Chris Sanger, EY’s Head of Tax Policy, comments on the possible direction the Chancellor might take at the 2023 Spring Budget:
“This Budget offers the Chancellor the opportunity to cushion this new high tax rate era with targeted incentives that replace the outgoing super deduction and mitigate the impact of the incoming corporation tax rise to 25 per cent. This Chancellor has frequently emphasised the importance of maintaining steady, stable policy and has pushed back on calls for tax cuts, but modernising incentives and reliefs for a higher rate environment would allow him to maintain that pledge while doing what he can to nurture growth. This Government may be against broad tax cuts, but updating incentives within the tax system is consistent with what Rishi Sunak set out as Chancellor last year in his Mais lecture.
“As the architect of the imminent 25 per cent corporation tax rise, then-Chancellor Rishi Sunak was clear that it was to be tempered with appropriate reliefs. The current Chancellor looks set to maintain the first part of his predecessor’s strategy and it would therefore be surprising to see him fail to follow through with the second part. Higher tax combined with the end of the super deduction would be a one-two punch to UK growth, so this would be the right time to counter that with the introduction of incentives. If that doesn’t happen, it would be difficult to see how the Government creates the right environment for sustained economic growth ahead of the next election.”
Chris Sanger on the end of the super deduction
“The extra 30% of the super deduction was designed to encourage businesses to invest in 2021 and 2022, rather than waiting until this year when they could offset allowances against a 25 per cent corporation tax rate. It always intended as a temporary stopgap that would end. However, we’re still likely to see the super deduction replaced in some form, as to not do so would be a divergence with the economic strategy the Prime Minister designed during his own time at the Treasury.
“In the Tax Plan published alongside his 2022 Spring Statement, then-Chancellor Rishi Sunak attributed the UK’s ‘long-standing issue with productivity’ to ‘a lack of capital investment’ and pledged to ‘incentivise businesses to invest’ in ‘capital, people and ideas’ once the super-deduction ended in April 2023. Our current Chancellor’s own vow to prioritise Enterprise, Education, Employment and Everywhere seems to mirror this to an extent and it would not be a surprise for him to follow the Prime Minister’s original roadmap in full by introducing investment incentives that drive enterprise and employment growth.
“Failing to replace the super deduction may also send an uncomfortable signal to business. Many companies will find themselves unaffected, as they’ll still receive broadly the same relief under the £1m Annual Investment Allowance (AIA) additions from 1 April. However, businesses investing more than £1m will lose a measure that has, for the last two years, encouraged immediate business investment. Without an incentive to act, some may choose to defer investments until the economic environment becomes more favourable.
“If the Chancellor did want to encourage continued business investment in the short term, he could extend the super deduction. This would effectively be a new policy offering 130% relief on top of the new AIA level, creating a far more generous tax treatment for capital investment. Other alternatives the Treasury may consider include extending the super-deduction’s reach to encompass relief for the purchase of rented, leased or second-hand assets, or raising the permanent AIA level above £1m, a move that could be framed as helping businesses invest in the right place for the future.
“While none of the Chancellor’s Four Es are particularly easy areas to tackle, Enterprise could be the most appealing to engineer growth. In the approaching era of the 15% Global Minimum Tax, the UK may have an opportunity to revisit the previously scaled back investment zones initiative to leverage existing investment to create an attractive investment proposition. Large businesses facing higher marginal rates elsewhere might be attracted to these zones with generous capital allowances and lower rates, including in relation to employer National Insurance Contributions when employing new workers.
“Whatever direction the Chancellor takes, business relief should play some role if the UK is to remain competitive internationally. Incentives form a natural double act with high tax structure, so it would be highly surprising if the Spring Budget only featured a solo performance from the raised corporate rate.”
Chris Sanger on R&D tax credits and the green economy
“We wouldn’t expect to see significant changes to the research and development tax credit scheme, following its reform at the Autumn Statement. The Treasury is intent on tackling what it calls the abuse of the R&D tax credit scheme by some smaller companies and it’s unlikely that we’d see a full-scale reversal now. However, we may see the Chancellor update (or target) his thinking and decide to offer some relief to all companies by slightly raising the R&D allowance across the board, or perhaps by tailoring relief to the Government’s priority areas.
“The Government’s is set to update its Net Zero strategy this year and we’re yet to see a policy response to the green subsidy race being run by the US and EU. As such, the Spring Budget would be a sensible time to announce any enhanced deductions for sustainabilityrelated R&D investment. This could have a dual benefit, not only supporting the creation of the green technology and products the UK will need to achieve our national 2050 Net Zero targets, but also encouraging companies to change their business models to invest in green technology for their own use.”
