Press release

25 Nov 2020 London, GB

Spending Review: OBR reveals £29bn tax bonanza since March Budget

“Digging a little deeper behind the Chancellor’s headline announcements from today’s Spending Review reveals how significant the tax changes have been since the formal March Budget.

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Chris Sanger, EY’s head of tax policy, comments:

“Digging a little deeper behind the Chancellor’s headline announcements from today’s Spending Review reveals how significant the tax changes have been since the formal March Budget.

“In total, the OBR report reveals that there has been £29bn worth of tax giveaways since numbers that the OBR signed off for March – a far cry from the ‘fiscally neutral’ budgets of his predecessor. The size of the number is even more staggering given that all of this is without an Autumn Budget. 

“In addition to the Government direct spending response on COVID, the OBR’s Spending Review document reveals there have been no less than 26 tax measures since the Chancellor’s pre-COVID Budget proposals, including:

  • Measures supporting jobs and employment through COVID-19, such as the temporary reduced VAT rate for hospitality and tourism sectors until 31 March 2021 and the increase in the stamp duty land tax nil-rate band threshold to £500k until 31 March 2021 (these measures are the highest in absolute terms after business rates)
  • Measures supporting businesses through ‘direct’ COVID-19 measures, such as the business rates holiday (the highest costing measure) along with VAT and income tax deferrals (which appear to cost real money and not be just a reallocation of tax between years)
  • Measures supporting businesses through ‘indirect tax policy changes’ (such as the deferral of off-payroll working and the extension of the higher annual investment allowance)
  • Other measures (including the future of Making Tax Digital, the withdrawal of outbound VAT-free airport shopping from January 2021 and the VAT ‘parcel reforms’.)
“As is to be expected the tax spend is notably smaller than that on either the Coronavirus Job Retention Scheme (CJRS), the Self-Employment Income Support Scheme (SEISS) or the targeted grant funds.  Tax measures are just over 10% of the total cost of policy decisions for 2020-21 with about 40% of the cost for tax measures relating to the business rates holiday for eligible properties in the retail, hospitality, leisure and nursery sectors. 

“Alongside the headline freeze in pay for some public sector workers, the spending review also confirms that the Government will increase the 2021-22 Income Tax Personal Allowance and Higher Rate Threshold by 0.5% in line with the September CPI figure. This is the minimum required by legislation. The Government will use the same figure for setting all National Insurance limits and thresholds for 2021-22.

“Away from the policy costings, the review provided details of HMRC’s settlement which not surprisingly includes £1 billion of funding to reform and enhance the UK customs system after the end of the Transition Period. In keeping with the sums involved, HMRC is being given £20 million to fund additional resource to implement and ensure compliance with Covid-19 support schemes. HMRC has already started its campaign to follow up claims with businesses.

“The OBR’s forecast for tax receipts in 2020-21 is £101.9 billion lower than its March forecast thanks to the combined effect of the weaker economy hitting almost all taxes (explaining around 90 per cent of the shortfall) and the direct impact of policy measures (explaining the remainder). In cash terms, the OBR’s latest receipts forecast is substantially weaker than that presented in its March forecast, but not as weak as the central scenario from its July Fiscal sustainability report (FSR).

The challenge ahead of balancing the books

“The Spending Review and the OBR report shine a light on the cost of the Government’s recent policies and also highlight the fall in tax receipts in the last year. The Chancellor continues to maintain that the UK must begin “returning to sustainable public finances”, indicating tax rises are likely to be on the way. The OBR report gives an indication of the size of tax rise (or spending cuts) required (between 1 and 4% of GDP) and overall the documents demonstrate the scope of the challenge ahead for the government in 'balancing the books' while helping to drive the economy forward.”