• Spring Statement 2022 - Our Predictions

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Spring Statement 2022 – Our Predictions
Will 23 March be a day for big tax announcements?


Jon Hickman - Corporate Tax Partner
Jon has many years of experience dealing with both OMB’s and large international business.


 

 

The costs of COVID, the resulting downturn and a rapid bounce-back bringing the return of inflation (a whole economic cycle in one parliament!) have, unsurprisingly, blown the current Government’s tax plans off course. So is it likely that when the latest figures for the economy are announced the Spring Statement on 23 March the Chancellor will shelve the remains of this Governments tax plans for the future? Will tax policy again be dictated by events and an attempt to address the ‘cost-of-living crisis’?

All a bit political

At the time of writing, both the Prime Minister and the Chancellor are publicly sticking to their plans to introduce the Health and Social Care Levy to help the NHS catch up after COVID (or a ‘jobs tax’ increase in NIC if you prefer to see it that way). The Chancellor has also announced an innovative direct support package for households facing swinging increases in their fuel bills – although dramatic fuel price rises have significantly eroded its value. Until recently, big announcements on 23 March did not seem likely but as the political and economic situation continues to develop rapidly, urgent tax measures may suddenly be deemed essential.

While we should not expect the Chancellor to cancel or delay the Health and Social Care Levy (HSCL), he might just decide to ‘adjust’ it to reflect cost of living concerns. For example, he could choose to reduce the ‘normal’ rate of NIC for those on lower earnings so that they pay the levy but see no net difference in their take home pay from April – but this would most likely need to be balanced with NIC increases on high earners.

Beyond such concerns, there are good economic reasons for the Chancellor to sit tight on taxes for now - although there are rumours that he may announce consultations on boosting future business investment. Further interest rate increases expected this year will add hugely to the Government’s borrowing costs on its eye-watering debts built up through COVID support. However, cutting back on public spending or putting up taxes may just amplify the impact of squeeze on household income and consumer spending that is expected to be a threat to the economy this year.

Calls for action to help households through the cost of living crisis have gone beyond the NIC increase and covered cuts to VAT and excise duties on fuel, a cut in the standard rate of VAT and other forms of financial support for struggling households. Whether the Chancellor judges that any such measures are affordable, particularly so soon after spending so much on COVID support, remains to be seen.  

Inflation will also be putting pressure on government departmental Budgets - just meeting their spending review targets may seem like a partial return to ‘austerity’ in some quarters so announcements of further widespread spending cuts are highly unlikely. Indeed, a return of the Universal Credit £20 supplement may be required as targeted cost of living support. 

Of course, with high employment continuing, inflation does actually push up tax revenues in certain areas of the economy (VAT receipts on fuel for example), even if they take a hit in other areas.

So will the Chancellor ask those with the ‘broadest shoulders’ to contribute more? Aside from possible NIC adjustments, I suspect that personal tax changes are likely to be few and far between. The Chancellor has already had the opportunity to overhaul both CGT and IHT and chose to stay well clear of fundamental changes to either in the last Budget: with an eye to the future, he may well will stick to that approach. The idea of a wealth tax is still being widely discussed but the Chancellor is not a supporter and even proposing one may be a bad career move. 

In fact, Rishi Sunak could be forgiven for wanting to say very little and hoping that the storms (both financial and political) will die down somewhat over the summer so that he can take sensible action in the Autumn 2022 Budget.  In ‘interesting times’ like these, the temptation to do nothing now for fear of doing more harm than good must be very high.

So is anything likely to be in the pipeline then for a March announcement?

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Possible tax announcements

Reaction to the cost of living crisis may lead to some short-term changes in taxes on fuel. Speculation about a windfall tax on energy companies (which could be used to fund energy price subsidies) is widespread but it seems that there is not much Government support for such a very ‘un-conservative’ approach to taxes as yet. However, the Government did introduce some last-minute changes to the current Finance Bill to block energy companies ringfencing assets in a way that might have created more risk of triggering Government support action. And it is likely that a windfall tax would be electorally popular and echo action in other countries – so it can’t be ruled out completely.

I’d like to see the Chancellor do something to help with the ‘cost of living’ rises that SME businesses are facing. Just as many businesses are recovering from COVID issues they are being hit by spiralling input costs (raw materials, transport costs post-Brexit, energy price rises and increases in NIC, the minimum wage and wage demands that are driving up staffing costs). All this just as consumers start to rein in spending to deal with their own cost of living concerns may just push some businesses over the edge without more government support.

More potential bad news for businesses has already emerged. The idea of an online sales tax to level up the business playing field between online retailers and the high street was mentioned yet again at Autumn 2021 Budget and the Chancellor pre-empted the Spring Statement by publishing a formal policy consultation on the idea on 25 February. The Government has also been consulting on how to implement the Global minimum tax proposals it has signed up to through the OECD’s Digital Economy project, although the Chancellor could rightly celebrate this as a move towards fair taxation of large multinational companies. Read the latest on the OECD project here.

Better news for businesses may come in the form of further proposals to improve R&D tax relief as part of the Government’s ongoing review. As reforms that have already been announced will refocus R&D relief on UK based activity , it is hoped that new proposals will make the relief even more attractive to make it cost-effective for all forms of R&D to be carried out in the UK. There may even be proposals for some form of regional based supplement to the rate of R&D to encourage more activity in areas of the UK that need ‘levelling up’.

Rumours have emerged that the Chancellor is also keen to focus on improving business investment by improving the way the Apprenticeship Levy works and exploring what capital investment incentives would be needed once the capital allowances super deduction ends in April 2023. A range of consultations on these themes may be announced.

A consultation on the current cap on fees charged by insurance companies managing defined contribution pension schemes has already been promised – the idea is that if pension providers can charge more they can invest in a wider range of assets, hopefully boosting investment in UK businesses and infrastructure. Similarly, a consultation on options to simplify the VAT treatment of fund management fees and a roadmap for future work to overhaul of the UK’s Tax Administration Framework are expected this spring.

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