Posted: 02 / 03 / 2021
Written by David Evans, Tax Partner at Sedulo.
There has been a lot of commentary in the accounting profession that the forthcoming Budget on 3 March could be one of the most important for a decade.
The unprecedented financial support offered by the Government in response to the COVID-19 pandemic has led many to expect widespread changes to the tax system. For me, the question is whether now is the right time for Rishi Sunak to announce widespread tax rises, given that so many businesses are still struggling, particularly during this latest national lockdown.
I’ve summarised the main rumours below that have been circulating amongst the tax press in recent weeks. Time will tell whether any of these materialise when the Chancellor stands up in the House of Commons…
Changes to higher rates of income tax, as well as capital gains tax?
In their 2019 Manifesto, the Conservative Party pledged to not raise the rates of income tax, national insurance or VAT for five years. This is known as their “triple-lock”. It’s been reported that the Chancellor will stick to this pledge but this doesn’t necessarily mean there won’t be changes to these taxes to raise additional cash. It is possible that the Chancellor will reduce the threshold at which the higher rate of income tax applies. I think we are most likely to see the thresholds remaining the same as the last two tax years (i.e., no increase like there has been in the majority of the past 15 years).
There has been a lot of speculation that changes may be coming to capital gains tax, particularly after a report last year by the Office of Tax Simplification which recommended CGT rates being more closely aligned with income tax rates. We’ve seen clients accelerate transactions in an effort to get them completed prior to any changes coming in on Budget day. It might be the case that a rise in CGT is announced but doesn’t come into effect until next year. This would create an even bigger rush to complete transactions this year and accelerate the tax collection for the Government, albeit at the current CGT rates.
I feel like we’ve been expecting this every year for the last 10 years, so will this year finally be the year that we see a change to higher rate tax relief on pension contributions?
There was a lot of talk last summer about the introduction of a potential wealth tax whereby taxpayers pay an annual charge based on their wealth. This seems to have gone off the radar and has reportedly been ruled out by the Chancellor. A tax such as this would be difficult and time-consuming to implement so I’m not surprised that it’s been parked for now.
Rumours around corporation tax, rule changes to capital allowances and R&D tax relief, VAT cut extensions and the introduction of a new sales tax for online retailers?
The latest rumour is around an increase to the rate of corporation tax, with a rate of 24% appearing in several articles (compared to the current rate of 19%). Over recent years the Government has been reducing the corporation tax rate to be one of the most competitive rates across the G20, so it seems a bit of U-turn to now start raising the rate. Although they did cancel the planned reduction to 17% last year. The justification for the raise is that only profitable companies pay Corporation Tax, so the tax wouldn’t hit those that have struggled throughout the pandemic.
Any potential raise to corporation tax could, in part, be mitigated by increases to capital allowances for those businesses investing in plant and equipment. We could also see changes to the R&D tax relief schemes to encourage businesses to innovate. It’s worth pointing out that HMRC does appear to be clamping down on fraudulent R&D claims so we could also see rules to tighten the qualification criteria.
There have also been calls for a new sales tax to online retailers in an effort to make the high street more competitive. Given that a lot of physical stores have been closed over the past year this could have some legs, particularly as it has the backing of some major brands like Tesco and Asda.
The Chancellor will likely extend the temporary VAT cut for the hospitality and leisure sectors beyond the end of March. This seems completely logical given that these sectors are the hardest hit by the lockdown restrictions.
Changes on the way for tax around properties?
I think it’s fair to say that the temporary cut to SDLT has driven more property transactions to take place over the past few months. Pressure seems to be mounting for the cut to be extended beyond the end of March. Given the current fragility of the economy, I can see such an extension being announced on Budget day.
There have also been some rumours that the Government is considering replacing SDLT and Council Tax with a new annual property value tax. As with the wealth tax mentioned earlier, this would be difficult to implement so I can’t see this one happening, at least not in the short term.
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