- With exactly four weeks to the day until the Chancellor delivers his Budget speech, EY sets out its predictions
Chris Sanger, EY’s Head of Tax Policy, comments:
“While it’s been nearly a year since last Budget, the Chancellor has arguably spent more time delivering the series of mini ‘Covid-19 crisis Budgets’, than he may have done giving a normal Budget speech.
“While the first few Budgets of a new parliament are usually used for the government to deliver on campaign promises and raise money to spend over the rest of the term, the Chancellor has found himself in a completely different environment, one that has overturned the norm and required a wholly new rulebook.
“The Budget provides the opportunity for the Chancellor to set out what a Budget looks like in the midst of an ongoing pandemic and its response. Will this Budget seek to deliver on the tried and tested approach early-term Budgets of the past, namely to raise funds to spend later, or will it take a different approach, based on the precise situation that UK is in today?
“Some may argue whether a Budget is needed at all, given the country is still in the midst of a global pandemic, but apart from the legislative requirement to fulfil the fiscal cycle, the Budget provides the Chancellor and government the opportunity to lay out a clear road map that provides UK citizens and business with clear direction of travel over it plans for future taxation. Having a clear perspective of where the UK wants to be will provide the best environment for investment and future growth.”
How is the Chancellor likely to act?
“In all of the discussions on the future, the “elephant in the room” is the response to the increasing level of government debt as a percentage of GDP. This is adversely affected by both the increase in debt and the drop in GDP, with many headlines and high watermarks being hit. Given this, the Chancellor faces the decision of whether to raise taxes to reduce the debt level or to provide greater stimulus to increase GDP.
“The Chancellor could embrace the current low interest rates and put off balancing the books for now to invest in the future. This would be in line with the suggestion of Janet Yellen, US Treasury Secretary, that the US needs to “go big” to help the economy back on its feet. Will the Chancellor synchronise his approach with Ms Yellen and develop the UK/US special relationship?
“In practice, the answer is unlikely to be either one extreme or the other, with the Chancellor looking to boost the economy but at the same time to raise taxes in areas of the economy that he thinks can bear it. “
Tax rises under speculation
Corporation tax rate
A perennial rumour is a rise in the headline rate of corporation tax. The Government seems to have already decided that there is little competitive mileage in cutting rates below 19%, with the reversal of the cut to 17% which was due in April 2020. Any significant rise in tax rates is less likely to hit smaller companies, either due to the reintroduction of a specific regime or, at least in the short term, due to the losses incurred as a result of the pandemic .
In contrast, larger companies can currently only use a portion of their losses brought forward, with the additional cash flow burden that this imposes acting as a drag on the competitiveness of UK firms. Even beyond this, the current rules allowing losses only to be carried back one year denies previously profitable companies a valuable source of cash and any increase in 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.
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. Such a powerful position has been one that the UK government has fought hard for and this may therefore be a natural cap on the Chancellor’s willingness to raise tax rates on corporates, at least at this stage.
Capital gains tax and inheritance tax
Tom Evennett, EY’s Head of Private Client Services, comments: “While raising Inheritance Tax and Capital Gains Tax 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. It would send a message to the electorate that the government is serious about the redistribution of wealth.”
Building the environment for growth
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 regulations may play a significant part. But from a tax perspective, we may see a return to enterprise zones, targeted outside the South East to help address the levelling up agenda – a key tenet of the Conservative manifesto. These are likely to be accompanied by strict anti-avoidance measures to stop any ‘secondary market’ in the allowances and ensure the relief works as intended.
To help stimulate investment and drive future growth, he could 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.
While his party’s manifesto pledges have taken a back seat since the pandemic, he may conclude that now is the time to push ahead with the levelling up agenda. Creating enterprise zones, employee growth zones and expanding free ports across the North of the UK could be levers he chooses to use. He may also look to R&D incentives, capital allowances and entrepreneurship grants to boost the economy and to incentivise businesses investment. However, it is clear from the Government consultation on the R&D credit for SMEs that it will want to protect tax relief/grants against fraud and this may limit the expansive nature of any incentives.
