Budget speculation

Not the time for sweeping tax changes?

Whatever the chancellor chooses to announce on 3 March, it will be a gamble but it is also unlikely to represent systemic reform. Inevitably, some structural reform is needed to steer us out of the current economic crisis, but the economy is probably too fragile. Provided the vaccine rollout allows us to emerge from the current pandemic over the summer with limited likelihood of a return to lockdown next winter, it is far more likely that we will see more sweeping tax measures in the Autumn Budget.

Clear wins: The chancellor may be able to make some changes to increase tax revenues without having too much of a negative economic impact or generating a backlash.

Corporation tax: At 19% the UK has one of the lowest global headline rates and the government has already reversed plans to reduce the rate further to 17%. It is possible that the chancellor may impose a modest increase which will still allow the UK to claim a low (and therefore competitive) rate against international standards.
Online tax: It is probable that any online tax would be passed onto consumers rather than being borne by the retailer. The chancellor may feel that such a move might help rejuvenate the high street as an alternative to online shopping as the economy begins to reopen following covid. However, it is likely that something more comprehensive will be needed to help the high street.
Stamp duty: A cliff-edge withdrawal of the stamp duty holiday on 31 March could result in house prices falling in 2021. Housing is an important pillar of the UK economy and a crash would damage consumer confidence. We think the chancellor is likely to continue the holiday in the short term, perhaps with a tapered withdrawal to take the heat out of the market in a managed and gradual way.
Pensions relief: The taxation of pensions savings and receipts is incredibly complicated. Ideally any change to relief on pensions savings would be part of a well thought through pensions reform package that also delivers some desperately needed. The restriction to a flat rate relief of 20% is unlikely to have any significant economic downside, and so may be tempting to the chancellor.

Changes likely to be deferred: Changes to our tax workhorses are likely to be deferred, either to avoid disrupting the economy in the short term, or to allow for more considered policy development.

CGT: A tax hike may encourage some to advance disposal plans to pay the lower rate of tax on their gains, which might bring a short term bump to the tax coffers, but it could be counterbalanced by those who decide to hold on to their assets and ride out the increase. This is especially true when the tax increase is announced for the very near future, which will only allow those that already have deals in the pipeline to accelerate them. One sensible option may be to announce an increase in the tax rate but deferred until 2022.
National insurance: We might see some small changes: for example, imposing NICs on those that continue to work beyond the state pension age. Inevitably, however, any changes to national insurance would best be undertaken as part of a wider review of the taxation of work, ensuring that tax burdens are fair, and that the system works for modern ways of working.
Income tax: It is unlikely that we will see income tax rate increases based on the government’s manifesto. However, it is still possible to increase real tax take without increasing the main rates: for example, the personal allowance may be frozen at £12,500. This may not have large short-term impact yield but could have significant cumulative effect.
VAT: We are unlikely to see any changes to the VAT rate, and any increase in VAT would dampen demand in any case. However, we may well see the temporary reduced rate for the hospitality and tourism sector extended.
Business rates: It is unlikely that any major changes will occur on 3 March, but we can expect to see an extension to the rates holiday for retail, hospitality and leisure sectors. We could also see an announcement of detailed policy review, which may extend to property taxes more generally (and encompass stamp duty).

Bold new taxes: Every chancellor likes to have an eye-catching measure in their speech for the day, so we may see some of the following left-field initiatives.

Innovation hubs: Against the backdrop of an economy that needs levelling-up, exit from the EU and the success of UK science in relation to covid vaccines, there is a real possibility that the chancellor will gamble on an ambitious innovation agenda. It is possible that we might see plans to leverage freeports (areas designated by the government with little to no tax to encourage economic activity) with innovation hubs. The hubs would offer tax incentives to attract investment both from the south of the country, and internationally.
NHS tax or covid tax: In the midst of a global pandemic, the idea of some form of NHS tax or a short-term covid tax should form part of any policy response consideration. In practice, this could look like a temporary 1/2p on income tax. Clearly this could be seen as breaking the manifesto commitments, but the public is more likely to be understanding when it comes to supporting their NHS.

Melissa Geiger, KPMG

An employment tax perspective

What could be announced? Given that covid-19 does not seem to be going anywhere quickly, we may see an extension to the CJRS furlough arrangement that is due to come to an end on 30 April. This could present a further lifeline to employers and employees in protecting jobs and income until the Summer 2021. Alternatively, we may see the re-imagining of the employer £1,000 CJRS bonus that was withdrawn in January, given that this was to help encourage businesses to keep people employed. This could help reduce unemployment figures and provide a greater chance of a quicker recovery as the vaccine continues to accelerate.

