Ahead of the Spring Budget on 15 March, Jonathan Hickman, tax partner at accounting and business advisory firm BDO predicts what the Chancellor may announce with respect to business, employment and personal taxes.
With the Chancellor and the Prime Minister both keen to demonstrate that they are more than caretakers in their roles until the next General Election, we may see the Government setting out some longer term tax measures at the Spring Budget.
The Chancellor is under pressure to reduce corporation tax amid concerns that the imminent rise in the main rate to 25% from this April will make the UK a less attractive location for international businesses. To mitigate this, the Chancellor could pre-announce future tax cuts to corporation tax, perhaps over a period of five years as part of a ‘corporate tax roadmap’. This may help to set the direction of policy and restore much-needed certainty to business planning decisions.
Despite recent healthy tax receipts, the government’s cashflow needs remain pressing. To date, the windfall taxes on energy producing companies have not generated the levels of tax revenues that were originally envisaged. As a result, we may see a tightening of the rules and/or a widening of the base of the tax to retailers as well as producers.
However, it is highly unlikely that the Government will seek to make up any shortfall by allowing fuel duties to rise. We anticipate that the Chancellor will continue the freeze in duty rates to help reduce inflation.
On a more positive note, the cost of the energy support packages will be much less than feared as wholesale energy prices have fallen – so much so that the Chancellor seems to have ruled out extending the support scheme beyond April. Whether he chooses to simply bank the underspend to reduce government debts or uses it to fund business investment incentives, such as a replacement for the capital allowances super deduction or a transitional regime for the impending R&D relief changes remains to be seen.
We may also see other small measures designed to attract businesses to the UK. The government has already consulted on ways to encourage ‘corporate re-domiciliation’ – changing a company’s place of incorporation to the UK while maintaining its legal identity as a corporate body. These could be progressed without significant immediate tax revenue implications, the aim being to send a signal that the UK remains ‘open for business’.
Attracting businesses to the UK through the existing Freeports developments will also likely feature in the announcements, and the Chancellor’s first steps toward creating new ‘investment zones’ in under-performing areas of the UK to boost high growth industries will probably be announced – perhaps a bidding process for sectors and local government. Exactly how these investment zones will be underpinned with tax incentives or grants remains to be seen.
The Chancellor may also decide to take inspiration from other countries, most recently Spain, who have announced fixed period tax breaks – for example for their first five years of trading. Such a measure could encourage international entrepreneurs to set up businesses in the UK.
To help protect existing UK businesses, the Chancellor may consider creating some form of import levy like the EU’s proposed ‘Carbon Border Adjustment Mechanism’ that is intended to apply to goods that are produced by generating higher carbon emissions than EU production methods. This was rumoured as part of a deal to help finance UK steel producers in moving to less carbon-intensive forms of production, but this could eventually have a wider application as part of the UK’s net zero strategy.
It would also be surprising if there were to be no new announcements of tax anti-avoidance measures, as clamping down to close the UK’s estimated £32bn tax gap is probably the easiest way to raise revenue both in terms of the impact on the economy and in political terms. However, this would need to be backed up by greater resources for HMRC. The government’s own figures show that for every £1 invested in compliance activity, HMRC collects an additional £18 in tax revenue, so further investment here seems prudent.
The Chancellor has already hinted at new measures designed to encourage some of the estimated 6.6m ‘economically inactive’ people of working age, including retirees, back into the labour market.
While any immediate reforms are unlikely, the Chancellor could launch consultations on proposals around reduced National Insurance Contributions for returning workers and retraining funding – perhaps ‘lifetime learning loans’ similar to student loans for vocational qualifications for those out of full-time learning for over 10 years.
It is also possible that reform of the much-criticised Apprenticeship Levy will finally materialise. Although it has become a money spinner for the government, that wasn’t the original intention and more flexibility in using the levy funds would be welcomed by businesses.
There may also be changes aimed at addressing specific issues such as the numbers of GPs and hospital consultants retiring from the NHS. The government has already increased some of the limits used in calculating the annual allowance charge on pension contributions, but may go further and increase the annual allowance itself and or the lifetime allowance limit on pension fund value, as this frequently creates a disincentive for senior staff to carry on working. However, this will have an impact on tax revenues, so reductions to tax reliefs elsewhere may be considered to balance the cost.
While some ‘carrots’ may be offered, the ‘stick’ approach is also expected, with the Chancellor rumoured to be considering bringing forward another increase to the state retirement age to age 68 from as early as 2035 and raising the age at which personal pensions can first be accessed to 58.
The Chancellor has already announced reductions to the annual dividend income allowance and capital gains exemption – and a number of other tax reliefs may now be in his sights.
Many commentators have pointed out that while the tax advantages of Individual Savings Accounts (ISAs) are useful in encouraging personal investment, many wealthy investors now have significant amounts in these despite the annual cap on contributions. Introducing an overall cap, similar to the lifetime limit for pension funds, may now be seen as sensible.
Recent statistics show that the uptake of investors’ relief from capital gains is very low so it may be that this is rationalised away.
While Chancellors are notoriously wary of changing any inheritance tax rules, many of the existing IHT reliefs are also ripe for overhaul (having been frozen for many years). And with the opposition continuing to call for reform of the UK’s tax regime for non-UK domiciled individuals, there may be a political imperative on the Chancellor to issue a consultation to address the public perception of unfairness in the rules.
With very little room for tax giveaways, the Chancellor might use this Budget to address a number of the anomalies and inconsistencies in the current tax legislation that produce unintended results. For example, the Chartered Institute of Taxation has pointed out the inconsistent effect that capital gains tax rules for gifts of business assets can have due to the impact of subsequent rules on intangible assets and goodwill. However, the rules around the High Income Child Benefit Charge, now widely seen as unfair because the £50,000 higher earner threshold has not changed since 2013, may prove too expensive to address.