We did see the creation of the Future Fund during the pandemic and the Chancellor may look to replicate this type of equity investment by the Government in key start-up industries. He may also consider the opportunity to take on some of the Corona Virus debt which the banks have issued (and which the Government is currently guaranteeing) which becomes part payable shortly and either hold with extended terms or even consider converting part into equity stakes. The aim would be to freeze the debt burden on companies recovering from the pandemic at little additional liability for the Government.
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.
Wider changes to taxation
Beyond tapping the economy to increase the coffers or promoting growth in the UK, 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 indications so far is that the UK appears is likely to shift its approach to 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 sudden change of direction.
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. This year, we may see the Chancellor wanting to use this pulpit as a means 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.
Already in train
There are of course measures that are already in train, whether the subject of recently closed consultations or as defined policies waiting for implementation. Whatever happens between now and 3 March, these will need to form part of the Finance Bill that accompanies this Budget.
- The legislation to implement a 2% stamp duty land tax (SDLT) surcharge on property purchases by non-UK residents, to apply from 1 April 2021
- The Plastic Packaging Tax
- Tackling Construction Industry Scheme abuse
- A cap on the R&D SME tax credit linked to PAYE costs
- Measures addressing the tax implications of the withdrawal of the London Inter-Bank Offered Rate (LIBOR)
- Legislation in respect of hybrid and other mismatches (these amendments look to make sure the legislation acts proportionately and in line with the OECD work)
EY’s Budget runners and riders
A Budget of longer-term ambition?
With so many mini-Budgets having already taken place to support businesses and employees through pandemic, any give-aways and the proverbial ‘rabbit out of the hat’ surprise will give rise to a greater deficit. And with the economy in a delicate position, such that significant tax increases may risk the recover, the Chancellor may use this year’s Budget to set out the government’s broader ambitions rather than announce too many specific taxes.
He may also be keen to move the dial from being perceived as the ‘crisis Chancellor’ to one that sets out the road to future growth and prosperity.
The government’s environmental credentials
This Budget could be used as an opportunity to boost the UK’s green economy. With announcements around creating support mechanisms for companies in the environmental space he may use this as lever to support the levelling up agenda by announcing specific support for certain regions, encouraging job creating in environmental technologies for example.
With COP 26 scheduled to take place in Glasgow in November this year, he could use the Budget to expand on the government’s ten-point plan for a green industrial revolution, and set the government’s green ambition and credentials to help position the UK as a global leader and attractive destination for investment.
UK open for business post Brexit
With the UK now out of the EU, the government may be keen to make a statement of intent and demonstrate to people and business that getting ‘Brexit done’ will benefit the whole of the Union. The Chancellor may focus on the benefits of ‘Freeports’ and take the time to consider changes to the UK VAT rules.
In practical terms, the Chancellor may also wish to address some of the frustrations around post-Brexit trade, particularly around procedural requirements – most recently highlighted in respect of Scottish fisheries, the creative industries and the transport of products into Northern Ireland. With regards to the latter, his options are however limited by the Northern Ireland Protocol. What we may see is support for businesses which export through additional grants and the possibility of new export credit facilities.
Consultation on Uncertain Tax Treatments
Last March, the Government launched a consultation regarding its proposal to introduce a requirement for large businesses to notify it of uncertain tax treatments (UTT). The proposed measures would draw on accounting principles but instead of requiring an assessment of whether it is probable that a tax authority (including a court) would accept an uncertain tax treatment, it would require taxpayers to identify positions that HMRC is likely to challenge.
HMRC is working on making these rules more objective and easier to apply so as not to create a disproportionate administrative burden, and swamp HMRC with information it already has. Accordingly, the rules will be delayed until April 2022 but we may see an update on progress at the Budget.
COVID-19 Business Interruption Loans
Loans under the COVID-19 Business Interruption Loan Scheme (CBILS) were first granted in March 2020, with no interest due for 12 months. A big question remains over what decision the Chancellor will make on paying back these loans. Might we see the government take an equity share in those viable businesses which are unable to pay back the loans?
