Jon Hickman - Corporate Tax Partner
Jon has many years of experience dealing with both OMB’s and large international business.
If you have any questions or concerns about your business' tax position or the implications of the upcoming Spring Budget, please get in touch with Jon or our tax team who will be happy to help.
In what is likely to be the last major financial statement before the General Election, all eyes will be on what giveaways and policy measures the Chancellor announces to please voters. Bluntly, since businesses cannot vote, they can perhaps expect to get less immediate attention from the Chancellor this time around, although he will still be keen to show he is focusing on boosting employment and growth to build a stronger economy.
Provided by Nina Skero, Chief Executive, Centre for Economics and Business Research
The economic backdrop against which the Spring Budget will be taking place is one of stagnant growth, diminished living standards and above target inflation. The economy contracted in Q3 2023 and the possibility of a negative figure for Q4 means that the Chancellor could be delivering the Budget on the heels of a recession.
Still, the Chancellor is bound to be far from gloomy. Setting aside the political motivations of projecting optimism, the economic picture is better than many were expecting at this point in time. A key contributor to this is the strength of consumer expenditure, which has held up rather well considering the extent of recent monetary tightening. Many households have enjoyed a boost from higher interest on savings whilst remaining on a fixed mortgage. However, as fewer and fewer mortgage holders remain on rates set pre-2022 we are expecting a hit to growth, with GDP set to expand just 0.6% in 2024.
Inflation has slowed sharply in recent months, although it did rise marginally to 4.0% in December. Despite the latest movement and near-term pressure on the headline rate due to the impending Ofgem price cap hike, Cebr anticipates a general deceleration in price growth throughout the remainder of 2024. We see inflation reaching a low of 2.7% by the end of the year. A return to the 2% target is not expected until the late 2020s as domestic wage pressures continue to push up prices.
With inflation set to decelerate, Cebr anticipates the Bank of England beginning to cut interest rates in May 2024. A number of rate cuts are set to follow, taking the base rate to an anticipated 3.75% by year end.
The elevated rates of wage growth seen recently, combined with personal tax threshold freezes, have repeatedly seen tax receipts surprise to the upside, giving the Chancellor scope for some giveaways. Cebr has maintained that the freeze on income tax thresholds is set to add to Treasury coffers far more than anticipated. At the time of the 2023 Autumn Statement, we estimated tax receipts to be £13bn above OBR's projections for the period spanning 2023/24 to 2027/28.
Even so, the amount of fiscal headroom is not huge and a lot of it was used up by the November 2023 announcements. This, however, won’t necessarily prevent the Chancellor from announcing a wide range of giveaways which are to be financed out of future spending cuts, the feasibility of which remains uncertain in the medium term.
The Prime Minister has already announced that the Government will aim to reform state benefits to ensure that there is financial headroom for tax cuts. Whether this will be possible immediately and whether the predicted financial impact of future proposals can be built into the five-year plans already given to the Office for Budget Responsibility remains to be seen, but we can certainly expect a consultation on benefits reforms to be announced at the least.
There is considerable speculation that any fiscal headroom that the Chancellor can find, or engineer, will be used to fund a cut in the basic rate of income tax. As with the NIC cut introduced in January, it may be that another 2% cut is announced to bring the basic rate of income tax down to 18%.
Childcare reforms take effect from April 2024 to expand the free sessions available to parents but further help for families may also be announced. In January, the Chancellor appeared on Martin Lewis’s TV programme and acknowledged that the High Income Child Benefit charge contained an "unfairness in what happens with dual-income families on £50,000 each compared to a single earner on £100,000". Raising the threshold may be a partial solution but as the threshold at which individuals also start to payer higher rate tax is very similar (£50,270), wider tax changes to help taxpayers in this demographic might be forthcoming – for example, a possible increase in the basic rate band.
Older voters are likely to be more interested in what the Chancellor has to say about Inheritance Tax (IHT). Despite much speculation before the Autumn Statement, no changes to IHT were announced as the Chancellor believed that an ‘end of life’ tax cut would not win public support during a ‘cost of living crisis’. He will probably still prefer to direct immediate tax cuts in other ways, but it would be quite a surprise if there was no good news for older voters on IHT before the General Election. It is possible that interim reforms to IHT reliefs and potentially an increase in the Nil Rate Band may be announced alongside a promise to work towards abolition of IHT after the General Election.