What’s likely to be announced? The noises out of the government suggest strongly that no delay to the private sector IR35 off-payroll changes will be announced, meaning that it will go live from 6 April regardless of whether employers are ready or aware. There is strong opposition still to this change, but many businesses have accepted this is not likely to be scrapped or further delayed and are therefore preparing for the imminent change that has already been delayed by 12 months.

What should be announced? We think that greater income tax and NICs reliefs for going ‘green’ and supporting sustainable initiatives should be announced, due to the growing focus on sustainability and the opportunities covid-19 has brought in changing how we work, live and design reward programmes. Extending or giving greater long term certainty to the low or 0% benefit in kind values for wholly electric cars would be a good idea. Also looking at how tax or NICs relief could be given on other green initiatives, like employer provided renewable charging units, would potentially transform how employers design travel policies and employee reward programmes, including salary sacrifice arrangements.

Ian Goodwin, Mazars

Issue: 1520
Categories: In brief

Not the time for sweeping tax changes?

Clear wins: The chancellor may be able to make some changes to increase tax revenues without having too much of a negative economic impact or generating a backlash.

Corporation tax: At 19% the UK has one of the lowest global headline rates and the government has already reversed plans to reduce the rate further to 17%. It is possible that the chancellor may impose a modest increase which will still allow the UK to claim a low (and therefore competitive) rate against international standards.
Online tax: It is probable that any online tax would be passed onto consumers rather than being borne by the retailer. The chancellor may feel that such a move might help rejuvenate the high street as an alternative to online shopping as the economy begins to reopen following covid. However, it is likely that something more comprehensive will be needed to help the high street.
Stamp duty: A cliff-edge withdrawal of the stamp duty holiday on 31 March could result in house prices falling in 2021. Housing is an important pillar of the UK economy and a crash would damage consumer confidence. We think the chancellor is likely to continue the holiday in the short term, perhaps with a tapered withdrawal to take the heat out of the market in a managed and gradual way.
Pensions relief: The taxation of pensions savings and receipts is incredibly complicated. Ideally any change to relief on pensions savings would be part of a well thought through pensions reform package that also delivers some desperately needed. The restriction to a flat rate relief of 20% is unlikely to have any significant economic downside, and so may be tempting to the chancellor.

CGT: A tax hike may encourage some to advance disposal plans to pay the lower rate of tax on their gains, which might bring a short term bump to the tax coffers, but it could be counterbalanced by those who decide to hold on to their assets and ride out the increase. This is especially true when the tax increase is announced for the very near future, which will only allow those that already have deals in the pipeline to accelerate them. One sensible option may be to announce an increase in the tax rate but deferred until 2022.
National insurance: We might see some small changes: for example, imposing NICs on those that continue to work beyond the state pension age. Inevitably, however, any changes to national insurance would best be undertaken as part of a wider review of the taxation of work, ensuring that tax burdens are fair, and that the system works for modern ways of working.
Income tax: It is unlikely that we will see income tax rate increases based on the government’s manifesto. However, it is still possible to increase real tax take without increasing the main rates: for example, the personal allowance may be frozen at £12,500. This may not have large short-term impact yield but could have significant cumulative effect.
VAT: We are unlikely to see any changes to the VAT rate, and any increase in VAT would dampen demand in any case. However, we may well see the temporary reduced rate for the hospitality and tourism sector extended.
Business rates: It is unlikely that any major changes will occur on 3 March, but we can expect to see an extension to the rates holiday for retail, hospitality and leisure sectors. We could also see an announcement of detailed policy review, which may extend to property taxes more generally (and encompass stamp duty).

Bold new taxes: Every chancellor likes to have an eye-catching measure in their speech for the day, so we may see some of the following left-field initiatives.

Innovation hubs: Against the backdrop of an economy that needs levelling-up, exit from the EU and the success of UK science in relation to covid vaccines, there is a real possibility that the chancellor will gamble on an ambitious innovation agenda. It is possible that we might see plans to leverage freeports (areas designated by the government with little to no tax to encourage economic activity) with innovation hubs. The hubs would offer tax incentives to attract investment both from the south of the country, and internationally.
NHS tax or covid tax: In the midst of a global pandemic, the idea of some form of NHS tax or a short-term covid tax should form part of any policy response consideration. In practice, this could look like a temporary 1/2p on income tax. Clearly this could be seen as breaking the manifesto commitments, but the public is more likely to be understanding when it comes to supporting their NHS.

Melissa Geiger, KPMG