cause the Chancellor to pause to think in pursuing his plans to reform the taxation of work and the scope of NICs.
While it is unlikely that the Chancellor will make any changes to NICs generally, as with pensions tax relief, we may see specific changes, such as removing the exemption from NICs for those above the State Pension age.
The issues with all the changes covered above is to what extent they materially impact the fiscal deficit. If the fiscal deficit is to be addressed, then HM Treasury and the Chancellor will need to take a view on which taxes offer the most significant opportunity to do this and may have to take a tough decision. Even if this doesn’t happen in the short-term, the Chancellor may signpost changes over the next year or so.
In the run-up to Budget, there are always rumours and predictions circulating, all with a varying likelihood of being included in the Chancellor’s speech. We have set out some of the more popular rumours and our assessment of what we might see and we will keep this under review as we get nearer to the Budget.
There have been calls to extend the job support schemes (due to end 30 April), the business rates relief (due to end 5 April) and the reduced VAT rate for the hospitality sector (due to end 31 March). We think there is a high likelihood that the Chancellor may announce new measures in the week beginning 22 February – in conjunction with the Government's roadmap for easing lockdown restrictions in England – rather than wait for the Budget. We may also see an announcement to avoid a cliff-edge in respect of the increased threshold for stamp duty land tax due to revert to £125,000 on 31 March but we consider this likely to be some form of grandfathering for transactions under way rather than a general extension.
Corporation tax: Rumours suggest a rise in corporation tax, perhaps to 23 or 24%. It is not clear whether any rise might be gradual or even announced, but deferred (in both cases companies would need to forecast when their losses might be used in the future, in order to understand the deferred tax implications). If an immediate rise is announced, we think it more likely to be in the region of a one percentage point increase.
Income taxes: The Government's commitment to its ‘Triple Lock’ (its promise not to raise rates of income tax, national insurance or value added tax) suggests that we won’t see rises in income tax rates. Beyond the rates, we already have the personal allowance figures and higher rate threshold for next year, which increase by the inflation number as of September.
National Insurance: We don’t expect any general rise in either employer or employee rates, though we could see changes to remove the exemption from NICs for those above the State Pension age or to provide additional incentives for new hirers.
VAT: There may be specific amendments to VAT rates on particular items (and the extension in the duration of the reduction for hospitality), but we see no call for a general rise in VAT rates. Indeed, in a later budget, the Chancellor may see cuts in VAT for particular sectors (along the lines for hospitality) as a way of boosting the economy.
Inheritance tax (IHT) and capital gains tax (CGT) rates: CGT is an unlikely place to start to raise money to fund COVID-19 debts, though it may be the least unpopular of tax rises. If there are any changes in CGT rates to align them with income tax (perhaps gradually), these changes are likely to be effective immediately. In addition, and perhaps more likely, some of the other suggestions made by the Office of Tax Simplification (OTS) may come forward for consideration (such as the cut in the Annual Exemption Allowance). It could well be that we see a consultation on the ideas covered in the OTS proposals on IHT (such as updating the IHT reliefs and the operation of the potentially exempt transfer rules).
Incentives: We expect to hear announcements in the Budget on the promised Freeports and this may be accompanied by new enterprise zones, targeted outside the South East. We may also see new announcements on R&D incentives (in line with the consultation that closed in October 2020) and, possibly, temporary increases in capital allowances and entrepreneurship grants. We may also see an increased ability to carry losses from the last year back up to three years, in order to generate tax repayments.
Green taxes: It has been reported that the Government has rejected calls for a ‘meat tax’ as a way to fight against carbon emissions. This fits with our expectations that we will see limited new carbon taxes at this stage (though we may see some new incentives and the announcement of further consultations on taxes and incentives in the run-up to November’s climate change summit). The ‘green issue’ that may trouble the Chancellor the most may be fuel duty – a rise may be in keeping with environmental policy but could also be seen as an unwelcome tax on small business and families at this stage (and indeed one passed on through higher prices generally).
Online sales tax: Treasury officials have been said to have been discussing how such a tax would work with firms. Any such levy might also be linked to the reform of business rates (perhaps allowing the online sales tax to be partially offset against business rates) and we don’t expect to see a tax being made effective in this Budget, though work on it could be announced.
Windfall taxes (taxes on excessive profits): At the moment, we don’t expect to see a tax in the upcoming Budget on any increase in profits in 2020 compared to 2019. However, the calls for taxes on certain sectors of the economy are becoming more consistent.
Property development taxes: Not a prediction as such, as the basics have been announced (on 10 February). A gateway 2 developer levy will be implemented through the forthcoming Building Safety Bill and will apply when developers seek permission to develop certain high-rise buildings in England. Separately, a new tax will be introduced for the UK residential property development sector in 2022 to raise at least £2 billion over a decade to help to pay for cladding remediation costs. The Government will consult on the policy design of the tax in due course.
Notification of uncertain tax treatments: This requirement for large business to notify uncertain tax treatments is not due to be implemented until April 2022, though we may see a progress report.
Review of VAT grouping rules: We may see a response to the Call for Evidence which closed last November.
A one-off wealth tax: In July 2020, the Chancellor indicated he was against the idea of a wealth tax and we don’t expect anything to have changed in this regard.
Property valuation tax: There have been suggestions that the Government was working on a proposal to replace stamp duty land tax and council tax with a proportional property tax (applying to all homes). Reports have suggested this has been denied by a Government spokesperson and we don’t expect to see anything on this in the Budget.
Pensions tax relief: The removal of higher rate relief for pension contributions has been consistently raised before recent Budgets. We think further pension reform is too complex at this stage (given the differing issues raised by defined benefit and defined contribution schemes) but we would not rule out a commitment to re-examining the idea of flat rate relief and new annual/lifetime limits. We do expect to see some progress resolving the issues associated with pension tax relief for lower paid workers.