We can perhaps expect to see the phrase “clear blue water” in the press in relation to the Chancellor’s proposals that attempt to demonstrate traditional ‘Conservative values’ ahead of the General Election and support personal and business aspiration.
There has already been a pretty strong rumour that the Chancellor will look to provide more help for people wanting to buy their own home in the Budget. This may signal a return for the Help-to-Buy scheme for first-time buyers or perhaps, an updated scheme that distorts the property market rather less.
Another proposal championed by the omnipresent Martin Lewis in his interview with the Chancellor was to address the Lifetime ISA threshold for buying a home: at present this is set at £450,000 – using LISA funds to buy a home costing more triggers clawbacks of the LISA subsidy and further penalties. If the Chancellor raised this threshold significantly (if only for properties bought in London and the Southeast) or simply abolished it in the name of simplification, this would help many first-time buyers.
The Chancellor may also be able to echo the aspiration agenda of the 1980’s government by allowing a public share offer for the sale of the Government’s stake in NatWest bank – something he proposed at the Autumn Statement. Achieving this before the General Election would be considerable coup for the Chancellor.
Before the Autumn Statement, it was rumoured that the Chancellor wanted to use taxpayer’s savings to boost investment in UK companies. Following Brexit, reforms to the ISA rules that favour investment exclusively in UK listed companies are now possible and may be forthcoming as part of an ‘aspiration’ package. The Government may also finally publish reform proposals following the Spring 2023 consultation on changes to the ‘Help to Save’ rules.
Further moves to cast the UK as a “shareholder democracy” may come in the form of enhancements to employee share schemes. As part of an ongoing review the Government has been consulting on reforms to the Save-As-You-Earn (SAYE) and Share Incentive Plan (SIP) schemes to help boost employee participation, so changes to make them more attractive to employees would not be surprising.
In a similar vein, as the UK is no-longer subject to EU restrictions on state aid, it would be possible for the Government to remove some of the current restrictions on the Enterprise Investment Scheme. Removing the requirement for companies to be less than seven years old to qualify for EIS and removing the capital limits would significantly expand the number of businesses that could use it to grow.
The VAT registration threshold for small businesses has been frozen at turnover of £85,000 a year for a number of years now and there is significant evidence that business owners seek to avoid going over the threshold – so they do not grow their business. Raising the threshold would only move this distortionary tax effect to a higher level but would be welcomed by many business owners and can easily be billed as a traditional Conservative policy supporting small business aspirations.
A change to the VAT threshold would, of course, apply across the UK and, therefore, it is perhaps more likely to be announced if the Chancellor also decides to restore VAT free shopping for overseas visitors – which is seen as heavily favouring businesses in London and the Southeast.
It is likely that the Chancellor will make more announcements about the forthcoming investment zones to be opened in deprived areas – confirming precise locations and providing progress updates on the scheme. In addition, it would be surprising if there were no further announcements about regeneration funding for selected areas across the country, although these are likely to be for very short-term projects.
On 18 December 2023, the Government announced that it would go ahead with implementing a UK Carbon Border Adjustment Mechanism (CBAM). This will not take effect until 2027 but we can expect a consultation on both the reporting mechanism and a potential charging structure.
In the Autumn Statement, HM Treasury forecasts showed that it expects to collect £12.7bn in tax revenue from multinational groups as a result of the Pillar 2 reforms. Given that this is a significant increase in corporate tax revenues for the UK we can expect at least a progress update on how it is being implemented and possibly proposals for more legislative changes as global rules are still evolving.
A review of the Gambling Act in 2023 sparked a number of Government initiatives, and we can expect to hear an update on proposals for an industry wide levy on gambling companies to help secure long-term funding for research, prevention and treatment programs for ‘gambling related harm’.
Further clamp downs on tax avoidance may help to provide the headroom for tax cuts that the Chancellor will need.
We may see further reporting proposals for trusts, following a consultation on transparency of land ownership involving trusts, as HMRC continues to build its toolkit to identify and block tax avoidance involving UK property.
HMRC has also been consulting on the location of trustees acting for Employee Ownership Trusts that own companies for the benefit of their employees: restrictions to ensure that the trust remains UK resident for tax purposes seem likely.
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