- Chancellor may use this Budget to deliver on manifesto pledges and announce consultations to be decided upon later in the year
- Budget in November could be used to set out ambitious spending and bolder tax policy changes
LONDON, 6 March, 2020: Only three weeks into his new role and the Chancellor will deliver his first Budget, something his predecessor did not have the opportunity to do over his six month tenure.
Chris Sanger, EY Partner and head of tax policy, comments:
“The new Chancellor has two bites of the Budget cherry this year – the first when he delivers his speech next week and another later in the Autumn.
“This provides the Chancellor the opportunity to use next week as an emergency Budget – in everything but name – delivering on his party’s manifesto pledges while announcing a number of larger, strategic, consultations. This helps demonstrate to the electorate that positive change is afoot and delivers on the Government’s promises that any significant changes are consulted on, whilst still making final decisions this year.
Emergency measures to help business?
“Traditionally, the first Budget of a parliament is a tax raising one, but there are a number of reasons why this might not be the case this time. First of all, there is the chance to raise money later in the year and hence the opportunity to extend the honeymoon period, before the reality of tax raising bites.
“Secondly, the growth of Covid-19 may prompt the Chancellor into more of a give-away mood, or potentially ensuring that he has the power to make changes rapidly in the future. Other countries have introduced fiscal stimulus packages, and the Chancellor may well wish to prepare for such an eventuality. The packages seen in 2009 in the face of the global financial crisis included improvements in the tax provisions for accelerated depreciation, loss carry forward and carry back, R&D tax credit, indirect tax changes (VAT reductions) and personal income tax measures.
“Looking at the list with today’s position in mind, some of these changes have become ongoing trends such as the reductions in corporate tax rates and increases in R&D tax credits. However, others such as time to pay provisions, and cuts in indirect taxes to stimulate spending remain as powerful today as they were then. In contrast, the trend in policy since the financial crisis has been to reduce accelerated depreciation and to restrict the use of losses, and so releasing the constraints on these now could have an even greater impact that the changes might have had in the past. All of these remain viable tools to support the economy and many are already being used by other countries, particularly in Asia.
Bold statements around future intent
“He may also use the November Budget to make some bolder statements on his intentions around tax policy, not forgetting that this March Budget is being delivered against a backdrop of intense Brexit negotiations. Delaying some of the bigger changes may afford some breathing space for HM Treasury and HMRC to work through the challenges brought about by Brexit preparations.
“However, while the Chancellor may decide to keep some of his powder dry next week, with a view to making the November Budget a far more expansive fiscal event, he is unlikely to completely give up the opportunity to make some headline grabbing announcements.”
Chris Sanger comments:
Digital Services Tax (DST)
“DST remains at the forefront of policy makers’ minds, with arguments between countries as how taxing rights over the profits made by digital companies are allocated. Many countries are arguing that more taxing rights should be given to those countries with the digital customers (the market jurisdictions), as opposed to where the intellectual property is owned. This is what has led to the flurry of DSTs, turnover-based taxes intended to deliver some taxes to those market jurisdictions whilst the debate on reforming the corporate tax system develops in the 137 country group of the so-called “Inclusive Framework.
“The Chancellor will be well aware that DSTs are not without controversy or consequences. In its review of the French DST, the US Trade Representative argued that these taxes predominantly discriminate against US tech giants, and cover only services where US companies are dominant. That is why the US countered France’s plans by threatening the imposition of tariffs on French goods entering the US. That is something that the UK would clearly not want applied to its goods as it embarks on new trade relations after leaving the EU at the end of 2020.
“In January, at the World Economic Forum, the “Davos compromise” position was agreed between France and the US, under which no DST would be collected by the French this year and no tariffs would be imposed by the US. If the OECD comes up with an acceptable alternative by the end of this year, France would use that basis to charge tax rather than the legislated DST.
“Much of what we might see in March 11’s Budget depends on what progress can be expected by the OECD and “Inclusive Framework”. The latest update arguably provides the basis for the UK to defer implementation, secure in the knowledge that there is a second Budget due in the Autumn. That would “cost” the UK Exchequer the approximately £300m that it had booked for 2020/21, but may be a small price to pay to be able to sit back and watch the developments for another six months. A deferral would also allow him a greater chance to refine the legislation through further consultation.”
“Business rates has remained a running sore for the Government, with the increase in the burden of business rates that we have seen in the last decade now really hitting businesses. The previous consultations and responses have reduced the number of properties in scope, but has not materially reduced the costs for larger businesses and properties. Having had so many recent consultations, the hope will be that this consultation will allow a more strategic look at the role of business rates (a business tax imposed on property) and the concerns that this creates for tax policy. This time, there should be greater focus on what is the right way to tax businesses.
Of course, this is a tax that is not wholly within the power of the Chancellor and the interaction with local government makes any changes more complicated.”
“The Conservative manifesto promised increases in the Structures and Buildings Allowance and the R&D credit. The higher limit on Annual Investment Allowance may be extended. We are also likely to see a new consultation on the proposed extension of R&D tax relief to cloud computing data which was included in the manifesto.”
