The Government has spent hundreds of billions trying to protect jobs and the economy during the pandemic, and it is now widely accepted that an increase in taxes is inevitable, at some point, to recoup some of these costs. Any tax increases will, however, need to be balanced with the need to provide support and stimulus to encourage a strong economic recovery and promote growth. The impact of announcing tax increases while we are struggling through another lockdown will also be on the Chancellor’s mind.
Although income tax, national insurance, and VAT make up the majority of the tax take, the Conservative party ruled out increases to these in their manifesto. The Government therefore needs to look elsewhere for funds. Potential increases to capital gains tax have been the subject of much speculation recently, and reports indicate that an increase in the rate of corporation tax is also under consideration. The taxation of wealth was given a lot of attention in 2020, but the Chancellor has previously indicated that he was against the idea of a wealth tax.
On top of this, the Chancellor will want to set the course of Britain’s future outside the EU. The recent changes to DAC6, an EU directive relating to cross-border tax arrangements, give a strong indication that the UK is likely to shift its approach to align with global standards, rather than EU standards.
In the run up to the Budget on 3 March, we have considered what all of this might mean for tax.
1. Increasing the rate of corporation tax (CT)
The UK has a low headline rate of CT, so much so that a 1% increase would still leave us joint lowest in the G20. It has taken the Government some time to get to that position, so there could be reluctance to make big changes, but it has been reported that the Chancellor is considering a rise in CT. If this does happen, he has been urged to apply special treatment to sectors which have suffered the most during the pandemic, such as hospitality and leisure.
A more significant increase in the rate of CT is not out of the question, but, with the continuing difficulties faced by many businesses, it is unlikely to take effect immediately.
2. Relax the limits around the carry back of losses
The Government may consider allowing companies to carry back business tax losses arising over the period of the pandemic, which are in many cases substantial, against profits of the three previous years. The current limit for carryback is one year.
The professional bodies working in accountancy have called for this, and it could be introduced in conjunction with an increase in the rate of CT to keep some balance. Relaxations to the recently introduced 50% loss relief restrictions have also been requested.
3. Measures to increase investment
There are a range of possibilities that the Government might consider. Improvements to tax incentives for research and development, and increased capital allowances, could encourage business investment. In particular, the Chartered Institute of Taxation has suggested that the level of the annual investment allowance (AIA) is increased to £1million, permanently.
With increased digitalisation, the range of incentives available might increase, with a particular focus on technology. It is possible that these will be targeted at the many successful tech hubs around the UK, as part of the Government’s ‘levelling up’ plans.
4. Increase in rate of Capital Gains Tax (CGT)
CGT generates very little for the exchequer: around £9 billion, or 1% of the total tax take. Despite this, it could be one of the least unpopular tax rises with the electorate, and an increase in the rate of CGT is thought to be one of the more likely outcomes of the Budget. If CGT rates were aligned with those for income tax, both an increase in tax revenues and a simplification of the rules could be achieved.
Increases to the CGT rate could, however, risk discouraging potential entrepreneurs, stunting growth and job creation. Given the need for economic recovery, the Chancellor may protect reliefs that encourage investment and entrepreneurship. An alternative could be CGT rate increases only on disposals of more passive types of investment, such as on rental property, as well as more technical changes to CGT reliefs.
Subject to investment decisions, you may want to think about accelerating planned disposals or gifts whilst the CGT rates are known and remain low. Any action taken in anticipation of changes does though involve significant risk. For example, CGT rates may not change as you expected or action taken before the next Budget could be caught by a subsequent change. No one thinks rates will fall.
5. Extending COVID support
There have been calls for the Chancellor to increase business support by extending the job support scheme, business rates relief, and loan schemes. It is possible that we will hear more on this ahead of the Budget, as further announcements are due during the week of 22 February.
Perhaps the SDLT holiday could also be extended past 31st March and tapered back throughout 2022 to ensure a smooth transition back to pre-COVID rates.
The chief question as we approach the Budget is whether or not the time is right for tax increases. This Budget was postponed from the Autumn to allow the Government to concentrate on the more urgent measures needed to support individuals and business, rather than outlining long-term plans.
With the COVID vaccination campaign going well, but with no clear end to lockdown in sight, the Chancellor may well feel that the next Budget, due this Autumn, is a better time for more significant announcements. Given the need to balance restarting the economy with coping with a huge deficit, however, nothing can be ruled out.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.