Business Rates/Online sales tax
There will be pressure on the Chancellor to match and perhaps exceed the three month extension of the business rates holiday into 2021 promised by the Scottish Government in its recent Budget. Such a move may even come in advance of Budget day. Recent moves by online retailers taking over well-known fashion brands but not their stores or employees have led to more calls for some ‘re-balancing’. Given this, and in response to the consultation on Business Rates, the Chancellor may take the chance to look at an online tax on retailers, potentially allowing these proceeds to reduce the business rates, something of value to more traditional retailers.
Redistributing wealth from the few to the many
Tom Evennett, EY’s Head of Private Client Services, comments: “While altering Inheritance Tax and Capital Gains Tax 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. It would send a message to the electorate that the government is serious about the redistribution of wealth.”
Pensions Tax Relief
Evennett adds: “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. Further restrictions for high earners may be popular in terms of redistributing wealth from the ‘few to the many’ but would need to avoid recent conflicts, particularly with the medical profession who viewed excess pension taxation as a barrier to NHS working. This provided negative publicity in the run up to the 2019 General Election with a temporary fix provided for doctors.”
IR35 and NICs
Some contingent workers have been hit hard by the effects of the pandemic and have largely been unable to benefit from any 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.
While it is unlikely that the Chancellor will make any changes to NICs generally, the work of the Institute for Fiscal Studies (IFS) and others continue to focus attention on the distinction between the NIC treatment of various forms of work and employment. This builds from Good Work: The Taylor Review of Modern Working Practices (July 2017) in which it was noted that different rates of National Insurance mean that the UK system of taxing labour is not neutral. A self-employed person doing the same work as an employed person can pay a different amount of tax or National Insurance despite receiving similar contributory benefit entitlements. The IFS notes that further reductions are available to those working through their own personal service companies. Whilst these differences may encourage employers to use flexible workers, the Chancellor may see that now is the time for reform. Any such changes might also be paired with changes to the SEISS to align support.
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, he may nod to a review taking place with a view to an overhaul over the next year or so.
Angela Dawes, UK Financial Services Tax Leader, EY, comments:
“This will be a challenging Budget for any Chancellor. With the combined effects of COVID-19 related economic difficulties and Brexit still driving a lot of uncertainty, in addition to a second Budget scheduled for the Autumn, the likelihood for future changes being announced rather than put into action straight away may be higher than normal - likely to be more consultation than legislation.
“While the Chancellor will be keen to start rebuilding UK plc’s finances, there will be certain taxes, such as Income Tax, VAT and National Insurance, that could be off the table for the time being. To date, the speculation has focused mostly on Corporation Tax, Capital Gains Tax and Pensions Tax Relief; if the Chancellor does decide to tackle the latter, the industry expectation is a move to a flat rate, possibly in the 25-30% range. However, the fact remains that a significant proportion of higher rate tax relief goes to public sector pensions, including NHS pensions, making it difficult to reform at any time but especially, one would assume, during the current pandemic.”
Jason Whyte, Associate Partner, Life & Pensions, EY, comments on the insurance side:
“Insurance Premium Tax - which has been raised every couple of years since it was introduced but has not risen since 2017 – could arguably be set for an increase. Currently at 12% though, it is already considered to be reasonably high and is a relatively small contributor to the overall purse. There is also potential for the pensions auto-enrolment system to be widened to include more of the estimated 10m self-employed and low earners it doesn’t currently reach."
Mark Lee, UK TaxChat Leader, EY, comments on personal tax:
"There has been a lot of speculation on Capital Gains Tax rates increasing to align with Income Tax since the Office of Tax Simplification’s recommendations in November, but recent rumours conflict, suggesting headline tax rises may not be brought in until 2022. The pre announcement of a tax rise could encourage many to act in the short term, which would likely increase tax revenues. In addition, given the popularity of the temporary reduction to SDLT, which helps homebuyers lower purchasing costs, it would not be a big a surprise to see this extended beyond the current end date of 31 March 2021.”