Chris Sanger, EY Tax Policy Leader, comments on the possible direction the Chancellor might take at the 2024 Spring Budget.
He said: “In choosing which of his “starters” make it over the finishing line and into the Spring Budget, the fact that this isn’t just a Budget, but a pre-election Budget, is likely to be front of mind for the Chancellor. This will be his Shop Window Budget and he’ll likely be focused not only on funding the Government’s programme for the next five years, but also on which policies will entice voters at the General Election.
“History shows us that pre-election Budgets tend to bring out the generous side in Chancellors and this one will likely focus more on handouts than hair shirts, with tax cuts and extra spending featuring heavily. However, the extent of the Chancellor’s largesse will heavily depend on the final forecast from the Office for Budget Responsibility.”
Retail: Could VAT-free shopping be on the table again to boost UK attractiveness in the Olympic year?
Amber Mace, Consumer Products and Retail Market Segment Lead at EY, comments:
“UK retailers are continuing to struggle with sustained cost pressures and a challenging labour market and would welcome a move by the Chancellor to cut income tax and increase take-home pay for workers without adding a further cost burden to business, potentially increasing consumers’ ability to spend.
“Luxury retailers will be particularly eager to see the reintroduction of VAT-free shopping in order to bolster the UK’s attractiveness to high-spending tourists, especially in a year when the Olympics will likely make France a top European destination for affluent travellers.
“In Autumn Statement documentation, the Government vowed to carefully consider representations and broader data about VAT relief for tourists and has now asked the Office for Budget Responsibility to comment on the numbers, perhaps indicating that the Chancellor is inclined to reintroduce the policy if fiscal headroom allowed. Some recent reports have suggested that UK retail has lost ground to EU competitors who have continued offering rebates to visiting shoppers.”
Corporation tax: Any more boosts for investment?
Chris Sanger, EY Tax Policy Leader, comments:
“The Chancellor’s Autumn Statement delivered on his promise to make the cash-flow benefit of full expensing permanent, ironically reducing the urgency of businesses to invest before the relief was gone. The question therefore remains whether the Chancellor will go further to attract additional investment and jobs to the UK. Having only recently increased the corporation tax rate to 25% and reformed the research and development tax regime, the obvious levers have either been pulled or seem out of reach.
“One area of unfinished business is the potential to boost the impact of full expensing even further, by allowing this to apply to leased assets. The Treasury has previously been wary of this, due to the risk of leakage, but may now feel that it can safely extend the provisions to liberate additional finance and drive a welcome boost in investment.
“In order to accelerate investment even further, the Chancellor may examine current UK restrictions on how businesses can use tax losses, as current rules may limit the cash flow benefit full expensing is intended to provide. To address this, the Chancellor could exclude any losses generated by full expensing from these restrictions, which would simplify the process and provide even more incentive for companies to invest, bolstering the effectiveness of the original full expensing policy.
“Now that much of the world is, or will soon be, operating under a global minimum tax rate of 15%, the UK has the chance to enhance its attractiveness to global investors by offering targeted incentives. Given the tax rate of 25%, and established investors, the UK could offer low marginal rates to attract investment without lowering the average rate below 15%. Combining such an incentive with the use of enterprise zones, the Chancellor could deliver a boost to the Government’s industrial strategy and direct investment into particular priority locations and sectors, such as life sciences or advanced manufacturing.
“Businesses want clarity over the taxation regime for the next parliament, but that is likely going to have to wait to the manifestos, the election result and potentially the first Budget of the new government. Ahead of that, the Chancellor might focus on attracting additional cash investment, such as through ISAs and other reforms affecting personal investment.”
Income Tax: Expensive cuts are unlikely, expect swift, inexpensive changes to help household budgets
Tom Evennett, EY UK&I Private Client Services Leader, comments:
“A headline grabbing potential change would be an outright income tax cut at the Spring Budget, as this would encompass all forms of income, from earned salary or self-employed income but also unearned income including rental profits and dividends. However, cutting taxes on this broad range would be expensive, and every 1p reduction in the basic rate of income tax would cost around £6.3bn in the 2024/25 tax year, rising to nearly £7.5bn in future years.
“The Chancellor may be more tempted to make changes that can be swiftly felt in household budgets ahead of a general election but are potentially less expensive for the Exchequer. This could include increasing the personal allowance and the threshold at which the higher 40% income tax rate becomes payable. While frozen thresholds have raised significant funds for the Chancellor as inflation has driven up pay, a rise in the personal allowance and the threshold at which people pay the 40% rate from the current £12,570 and £50,270 point could provide a tangible boost to household finances.
