The chancellor is faced with a difficult balancing act in next week’s Autumn Statement. He is on record as saying ‘the tax burden is too high’, but finds himself with limited room for manoeuvre, given the challenging macro-economic background. While there may be some eye-catching announcements, our expectation is for mainly low-key measures, designed to counter inflation, and a focus on technical issues that address known challenges, stimulate business investment, reduce compliance costs and tackle tax avoidance. No doubt, he will keep some powder dry for a pre-election Spring Budget.
- Confident predictions
- Reasonable expectations
- Extended predictions
Income tax and personal allowancesMany of the personal tax thresholds and allowances have been unchanged for several years and are currently frozen until 2028. We expect the chancellor to find room for small giveaways, which could include increasing the personal allowance or higher rate threshold from 6 April 2025, when inflationary pressures will hopefully have eased. Any increase to the higher rate threshold will most likely be mirrored in the National Insurance contributions thresholds.
Stamp duty land tax (SDLT)One of the surviving measures of the 2022 mini-budget was SDLT cuts on residential property, which the chancellor has previously stated will remain in place until 31 March 2025. We expect him to make this cut permanent and go further in increasing the thresholds at which SDLT is paid. We also anticipate further good news for first-time buyers, with announcements extending the SDLT relief available to them and financial support to help them onto the property ladder. This could be paid for by further increasing the SDLT due on acquisitions by non-UK residents.
Inheritance tax (IHT) rates, thresholds and allowancesWhile there has been speculation that IHT could be abolished, given receipts could exceed £8bn for 2023/24, this could prove too costly. We expect the chancellor to announce less substantial changes. IHT thresholds could be unfrozen, the various current annual gifting allowances could be replaced with a single allowance, or he could instead reduce the headline rate of IHT.
Capital gains tax (CGT)Currently, assets inherited on an individual’s death are uplifted to their market value for CGT purposes. This may cause people to hold onto assets longer than they otherwise would. Scrapping this rebasing rule at the same time that IHT rules are relaxed could increase inter-generational asset transfers and may increase tax receipts overall.
Individual savings accounts (ISAs)To make the ISA regime more accessible, the chancellor may raise the longstanding £20k ISA allowance and encourage domestic investment by introducing an additional ISA allowance specifically for investment in UK businesses.
Research and development (R&D)We expect the chancellor to confirm that there will be changes to the enhanced corporation tax relief for eligible R&D expenditure, including more generous relief for R&D intensive small and medium sized enterprises. A widely supported proposed merger of the two existing R&D schemes is also likely to be confirmed, but may be delayed by 12 months to allow renegotiation of existing commercial arrangements.
Investment zonesUpdates to the locations of, and on grant funding and tax incentives for the intended 12 UK investment zones, which are targeted at driving growth in ‘key future sectors’ including green industries, digital technologies, life sciences, creative industries and advanced manufacturing.
International taxWe expect the chancellor to confirm that the UK will sign up to a multilateral convention to implement the OECD and G20’s two pillar solution to the tax challenges of digitalisation and globalisation. This includes rules concerning the allocation of taxing rights between jurisdictions and the repeal of the current UK digital services tax, and may require the world’s largest businesses to pay more tax in customer jurisdictions where they may have limited physical presence.
High-income child benefit charge (HICBC)The controversial HICBC is assessed on an individual earner’s income and not the income of the household in receipt of child benefit. A household with a single earner earning £60k would incur a tax charge equivalent to all the household’s child benefit, while a couple each earning £50k would not. There may be changes in this area in the interests of fairness and to reflect that the intended target is high income taxpayers.
Changes to tax reliefs for investorsThe enterprise investment scheme (EIS) and the venture capital trust (VCT) scheme incentivise individuals to provide funding to early-stage businesses. The current rules for both EIS and VCT tax reliefs expire on 5 April 2025. The Treasury has stated they are likely to be extended and further tweaks may be tempting to encourage much-needed investment in UK businesses.
Tax advantaged employee share schemesHMRC has consulted on the company share option plan (CSOP), save as you earn (SAYE) and share incentive plan (SIP) employer share schemes, with a view to improving the schemes by making them easier for staff to access and businesses to operate.
Employment taxationA number of business-related tax allowances and exemptions, such as the benchmark subsistence rates, approved mileage allowance payment (AMAP), trivial benefit exemption and homeworkers’ allowance are looking outdated, as a result of inflation. These may be uprated. Consideration should also be given to addressing an anomaly in the tax rules which results in many reimbursed expenses and benefits having different tax treatment to those which are met directly by the employer.
Hybrid and remote workersHome and global remote working have become commonplace following the coronavirus pandemic, but most of the relevant tax legislation and HMRC guidance pre-dates this. The chancellor could announce changes to the tax rules and practice to reflect hybrid and distance working arrangements, alongside changes to wider employment allowances and deductions.
Occupational health incentivesReforms and incentives for employers to provide additional tax-advantaged occupational healthcare for employees are expected, to help to address workplace productivity and well-being.
Stamp taxes on sharesCurrent legislation governing stamp taxes on share transactions is archaic. The chancellor may announce changes in this area and could combine stamp duty and stamp duty reserve tax into a single new regime.
VAT treatment for charging electric vehicles (EVs)
We expect the chancellor to announce the outcome of an HMRC review of business' entitlement to recover VAT on the costs of charging EVs, including employee home-charging for business trips.
This regime has undergone extensive change in recent fiscal events. An extension of the current three-year ‘full expensing' period to better incentivise long-term capital investment decisions is possible. Such projects often take many years to implement, and businesses would welcome tax certainty at the planning stage.
Residential landlordsRecent restrictions to the deductibility of costs related to residential letting have affected the commercial viability of some residential property businesses. We may see the tide begin to turn and some additional tax relief for residential landlords whose property businesses are not operated through a company.
Non fungible tokens (NFTs)This developing class of cryptoassets is not well catered for by existing tax legislation. We expect an update on the plans and timeframe for the introduction of a clear policy on the VAT treatment of NFTs.
VAT flat rate schemeThe possible withdrawal of the VAT flat rate scheme, an optional simplification for businesses whose VAT turnover does not exceed £150k, to tackle tax fraud and abuse, in particular by businesses using umbrella companies.
The economist's view
On paper, there is a sharp fiscal squeeze coming next year worth almost 2% of GDP. However, the chancellor is under increasing pressure to offer voters an early Christmas present. Indeed, taxes have almost always been lowered before a general election.
In theory, chancellor Hunt does have some room to play Santa. Government borrowing this year is likely to come in a whopping £26bn below the Office for Budget Responsibility’s (OBR) forecast. Given Mr Hunt had headroom of £6.5bn against his main fiscal target, for the debt-to-GDP ratio to be falling in five years' time, that gives him a decent starting position.
However, higher interest rates will force Mr Hunt into being much more grinch-like. As interest rates have risen by much more than the OBR expected, it will probably revise up debt interest payments by £37bn next year and by around £18bn in the long term. The OBR will also likely revise its medium-term forecasts for the performance of the economy, but not by enough to offset the increase in interest costs. And with government departments from health to defence crying out for more funding, the chancellor’s ability to deliver major tax cuts is likely to be limited.
Of course, the chancellor can still meet his fiscal target by spending more next year and pencilling in larger cuts for the next parliament to deal with. But financial markets are likely to be sceptical of such promises, with memories of the disastrous 2022 mini-budget still fresh. This should dissuade Mr Hunt from making bold promises that might spook investors, so households and businesses would be wise not to get their hopes up.