“Looking to the manifesto, now a distant memory having been launched last decade – cc ok, five months ago – it would be hard to predict what the Budget would contain on environmental taxes. In common with the other main political parties, there were few direct commitments among the rhetoric. Beyond a statement on plastics packaging tax, we saw only a promise to “prioritise the environment in the next Budget, investing in the infrastructure, science and research that will deliver economic growth, not just through the 2020s, but for decades to come.” Combined with the fact that the UK is now hosting November’s 2020 United Nations’ International Climate Change conference (COP26) in Glasgow, this has increased expectations.
“So, beyond the Plastic Packaging Tax, what more might we see? The first question will be whether this will be the time for the Chancellor to stop the freeze in fuel duty. The freeze of duty in 2019-20, in the 2018 Budget, cost the Exchequer £840m in that year and increasing with inflation each year thereafter. Given all the Climate Emergency demonstrations, the Chancellor with to take this opportunity to break the freeze. If he does that, he may want to pair that with some incentives that address the added costs – greater capital allowances, greater reliefs for environmental expenditure, and additional spending.”
Chris Sanger comments:
Entrepreneurs’ Relief (ER)
“There will be some changes to ER but the real question is around whether the Chancellor believes there remains a need to encourage successful entrepreneurs to remain in the UK and go on to build yet more successful businesses.
“Entrepreneur’s Relief, “a focused tax relief for entrepreneurs”, was introduced in April 2008 as a replacement for Taper Relief. Taper Relief, introduced a decade earlier, sought “to get the best out of the country's entrepreneurs [by changing] the UK tax system … to recognise the investment of individuals who nurture promising start-ups into successful businesses”.
“Back in 1998, entrepreneurs considering selling their businesses, and without access to retirement relief, faced the stark choice of paying CGT at the marginal income tax rate of 40%, or leaving the UK before selling up and paying minimal, if any, tax given the UK’s tax treaties. Unsurprisingly, many chose the latter. Faced with the loss of lots of “rainmakers”, the government introduced the Business Assets Taper to help retain those individuals, with a view to fostering the “Dragons Den” culture.
“The tax landscape has moved on somewhat from the days when taper relief was introduced. The lower rate of CGT makes the incentive for leaving the UK lower. Nevertheless, entrepreneurs are increasingly globally mobile, and a balance will need to be struck between tax raising and retaining investment in the UK by those disposing of businesses.”
Tom Evennett, EY’s head of Private Client Services, comments:
“There is a suggestion that we may go back to revisiting the pensions debate raised by George Osborne in 2015. There seems to be a drive to make pensions ‘fairer’, especially in light of the cost of the tax relief currently given, but no clear picture as to what a fairer system might look like. There appear to be a number of points of detail that the Chancellor is under pressure to fix which may encourage a wider review (albeit by way of consultation).
“It is clear that Government has to address the impact of the tapering of the annual allowance on the NHS, with doctors reportedly declining additional shifts due to the tax impact of the tapering on their annual contributions to their NHS pension plan. The initial fix proposed has been to amend the terms of the plan, but the pressure is on the Chancellor to amend the tax rules (which will then presumably apply to everyone). One suggestion is that the rules will not apply until someone earns more that £150,000 per annum (excluding the value of any pension contributions). This will reduce the number of taxpayers hit by the rules but do nothing to address the impact for those caught.
“A secondary factor in the NHS debate has been the impact of the Lifetime Allowance cap with renewed calls to lift the limit or scrap the cap altogether. The difficulty here is that most taxpayers do not reach the cap (currently £1.05m) and providing increased tax advantages for those that do may not fit with the ‘levelling up commitment’. At most, we might expect the Chancellor to agree that the cap is measured against contributions rather than value (for defined contribution schemes) rewarding ‘responsible savers’.
“Arguably an equally pressing area to address is the treatment of low earners who fall within the auto enrolment rules but below the income tax threshold of £12,500. Members of pension schemes who don't pay income tax are granted basic rate tax relief of 20 per cent on pension contributions up to £2,880 a year. However, this tax relief is only available where the pension scheme operates on a relief-at-source basis. It is not available for schemes that operate a net pay arrangement. A net pay arrangement may have attractions for higher rate staff and may have lower charges. Currently, a scheme can only use one method for all staff.
“Where we may see practical change is in the link between national insurance credits (building up state pension benefits) and the child benefit charge. If you’re not registered for child benefit you won’t receive the credit counting towards a state pension and there is evidence that people do not realise they still need to register even if they know that they will have to repay the child benefit in a year due to the impact of the child benefit charge. HMRC has said it endeavours to make this clear, but we may see action to ensure the pension credit is given automatically (and backdated). We don’t see any likely changes to the operation of the child benefit charge itself.