“Another option would be to raise the child benefit cliff edge, which sees the benefit diminish for families where the highest earner has an income of over £50,000. Raising the individual earnings threshold to £75,000 or capping at a household income of £100,000 would bolster family finances. It would also address a long running issue where families with one main earner on a £60,000 salary may consider it unfair that their child benefit is tapered off while a household with two parents earning £49,999 each receives the full child benefit entitlement.”
Chris Sanger, EY Tax Policy Leader, added:
“The Chancellor might also use this Spring Budget to deliver on his promise of simplification. The current income tax system includes an effective 60% rate for those earning from £100,000 to £125,140, as the personal allowance is gradually removed.
“The Chancellor could remove this 60% band by changing the personal allowance from a tax-free income allowance to a tax credit of £2,514, being 20% of the personal allowance of £12,570. Those with tax bills under this amount would pay no tax, and those over would reduce their tax bill by this credit. This would simplify the system and mean that the credit was worth the same amount to all, regardless of tax bracket. By combining this change with increases in the thresholds, the Chancellor could deliver both simplification and some respite to many taxpayers.”
Housing: A careful balance to strike with buy-to-let landlords
Tom Evennett, EY UK&I Private Client Services Leader, comments:
“Following the Government’s newly-announced housing reforms, the Chancellor may consider how the tax system could further support this programme. Previous tax changes – including increased SDLT charges on property purchases and restrictions on mortgage interest relief – had a significant impact on the net income of buy-to-let landlords. Landlords paying tax at the 40% rate or above will find that the tax system now means that they still have tax to pay when only breaking even after covering mortgage and other costs. This additional tax burden means is likely to have factored into some leaving the market, reducing available rental properties and increasing rents.
“Interest rate increases have likely only intensified this issue by raising the mortgage costs . Given the property challenges, the Chancellor may now be tempted to remove the additional tax penalty imposed on landlords. However, this policy would require careful consideration to ensure it doesn’t fuel a buy-to-let-driven property boom, to the detriment of individual home buyers.”
Inheritance Tax: An appealing pre-election abolishment that may become a manifesto commitment
Tom Evennett, EY UK&I Private Client Services Leader, comments:
“Inheritance Tax (IHT) speculation has been a recurring theme at recent Budgets and Statements, but a looming election means this is probably the closest it has come to being revised or even abolished altogether. The Government may be inclined to pursue swift changes that can be delivered to taxpayers before polling day, rather than those that need an extensive consultation period. Abolishing IHT should be quite straightforward to implement and, given IHT raised around £6bn in the first nine months of the current fiscal year, relatively inexpensive in comparison to other potential income tax changes, with a limited impact on the Treasury’s overall tax revenue of c.£1trillion for the 2024/5 tax year. This change may also appeal as IHT may not be easily reintroduced by a future Government, particularly as it is often seen as one of the most ‘unfair’ taxes.
“Other less drastic options could include a reduction in the IHT main rate to perhaps 20% and a reduction in chargeable lifetime gifts to perhaps 10%. The Chancellor may also consider increasing reliefs for lineal descendants on a sliding scale to something like 20%, which would mean a beneficiary would pay less tax if inheriting from a parent than if they were inheriting from a more distant relative. This would add some complexity to the tax system but might be viewed by some as ‘fairer’ alternative to outright abolition.
“However, the Chancellor recently said that he wants to start putting more money back in peoples’ pockets and, given IHT affects less than 5% of estates, he may instead decide to direct his limited fiscal headroom towards changes that would be felt by a broader spectrum of taxpayers. If this were the case, the Spring Budget could instead see some form of adjustment to income tax thresholds or addressing cliff edges, rather than adjustments to IHT, which may instead follow as a manifesto commitment prior to a general election.”
Lifetime ISA (“LISA”) Reform: Changes expected to help more first-time buyers
Tom Evennett, EY UK&I Private Client Services Leader, comments:
“The Chancellor could look to increase the flexibility of the LISA regime by increasing the price of the property purchased by a first-time buyer from the current £450,000 to £500,000, or potentially higher, given the movement of house prices since the LISA was introduced.
“We may also see a removal of the penalty where the LISA provisions are breached. Currently, this penalty can exceed the state bonus that is added to individuals’ LISAs, meaning that if an individual uses their LISA savings to purchase their first property for £500,000, they will be penalised not only for the bonus that the state has added to their LISA, but also to the tune of 6.25% of the amount that they originally contributed themselves into the LISA. A more balanced penalty for breaching this the LISA provisions could be capping the penalty at the amount of the state bonus that has been received.”