Chris Sanger on IR35
“Despite industry calls for further reform, we’re unlikely to see additional changes to IR35 off-payroll worker rules, partly because this area has already been subject to significant change over recent years but also because it remains a highly complex issue that may well now be deferred until after the next election. At some point, the Government will need to grasp the nettle and address the wider employment tax system, perhaps simplifying it by codifying a statutory employment test, similar to the statutory resident test, but that’s unlikely to happen this Spring.”
Tom Evennett, EY UK&I Private Client Services Leader, comments on Personal Tax options available to the Chancellor:
“This Chancellor has been a strong advocate of stable, long-lasting tax policy and we’re unlikely to see any sweeping changes to income tax rates allowances following the changes announced at the Autumn Statement. The extensions to those threshold freezes will only begin to raise significant sums over the next two years as inflationary pay rises push many into higher rates, so it would make little sense to make adjustments now.
“If the Chancellor was intent on producing a rabbit from the hat, he may look to simplify the income tax system by removing the cliff edges at various income threshold boundaries. This could involve removing the 62 per cent effective rate that applies on earnings between £100,000 and £125,000, as a result of the gradual removal of the benefit of the personal allowance. This would address a longstanding quirk in the tax system and streamline a complication that could otherwise affect an increasing number of people as inflation pushes salaries higher.
“The Chancellor could raise or remove the child benefit cliff edge, which sees this benefit taper off for families where the highest earner has an income of over £50,000. This threshold has been in place for more than a decade and, with inflation affecting every other area of the economy, the Chancellor may look to address this, either by raising the threshold or removing it. This would put money in the pockets of middle-income families and also remove, or at least reduce, a thorny practical issue which has historically penalised many.”
Tom Evennett on IHT
“Inheritance tax thresholds are frozen until 2028 and, while there have been calls to utilise the unexpectedly high January tax receipts to fund an IHT cut, we’re unlikely to see major changes here. At most we may see the nil rate band increased from £325,000, but this is unlikely. IHT is a proven revenue-raiser for the Exchequer, and this is set to continue as inflation pushes many beyond the nil rate band.
Tom Evennett on pension reform
“While sweeping pension reform is unlikely to be announced as full policy, we may see a reference to the start of some form of consultation. Some had suggested the Chancellor might explore changes to the tax-free lump sum, reducing the 25 per cent level individuals are able to withdraw from their pension pots. While this would raise significant amounts for the Treasury in the long term, it would be a highly difficult decision politically.
“Instead of reforming the lump sum, the Chancellor may look to raise the age threshold that individuals can withdraw their private pension. This is already set to rise from 55 to 57 in April 2028, but the Chancellor may act to increase the threshold to 60. This could discourage older professionals from early retirement, instead keeping them in the workforce for longer. This would be attractive for a number of reasons, including maintaining a healthy income tax take as well as retaining skilled employees at a time when many industries are struggling to fill vacancies.”
Tom Evennett on non-domicile tax relief
“Non-domicile tax relief has come under increasing attention in recent months following Labour’s pledge to replace the regime, so we may see the Chancellor take action here. If he does not announce a change, he may look to explain this by sharing the Treasury’s assessment of how much the relief’s reform or abolition could affect tax receipts, which he requested after the Autumn Statement.
“If he is open to reforming the relief, there are a few options available to the Chancellor. A fairly straightforward change would be to raise the fee paid to qualify for the relief for those living in the UK, the Remittance Basis Charge. Alternatively, he could reduce the timeframe by which you’d be deemed a domicile from the current sixteen out of the last twenty years to something closer to ten out of twenty. However, neither of these steps would likely raise significant sums.
“It’s challenging to predict the behavioural impact of non-domicile relief reforms and whether changes or abolition would lead to an exodus of both high-net-worth individuals and their money. Proponents of scrapping the relief point out that reforms made in 2017 led to very few leaving the country, but this isn’t a like-for-like comparison. The earlier reform restricted access to the regime for those who had been in the country for an extended period, so wasn’t as far-reaching as a wholesale end of the policy. We also find ourselves in a very different world to 2017 and the international landscape has shifted dramatically, so high net worth individuals may not take as much convincing to depart. When referencing the non-domicile relief at the Autumn Statement, the Chancellor pledged to be guided by facts over politics and we expect the Treasury to approach this issue with caution and be data-driven.”
