Money, money, money!
It must be a daunting task to sit down with your team and figure out a plan to raise the money needed to fund national expenditure, and all on the back of a global pandemic that has already seen massive increases in government spending.
Given the level of recent coverage of what may or may not be in the Chancellor’s Autumn Budget, this blog article looks at some of the other personal tax changes that Rishi Sunak might consider.
How do you solve a problem like the Budget?
Ahead of any ‘difficult decisions’ to increase taxes, overall tax receipts are likely to be lower in any case, since:
● Reduced wages and further anticipated increases in unemployment when (if) the furlough scheme ends this month will impact Income Tax and National Insurance receipts.
● Businesses affected by the recession will have lower taxable profits which in turn reduces the Income Tax and National Insurance bills of the self employed and Corporation Tax payments for companies.
● Everyone’s limited ability to spend on recreation, culture, restaurants and transport both during and after lockdown will impact these big sectors of VAT-able household expenditure.
The Big Three
Income Tax, National Insurance and VAT would normally provide a rich hunting ground. How easy would it be to increase each by one or two percent and, at the same time, achieve some level of tax simplification? Income Tax, VAT and Corporation Tax all on or starting at 21% anyone?
Politically though it would be tricky. The Conservative manifesto and, in particular, Boris Johnson’s Guarantee pledged not to raise these taxes leaving little wriggle room and (apparently) a sticking point in discussions between Prime Minister and Chancellor.
However, the promise might only protect the rates, not the rate bands…
Certainly, as far as Income Tax is concerned, adjusting the bands or adding further brackets as in Scotland could help achieve an increase in the tax take, remain progressive (although higher earners must be wondering when they are going to stop having to bear such a large proportion of the national tax take) and not break any manifesto pledge.
As far as National Insurance contributions are concerned, The Sun reported a potential increase in the self-employed rate from 9% to 12%. Whilst this would align Class 1 and Class 4 contributions let's not forget the quick U-turn Philip Hammond was forced to make when he tried something similar in his first Budget back in 2017.
This time around though, Conservative backbenchers and those across the House may not have the same leverage. Rishi Sunak’s speech when he introduced the self-employed support scheme included the ominous line: “If we all want to benefit equally from state support, we must all pay in equally in future”.
VAT rate rises would also be difficult politically as it is a regressive tax. The UK does, though, have one of the highest registration thresholds among European nations, so could this be reduced to bring more businesses within the VAT net?
What about CGT & IHT?
Capital Gains Tax certainly seems to be on the radar at the moment with most commentary suggesting it is a given that CGT rates will increase in line with Income Tax rates.
It was, after all, only two months ago that the Chancellor wrote to the Office of Tax Simplification (OTS) requesting a wide review of CGT. Both the ICAEW and CIOT expressed their concerns with the remit, including that the OTS may be in danger of overstepping the mark and straying into tax policy as part of its review.
Will these concerns persist after the Budget, or be added to if the Chancellor makes sweeping changes to not only the rate of CGT but also allowances, losses and reliefs, or even the historic distinction between income and capital?
Inheritance Tax was itself the subject of an OTS review which concluded in July 2019 with the publication of 11 recommendations to simplify it. These were focused on three key areas identified by the OTS:
1. Lifetime gifts, including a reduction of the gifting period from 7 years to 5 years and abolishing taper relief.
2. Interaction with CGT and the removal of the capital gains uplift on death for assets where an IHT relief or exemption applies.
3. Businesses and Farms, including alignment of the trading activity thresholds and tests to qualify for tax relief within IHT (Business Property Relief) and CGT (Entrepreneurs’ Relief as was, now Business Asset Disposal Relief).
Whilst none of the recommendations have been implemented to date, might the Chancellor choose the Budget as the time to put some or all of these into legislation?
Look in the background
Making Tax Digital (MTD) is a more long-term project aiming to rectify the tax gap which HMRC’s latest figures estimate at £31 billion.
HMRC have shown this year they are able to quickly implement digital solutions, so could there be a case to fast track MTD and bring it in ahead of the recently published road map?
It is possible but given government agencies and IT solutions have not historically been a great mix, we can only hope that in building a modern tax administration HMRC’s intention to consult closely with agents and other stakeholder groups remains.
The Budget
It will be interesting to see what decisions Rishi Sunak does take and no doubt there will be much more speculation between now and the moment he steps up to the dispatch box.
When that time does come (and despite tax being the focus of this blog) one can only hope that it does not dominate the Budget and that other measures focused on growing the economy and developing businesses, jobs and wealth are at the forefront.
How can we help?
At Fairfields Tax we can help you navigate the changing tax landscape and meet your tax planning needs.
Please do contact us for a free, no obligation quote.
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