Budget 2021 - what will the Chancellor do?
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There are already rumours that any tax increases will be delayed and some expect that any tax rises that are announced may not be implemented until April 2022. Of course, you can increase the future tax take without increasing the headline rates of tax – by cutting back reliefs, freezing tax allowances and tightening definitions and limits.
Nevertheless, it seems probable that the Chancellor will do everything possible to avoid moves that have a direct negative impact on consumer spending and I’d expect that to be the central theme of the Budget. For example, despite huge pressures on businesses, increases in the minimum wage are still scheduled to go ahead from April – increasing the spending power of millions of taxpayers.
Despite these constraints, a Chancellor that has already proved he is prepared to take ‘innovative’ steps may announce a wide range of measures - particularly if they take advantage of the UK’s ‘post-Brexit freedoms’.
Jon Hickman - Corporate Tax Partner
Jon has many years of experience dealing with both OMB’s and large international business.
There have been rumours that the Treasury is considering a rise in corporation tax rates, starting later this year and moving the rates up in stages to 23% by 2024. This might not seem very supportive of struggling businesses but perhaps a limited rise in corporation tax rates for larger companies that have fared well during the pandemic is possible. It wouldn’t directly hurt loss-making businesses or small businesses and probably wouldn’t have an immediate impact on consumer spending. If this was introduced alongside a range of investment incentives as part of a post-Brexit ‘corporate tax roadmap’ it is likely to win public support.
It is understood that such a rise would raise funds for the Treasury to cover the cost of extending the furlough scheme and other business support schemes into the summer or perhaps further.
For example, it seems likely that the VAT cut (the 5% rate) for tourism and hospitality will be extended. Along similar lines, it would not be too surprising if the Chancellor announced a new “go out to help out” scheme to support all dining and cultural venues during the summer.
A wider cut to the standard rate of VAT can’t be ruled out completely but it would very expensive so it is likely to be time limited. Post-Brexit, the Government may also make a range of small technical changes to the VAT rules that HMRC has sought for many years – most of which can be expected to increase the VAT take.
Boosting business investment will be high on the Chancellor’s agenda so increases to capital allowances – particularly those that support the Government’s carbon reduction agenda are quite possible. Such increases might be linked to the freeports that the Government is creating and possibly new enterprise zones created in areas hit hard by Covid-19. Similarly, although the UK is continuing with some EU grant schemes for now, announcing new growth grant schemes for businesses in certain areas and regions will be attractive for the Chancellor.
Post-Brexit, there may be scope for the Government to simplify the existing patent box regime in the UK to make it more effective. Simplifying and broadening the R&D rules for UK based research and development may also be on the Government’s agenda. Whether the Chancellor seeks to create similar tax incentives, for example for exporters, remains to be seen.
Of course, post-Covid, businesses may struggle to borrow to fund growth. To partially address this, it is possible that the Government may relax the qualifying rules and increase the investment limits for existing incentives such as the Enterprise Investment Scheme (EIS), Seed EIS and Venture Capital Trusts. Alternatively, innovative new schemes may be announced and plans for a national infrastructure bank may be fast-tracked to support the economic recovery.
With November’s Climate Change Conference in mind, the Government is reportedly looking at ways to tax carbon emissions across all departments. This is clearly going to be an important move but it will take considerable time to design so that it does not have a damaging impact on the economy. While we may not see a carbon tax introduced for some time, across the board changes to existing green taxes would be easy to implement. For example, alongside the new plastic packaging tax, there may well be consultations on new taxes on single use items (coffee cups etc.) so they can also take effect from April 2022. Alternatively, post-Brexit, it would be possible for the Chancellor to introduce a new higher rate of VAT for environmentally damaging goods and services without breaking the Conservative’s pledge to not increase the standard rate of VAT. Whether the Chancellor is inclined to increase fuel duty, after 11 years of frozen duty rates, remains to be seen.
The online businesses that pay Digital Services Taxes (DST) have done well from the pandemic so many would argue that they should pay more tax or even a one-off “excessive profits” tax. The USA has recently announced that it has suspended penal tariffs originally planned for imports from France because it applies a DST – thought to disadvantage America’s digital giants. Potentially, with the transfer of power in the USA, the risk of levying the DST is reducing and, therefore, it is possible that the Chancellor will feel able to increase the UK’s DST rate (currently 2%). The Government may also consider lowering the entry threshold to bring more businesses within the existing DST or even widening the scope of tax beyond services to capture a wider range of online sales. This may sound like another sales tax on top of VAT, but now the UK is outside the EU, this may be an attractive option.
