Taxes in 2021 – are there rises ahead?
By Neil Williams, Tax Partner
10 December 2020
The Chancellor’s Budget has been announced for 3 March 2021 and it will be his second dominated by COVID-19. The health crisis has changed the economic landscape so much that the Chancellor was not sufficiently confident in his forecasts to hold a Budget in the autumn as we would normally expect, but that has not stopped him making what many see as ominous noises about balancing the books when the pandemic is over.
With Government borrowing expected to exceed £500bn in this financial year there is clearly a very big issue to solve. A key question will be how long the various forms of lockdown continue in 2021 and how many business and jobs can be preserved until the economy gets back to normal operation. The quicker the lockdown eases, the less damage there will be to the economy and the faster the recovery in Government revenues will be. However, it already seems clear that high Government borrowing is locked in for the medium term – ie become “structural” and an issue that the Chancellor cannot tackle through a return growth in the economy alone in a post-Brexit world.
What are the options?
Boosting the economic recovery will be the Chancellor’s first priority for the next Budget. We may see more schemes like “Eat out to help out” to get the public spending money again: a scheme for theatres is rumoured. Then we can expected to see a range of schemes and financial incentives for employers to take on employees. Capital investment will also be high on the list and alongside the proposed national infrastructure bank, there are likely to be new tax incentives for owners to invest in their businesses – from enhanced capital allowances to free-ports and maybe new enterprise zones.
While few commentators believe that any significant return to “austerity” is likely, we may well see a significant tightening of Government spending with a public sector pay freeze for higher earning public sector workers outside the NHS already announced. But all these measures are not likely to boost growth of government revenues sufficiently - tax rises seem to be inevitable – at least in the medium term.
So which taxes will rise? The Government has pledged not to increase rates of income tax, VAT nor NIC in this Parliament. Given that these are the biggest revenue raisers for the Treasury, this makes the Chancellor’s job even more difficult!
The Treasury Select Committee review of ‘Tax after Coronavirus’ is expected to report before the March 2021 Budget. Although this is a cross party committee and its recommendations may be politically neutral, the Chancellor will no doubt pick and choose the ideas he wishes to take further. Therefore, it may inform some of tax reforms the Government investigates during 2021 but the Conservatives’ election pledge will probably loom larger in the Chancellor’s thinking.
A new report looking at the viability of introducing a wealth tax in the UK suggests that a one-off tax could raise £260bn. However, although the report is backed by a Government research body, the Chancellor has already said that he does not feel that a wealth tax is appropriate: and the report itself suggests that reforming Inheritance tax and Capital Gains tax would be a simpler option. Reform of IHT has been debated for some time (see our commentary) so it would not be too surprising if we do see changes in future. However, IHT is a very emotive topic for voters any Chancellor would tread very carefully when addressing it.
Another recent report by the Office of Tax Simplification on Capital Gains tax has led many to believe that higher rates of CGT are on the way as the OTS suggests to remove the distortions that tax system currently creates. Yet even if the Chancellor did raise CGT rates and managed to double the revenue it collects (a somewhat doubtful premise), that would only collect an additional £8bn a year in tax revenue. Personally, I think that dramatic increases in CGT are unlikely for now, particularly for the business community, although some pruning back of existing CGT reliefs is possible. (Read more on the OTS proposals).
Similarly, the cost of higher rate tax relief on pension contributions now looks very high at £40bn a year. Introducing a flat rate of relief at 25% would save £4bn a year according to the Resolution Foundation and it is (yet again) rumoured that the Chancellor is considering the idea – even though it has been politically toxic in the past and would be messy to apply in practice. Such as change would deter pension saving for some. While that is not good for economy in the long term, it that could have a handy short term benefit for the Chancellor if it means more money is spent in the economy or invested directly into businesses.
With climate change seen as the next global crisis, there is the strong possibility of green taxes being stepped up to advance the government’s zero-carbon agenda. Existing taxes on fuel, the carbon price floor and the new plastics tax are could be increased sharply and may be joined by new taxes such as road pricing, frequent flyer taxes and all single use items. And, 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 not increase the standard rate of VAT.
It is also possible that taxes on those other harmful substances – salt and sugar, may be introduced as part of a wider post-COVID-19 health campaign. Taxing us for our own good takes the moral high ground – statistics showed that the healthier you are, the less likely you are to get very sick if you catch Covid-19. So like the current ‘sin’ taxes on tobacco and alcohol, salt and sugar taxes could raise some significant revenue for the government in future.
When will taxes rise?
Unless the Chancellor can persuade his party to drop its election pledge, he is going to have to use at least some of these options and others to raise tax revenue in the medium term. I suspect that change will be gradual and that most of the announcements in the March Budget will be limited consultation documents as part of the normal legislative process for Finance Bill 2022.
However, that doesn’t mean you shouldn’t take advantage of current tax reliefs while you can. If the vaccination campaign is hitting its targets by March and the end of lockdown is in sight, the Chancellor may just feel empowered to prune back some tax reliefs to save money. And I’m certain that, as the economy recovers, we will see the Treasury ‘take back control’ of tax revenues with a range of tax rises and cuts in reliefs. In the long term, I would not be too surprised if securing future tax savings are as dependent on saving carbon and eating healthier as they are on using traditional tax incentives.
Further BDO Budget commentary
To read more about our Budget predictions and to take part in our poll ‘If you were Chancellor for the day, what would you support?’ please visit: BDO Budget Hub
Business timeline – empowering you to plan ahead
Whilst the uncertainty of future tax changes remain to seen, to help you navigate known key events, tax and legislation changes, please take a look at our interactive timeline. This can help guide you and your business in the decisions you take, to understand these issues and the appropriate strategies you need to put in place to navigate through any challenges and opportunities that these will present.