Rishi Sunak will soon be delivering his Budget, following an extraordinary year that he would never have expected at the start of his tenure. Back then, Brexit was still the main concern, but over the course of the last twelve months he has loosened the purse strings and paid out around £300bn (some estimates are even higher) to support individuals and businesses through the coronavirus pandemic.
The Budget background
While it will be impossible to repay the level of debt accumulated as a result in any short timeframe, the Chancellor will need to get spending under control. In the last fiscal year prior to coronavirus, 2019/20, the deficit (ie government spending in excess of receipts) was just under £60bn. The significant increase in the deficit in 2020/21 will, of course, need to be dealt with, but this needs to be done without holding back entrepreneurship or scaring off high earning talent and businesses to foreign lands. And everyone now knows how much easier it is to work from almost anywhere.
So, the immediate assumption is that taxes must rise; but by how much and on who is the question.
Options to increase tax revenues
The Government is committed to no increases in the rates of income tax, National Insurance and VAT. However, that still leaves many other existing taxes to consider and perhaps the chance of new ones.
Higher rate tax relief on pensions has been a source of much debate in recent years - recent estimates show that the total related tax and National Insurance relief costs around £40bn per year. Curtailing that would make a big dent in the deficit. We expect a report on the reform of pension tax relief published in February 2020 to give some direction on Budget day.
Inheritance tax (IHT) and capital gains tax (CGT) – together known as capital taxes – have been under review by the Office of Tax Simplification, at the Government’s request. Together these currently raise around £15bn per year.
A combined review which targets growth and entrepreneurship seems likely, removing some CGT reliefs for passive investors as they exit investments or certain IHT reliefs.
While a broad income tax rate increase is not possible within the Government’s manifesto promises, a broad corporation tax increase should not be ruled out, especially given the current rate of 19 per cent, which remains very low compared to other G20, and particularly G7 countries.
There is also more freedom now for the Chancellor to look at indirect taxes, given we are no longer bound by European Union rules.
The continued clampdown on tax evasion will rightly continue - the Government will, however, need to take care to ensure that legitimate tax planning doesn’t fall within that remit, as it could be very costly for compliant taxpayers, who have undertaken legitimate tax planning to arrange complex affairs, to endure unnecessary scrutiny.
And finally, a wealth tax. Will it happen? Introducing and administering such a new tax would be complex. Defining the scope of assets within the charge, which are located around the world, in trust or in other arrangements, and the residence or domicile of those to be taxed is extremely challenging and complex in a global world. In our view, it seems likely that increases in the Government’s overall tax take can be achieved in other ways and within existing regimes.
We expect the majority of the expected tax increases to fall on individuals rather than companies, and mainly on the wealthy and those with high incomes. If you are considering transacting on a sale or purchase, succession arrangements, extraction of profits, coming into the UK or leaving the UK, then be ready now with a plan in case you need to move quickly.
Tax changes announced on 3 March are generally only likely to have effect at the start of the next tax year on 6 April, so there may be time to plan, but not much time.
For more information please get in touch with Gary Heynes, or your usual RSM contact.