Interestingly, this year the Treasury has announced that many of the consultation documents that would normally be published alongside the Budget will not be published until ‘tax day’ three weeks later (23 March 2021). These consultations will cover legislation to be introduced in Finance Bill 2022 or later and the timing suggests that they will largely include post-COVID revenue raising measures - we shall have to wait and see.
Across the board cuts to NIC would be popular after the pandemic, but they would be expensive so are probably unlikely. However, the Government is already introducing NIC cuts for employers who take on former Armed Services personnel from this April, and further specific NIC incentives for employers who take on young employees may be popular after the pandemic.
Throughout the pandemic, the Chancellor announced direct grant and support schemes to boost employment of younger workers – the age group most likely to have lost their job as a result of lockdowns. It seems certain that the Chancellor will revive and extend these for 2021 to boost youth employment as the country comes out of lockdown.
Property developers have already been warned that a they face a new tax from April 2022 to raise funds towards the cost of replacing unsafe cladding on high-rise buildings and as well as a new planning levy on future high-rise developments: there may be a consultation document on Budget day.
The SDLT cut for sales of residential property has proved successful in boosting the property market, and the wider economy, so there is much public pressure for it to be extended. Given that an extension would give the Chancellor at least one guaranteed ‘good news’ story it seems likely to me that the SDLT cut will carry on for a few more months.
There had been rumours that the Treasury was considering replacing SDLT altogether as well as council tax and replacing them with a new annual property value tax. This would obviously have triggered difficulties and disputes over property valuations so it is not surprising that a Government spokesman is reported to have said: “We have no plans to introduce a new form of annual property tax.”
However, there is much demand to reform Business Rates. Businesses preparing their accounts under IFRS already have to include the market value of their assets (including property) in their accounts – so reform based on using that value could be used for the annual levy in future. Alternatively, abolishing business rates and replacing them with a new tax on online sales may still be on the Government’s agenda. Unfortunately, there are rumours that this long overdue reform will be delayed again due to the pandemic.
However, on the plus side, I’d expect COVID-19 driven holidays to business rates to continue for 2021/22 or until a new tax is up and running.
The idea of a ‘one-off’ wealth tax to fill Treasury coffers has reportedly been ruled that out by the Chancellor, but possible changes to our existing wealth taxes, capital gains tax (CGT) and inheritance tax (IHT), are certainly attracting attention.
There has been much speculation that the rate of CGT will rise – boosted by the fact that the Office of Tax Simplification has recommended equalising CGT rates with income tax rates. This would more than double rates for some business owners looking to sell - although rumours of a smaller rate rise have also been circulating. At this stage it is impossible to know whether the rates of CGT will go up, and if so, when. A rise would not send the right message to business owners but it might fit the bill, as a CGT rise would affect relatively few taxpayers overall.
Of course, it is an old tactic to pre-announce tax rises – it encourages people to act before the rise takes effect. If the Chancellor announced a rise in CGT rates from April 2022, many would be tempted to realise gains before the deadline. This would create a short term boost to tax revenues (albeit at current tax rates) – especially where UK property is sold as related CGT must now be paid with 30 days. A large number of transactions in the year would also give a boost to the wider economy – so this option might just prove attractive to the Chancellor.
Cutting pensions tax relief as a way of raising tax revenue has been suggested by commentators before most recent Budgets – each time the then Chancellor has refused to grasp this nettle. The Government’s finances have rarely be so stretched so the Chancellor may finally be able to cut income tax relief to a maximum of say 25%. In the current situation there may be less protest and the risk of damaging the immediate spending power of pension savers is minimal.
At the election, the Government promised not to put up National Insurance Contributions. Despite this pledge, an NIC increase for very high earners might win public support if it was ring-fenced for post-pandemic support. We already have a 2% NIC rate for earnings above the ‘Upper earnings limit’ and there is nothing to stop the Chancellor creating a further ‘very high earners’ limit. Similarly, now might been seen as the right time to remove or reduce the NIC exemption for workers aged over 65 – perhaps with a reduced rate introduced for such individuals or making them liable only on earnings above a certain level (eg £30,000 – broadly the UK’s average earnings).