23 Feb 2021
The ongoing coronavirus (COVID-19) pandemic, combined with the UK's exit from the EU, presents unprecedented modern economic challenges, uncertainty and anxiety. Whilst certain changes in the UK tax system are inevitable, the timing of such changes and the degree of change could be critical.
The 'elephant in the room' question is to what extent Chancellor Rishi Sunak will increase or reform taxation, or whether he retains the status quo for the time being. If he does seek to start a process of reform or increase, what areas will he target?
Tax revenues can, of course, be increased without headline reform or increases in rates – the 'tinkering' approach. This can be achieved through restricting the increase in, reducing or freezing reliefs or allowances. For example, the personal allowance and income tax bands for 2021/22 are now confirmed and are only increasing for 2021/22 by 0.5% in line with the September 2020 Consumer Price Index.
However, sooner or later there will have to be more substantial changes and areas of particular interest on Budget day could include:
- The future of national insurance
- Tax relief on pension contributions
- Capital gains tax (CGT)
- Inheritance tax (IHT)
- Corporation tax and VAT rates
- Business incentives
Why these areas?
On 26 March 2020, when the Chancellor introduced the Self-employment Income Support Scheme (SEISS), his statement included the following: 'But I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.'
This has been interpreted by many to mean that he will increase national insurance contributions (NICs) for the self- employed. There may have been a manifesto pledge not to increase NICs, but that was the world pre-COVID. Would such a measure in isolation really provide an equitable solution? Is a more radical reform of the NICs system long overdue?
A very recent report by the Institute of Fiscal Studies (IFS) states: 'For a job generating £40,000, tax in 2020/21 is £3,300 higher if the job is completed through an employment contract rather than by someone who is self-employed, and £4,300 higher than if they work through their own company. This is mostly because employees' salaries are subject to employers' NICs whereas other incomes are not.'
A simple increase in the rate for the self-employed or increasing NICs for high earners, which has also been mooted, does not level the playing field unless the issue of directors avoiding NICs is also addressed. Any quick fix is likely to be controversial depending upon where you or your clients currently sit in the system. The real question is whether he will start the ball rolling on any significant reforms on 3 March 2021.
Tax relief and pension contributions
A frequently asked question in recent years before any annual Budget is whether higher and additional tax relief will be cut on pension contributions. Undisputedly there is a huge cost to the Exchequer of tax relief on pension contributions and the tax-free growth of pension funds. A reduction in income tax relief or a reduction in the Annual Allowance could both reduce this tax cost.
Speculation of a hike in CGT rates (or an alignment with income tax rates) has been rife following the publication of the first report in November 2020 by the Office of Tax Simplification (OTS) into its review of CGT. The Chancellor asked the OTS to undertake this review in July 2020, leading to the speculation that CGT is one of his target areas for change. Currently, CGT raises just £8.3 billion a year in the UK and from around 265,000 taxpayers, so whilst any such change would increase revenues in comparison with income tax (£195 billion), NICs (£144 billion) and VAT (£134 billion), it is relatively small.
A similar review was also undertaken by the OTS on IHT (in 2018 and 2019). In both cases it is clear, the structure of these capital taxes and their interaction needs to be reformed to prevent distortive behaviour in client decision making. Concerns about the future of valuable IHT reliefs like Business Property Relief (BPR) create anxiety and uncertainty in planning. Any such reform needs to consider both areas and will require significant consultation and whether this Budget is the right time to start this process of reform is debatable, but we will be keeping a close watch for any announcements.
The UK has seen a downwards trend on corporation tax rates for nearly 50 years but rumours in the national press suggest that the Chancellor may be considering reversing this trend. In a post-Brexit world, this appears to be at odds with keeping the UK competitive. A report in February 2020 by professional services firms Alvarez & Marsal Tax and Capital Economics stated 'a combination of three high-impact measures – increased R&D incentives, creation of free ports, and a regional corporate tax system with lower average rates – could provide a 7% boost to GDP, amounting to £150 billion', but that was before COVID took over. In a post-COVID world, the need to recoup the enormous cost of COVID support schemes whilst at the same time supporting economic recovery for affected businesses and consumers will be a balancing act. Will successful companies therefore face an increased rate? Will there be more effective loss relief support for those that have incurred losses?
VAT revenue accounts for one fifth of tax revenue, so protecting that stream in the longer term will be critical. However, the departure from the EU also provides flexibility and control over reduced VAT rates, and the Chancellor may use that in the short term to promote consumer spending post-COVID in key areas.
Our team will be analysing, writing and presenting the key points from March 3, providing you with concise summaries, relevant blogs, accurate tax cards and other useful products. For more information, please see the Practice Track website.
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