“Will the Chancellor consult on pensions more generally? The challenge here is that even if there was agreement to, say, a flat rate of tax relief (or a Government bonus such as that given on LISAs), the removal of marginal tax relief on pension contributions would cause significant issues for final salary schemes, especially in the potential for ‘new’ tax charges on individuals without a compensating rise in income to pay them. Even for defined contribution schemes, a reduction in the tax relief available may make pension contributions seem unattractive – given that the money cannot be touched until 55. This could lead to more savings in ISAs but also unlooked for consequences of investing more in property (increasing housing costs) or simply not saving at all.”
“Will the Chancellor consider introducing the so called ‘mansion tax’. The tax, if introduced, might either be a new tax or additional higher rate council tax bands added to the existing bandings. The introduction of this tax would help level up the disparity of banding rates and help generate additional revenue from those properties with a high asset value.
However, there are questions to be asked:
- Will the Chancellor introduce a tax that will disproportionately penalise Conservative voters in its heartland of South East?
- How will the government address the position of pensioners who might be asset rich, and so incur high tax, but income poor, and so not be able to pay the tax?
- Will the tax be intended as revenue generating or will it offset some other reductions (such as a cut in SDLT)?
Stamp Duty Land Tax (SDLT)
“There have been calls for reductions in the rates of SDLT given its impact on transactions at the higher end of the market in particular. Certainly, the tax is a bar to mobility of labour but at the same time it has acted as a brake on house prices, which are already multiple times annual earnings. While no major reform is likely, the Chancellor may consider SDLT relief for certain people downsizing to smaller properties. This would help release larger housing stock on to the market and release capital tied up in large assets.
“Also on the cards is a new surcharge for purchases of residential property by non-residents. A previous consultation considered the possibility of introducing a 1% surcharge, but the Conservative manifesto committed to the introducing a surcharge of 3%. Given that a consultation has already taken place, the Chancellor may feel this is an easy win to introduce in his March Budget.”
Inheritance Tax (IHT)
“Two recent reports have called for changes to IHT including the Office of Tax Simplification. IHT applies to all estates over £325,000, though the ability to transfer to transfer unused nil rate band to a spouse and an additional allowance for residential property in certain circumstances can take a couples total tax-free estate to £1m. The tax is unpopular as the fact that the nil rate band has not increased means it applies to more estates and many people feel they are being taxed twice – once when they earn and then on death. Nevertheless, inheritance tax is only paid by around 4-5% of estates.
“Possible changes to IHT include changes to business property relief to make the qualifying criteria more stringent by aligning them with those for entrepreneurs’ relief, as well as changes to the lifetime gifts rule to shorten the look back period from 7 years to 5 when bringing gifts into charge on death. The OTS report also suggested removing the automatic capital gains tax uplift on death where the estate also benefits from an IHT relief.
“The all-party parliamentary report suggested a much more wide-ranging reform of inheritance tax with a low overall rate of 10-20% and no reliefs beyond those for gifts to spouses and charity. This report also suggested removing the CGT uplift on death in all circumstances.
“The Chancellor has some choices to make for IHT – does he make the more limited, piecemeal reforms suggested by the OTS or does he go for a more wide-ranging reform along the line proposed by the all-party parliamentary group. Given the length of time the new Chancellor has had to prepare for the Budget he may wish to postpone any more difficult choices until a later Budget.”
“There is a real need to address the tax system to fund social care. The APPG report of inheritance tax suggested that funding of social care could come from a revised inheritance tax. However, the proposed amendments would be unlikely to raise the funds needed and whatever decision is made there is no easy, short-term fix on this. This is something he may save for the November Budget.”
Nigel Duffy, EY Director, People Advisory Services, comments:
“In response to the review in 2017, the Government published its Good Work Plan in December 2018 setting out what it believes to be the necessary key reforms to employment law. There is a need (in some quarters) to implement more of the recommendations of the review and potentially address the main driver of the gig economy which is the avoidance of Class 1 NICs. The Taylor ‘can’ continues to be kicked down the road.”
“Government has recently laid draft legislation setting out the National Insurance thresholds for 2020-21. As announced during the General Election campaign, the level at which taxpayers start to pay NICs will rise to £9,500 per year for both employed and self-employed people. All the other thresholds for 2020-21 will rise with inflation, except for the upper National Insurance thresholds which will remain frozen at £50,000, as announced at Budget 2018.
“The press release accompanying the legislation restates the Government's ambition to raise the National Insurance thresholds to £12,500 (in line with the tax Personal Allowance) – so there will likely be an announcement in this area.”
“Brexit poses some challenges for the Government and for mobile workers and their employers. Uncertainty remains around what the social security position will be at the end of the transition period, when the UK is no longer party to EU coordination regulations. Without any agreement between the UK and the EU or individual member states, dual social security liabilities could arise. Government has published legislation to mirror EU Regs, however these are unilateral in nature, after transition the EU does not have to coordinate with them.”
Personal Allowance (PA) for non-residents
“Once the UK leaves the EU after transition there is a likely mismatch where non-resident EEA nationals are entitled to a still UK PA but UK non-residents (non-EEA nationals) are not. So, we may see a consultation on this resurface – similar to a previous consultation (to raise revenues in a pre-Brexit world) which was scrapped.”