UK Sustainability: A Budget that clarifies current green policies instead of unveiling new ones
Mark Feldman, EY UK&I Sustainability Tax Leader, comments:
“The Chancellor pledged last year that the UK would not go “toe to toe” with the US and EU on green subsidies, so those hoping for new measures to kickstart environmental investment may be disappointed. This presents a challenge for the UK’s Net Zero targets, as substantial private sector capital will be required to finance the necessary UK green infrastructure and facilities. While the UK remains an attractive destination for green investment, the nationwide transition to a low-carbon economy will require an enormous amount of private sector capital, and currently a substantial amount of this money is flowing towards UK competitors.
“Instead, this Spring Budget will likely clarify the Government’s current green policies rather than unveil fresh ones. For example, we would hope there would be an update on the Government’s plans to consult on implementing a UK CBAM (Carbon Border Adjustment Mechanism), the levy on carbon‑intensive imports it has pledged to introduce by 2027. UK manufacturers in carbon‑intensive sectors, like steel, would welcome more information on the details of the regime and on the expected timeline, as a CBAM should reduce the risk of their products produced in the UK being undercut by overseas competitors that don’t face the same carbon costs. The detailed design and timing will also be important for UK importers and global manufacturers selling wares in this country, as while the Government would likely look to minimise the compliance burden by aligning a UK CBAM to existing trade processes where possible, the reporting required would likely still be significant. These companies will be eager to begin their preparations as soon as possible.”
Manufacturing and automotive: Industry calling for the reduction on VAT rate on new electric cars
Mark Minihane, Advanced Manufacturing & Mobility Tax Leader at EY, comments:
“The Chancellor announced over £4bn of funding for the automotive, life sciences manufacturing and aerospace sectors as part of the Advanced Manufacturing Plan and UK Battery Strategy in the Autumn Statement. In the Spring Budget, businesses in these sectors will be eager to hear additional detail on when this funding will be made available, and what infrastructure will be placed to deliver it.
“There have also been calls from the UK automotive industry for the VAT rate on new electric cars to be reduced or removed to help boost sales and limit the sector’s exposure to penalties under the Zero Emissions Vehicle (ZEV) mandate. Currently, the ZEV mandate requires Original Manufacturers (OEMs) to ensure 22% of sales are made up of ZEVs, which will rise to 80% by 2030. However, the government’s decision to delay the ban on the sale of Internal Combustion Engine (ICE) vehicles to 2035 has de-incentivised consumers from purchasing EVs in the short-term, intensifying the challenge for OEMs to meet ZEV Mandate requirements.
“Last month, overall UK market share for Battery Electric Vehicles (BEVs) dipped below 15% for the first time in a year, so the industry will be looking to the Chancellor to do more to make the EV switch an attractive prospect in the short-term, and a reduction in purchase costs through a removal of or reduction to VAT on EV purchases could be a step in the right direction.”
Global Minimum Tax: Budget may confirm new legislation as UK keeps pace with developing rules
James Taylor, EY UK&I Deputy Managing Partner, Tax & Law, comments:
“Multinational businesses will monitor the Spring Budget for updates on the UK’s implementation of global minimum tax rules and some will be particularly interested to see whether the Chancellor confirms the introduction of Undertaxed Profit Rule (UTPR) legislation. This would require subsidiary companies in the UK to pay a top up tax on the profits of their affiliate or parent companies based overseas in jurisdictions that aren’t subject to the global minimum tax. This “up and over” form of taxation goes well beyond taxing subsidiaries that the UK company owns and covers affiliates that the UK company may not until now even know exists. It has attracted criticism elsewhere, such as in the US, where some regard the taxation of profits in one country by a different jurisdiction in this way as at odds with national tax sovereignty.”
Capital Allowances and Structures:
Katie Selvey-Clinton, Capital Asset Tax Services Partner at EY, comments:
“Another area of potential reform to the capital allowances regime could be providing renewables-related assets with a faster rate of relief, reducing the cash cost of businesses going green.”
Energy: After three budgets with energy tax increases will this be the Budget that supports the sector’s green energy transition?
Andrew Ogram, UK&I Energy and Resources Tax Leader at EY, comments:
“The last three Budgets have delivered additional taxes to the oil and gas and electricity generating sector, with increases in tax for oil and gas production and the introduction of a ‘windfall tax’ on electricity generation, both of which will be felt through to 2028.
“With energy prices falling significantly in recent months, the Chancellor may believe enough has been done in sector for the time being. But, for those seeking investment in projects to decarbonise the energy system, the question remains whether the current UK tax regime fits with the complex and costly delivery environment – or whether now is the time to give more support to the industry in transitioning to a new phase. This could include greater assistance for re-using gas fields to store carbon or help to ensure that infrastructure remains in place for future use.”
Raising the VAT Registration Threshold could provide boost to SMEs
Sarah Delaney, Indirect Tax Knowledge and Markets Lead at EY, comments:
“There are calls for the Chancellor to increase the UK VAT registration threshold for UK established businesses from £85,000 to £100,000, with evidence that the limit is providing a deterrent to growth for some businesses whose annual revenues are bumping up against it. While this idea has been discussed at previous Budgets, the upcoming election may convince the Chancellor to raise the threshold and offer a timely boost to small business balance sheets ahead of polling day.
“However, while this would provide a helping hand to those companies operating at or just above £85k, those closer to the new threshold may take steps to remain beneath it, such as closing operations for a couple of months. This has been a recurring issue at the current threshold level, and the Chancellor will be mindful that pushing this problem up the chain to businesses with slightly higher revenues may appear inconsistent with his goal to foster growth. The more radical approach of simplifying the administration and bringing the VAT threshold down significantly may be more attractive to the Chancellor in theory, but perhaps not in an election year.”
VAT relief on EV charging could reward EV users and accelerate Net Zero efforts
Sarah Delaney, Indirect Tax Knowledge and Markets Lead at EY, comments:
“Adjusting VAT policy on electric vehicle (EV) charging could provide an-opportunity for the Chancellor to incentivise EV users and support the UK’s long-term Net Zero targets. Charging EVs at a public charge point currently incurs the standard 20% VAT rate, so aligning public charging VAT with the 5% rate for home charging could reward consumers that have already invested in EVs and incentivise customers considering the transition.
“Aligning public charging VAT with the rate for home charging would involve an adjustment of an existing policy which raises relatively little for the Exchequer, but would go a long way in improving support for EV users.”
Pensions: Pensions reform likely to remain high on the agenda
Paul Kitson, EY’s UK Pensions Consulting Leader, comments:
“Pensions reform was high on the agenda in 2023 with the launch of the Mansion House Compact and a number of consultations announced in the Autumn Statement, and we expect momentum to continue in this Spring Budget.
“It wouldn’t be surprising if the Chancellor called on the pensions industry to follow the example of the Mansion House Compact signatories to increase their allocations to unlisted equities. This would generate better outcomes for both pensions savers and growing UK companies.
“Building on the intention set in the 2023 Autumn Statement to review how defined benefit (DB) pension surplus could be used by corporate sponsors, the industry would now benefit from concrete ‘next steps’ to drive this forward. It is possible – although probably unlikely ahead of a general election – that the Chancellor announces a progressive proposal to allow surplus to be returned to corporate sponsors. If this were announced in March, it could potentially unlock a quarter of a trillion (£250bn) for UK companies to invest as needed.”
Financial services industry calls for clarity on initiatives to boost UK investment and growth
Axe Ali, EMEIA Financial Services Private Equity & Venture Capital Leader, comments:
“The Chancellor has set a clear intention to boost investment in new and innovative UK companies, and initiatives including the Mansion House Reforms, the proposed British Business Bank growth fund, and the recently announced Private Intermittent Securities and Capital Exchange System (PISCES) trading venue are clear indicators of this ambition. In the Spring Budget, industry will be looking for the Chancellor to detail concrete next steps to drive these initiatives forward.
“In particular, following the announcement the British Business Bank growth fund in the Autumn Statement, the industry will be hoping the Chancellor uses this pre-election Budget to indicate when this highly anticipated investment vehicle will launch.
“The Chancellor is also expected to provide further detail on the recently announced PISCES trading venue. Intended to bridge private and public markets, PISCES should deliver a key focus of the broader change agenda to boost the UK’s capital markets. However, the complexity involved in establishing such a platform may mean that an official launch date for the intermittent trading venue won’t be announced on Budget Day.
“Continuing the theme of strengthening the UK’s capital markets, the Chancellor has hinted that he may announce a tax-free British ISA. Long called for by industry, it will be universally welcomed if it is announced in the Spring Budget, incentivising more individuals to invest in UK company shares.”
