Listening to the Budget, I was struck by how often the chancellor referred to Brexit as allowing him to make tax changes. Of course, he highlighted the potential popular ones, whilst the Budget papers mentioned actions taken to increase revenues.
The changes to tonnage tax, drinks levies, air passenger duty and freeports are part of a strategy to build up a coalition of interested parties who will have benefited from the freedom of manoeuvre afforded by Brexit. We can expect the number of interest groups to grow as more changes come through. This is definitely consistent with the political outlook of Rishi Sunak, who campaigned for leave in the 2016 referendum only a year after first entering the House of Commons.
Practitioners sometimes forget that the principles of EU taxation which have been put in directives are implemented through domestic legislation. Brexit did not automatically overturn the legislation and it remains valid unless and until the UK changes its own domestic law. So far, the UK has made a slow start in diverging from European law. It zero rated VAT for women’s sanitary products and effectively gutted DAC 6 on exiting the transitional arrangements on 31 December 2020. FA 2021 repealed the domestic legislation implementing the Interest and Royalties Directive with effect from 1 June 2021. This means that the UK now imposes withholding taxes in accordance with the relevant double tax treaties.
The Budget also announced the removal of the ability to effectively transfer terminal losses from a company operating in the EEA (European Economic Area) to set against UK profits. This effectively reverses the effect of the CJEU decision in Marks & Spencer v Halsey (Case C-446/03).
It is therefore likely that we will see further moves to take out references to the EEA in UK domestic legislation. For example, in the creative arts sector, the reliefs allowed include expenditure in the EEA. In exchange for the additional reliefs promised in the Budget, it is likely that they will be focused on UK expenditure only. The same is likely to be true of the R&D tax reliefs.
There are other areas where reliefs are given on an EEA wide basis such as personal allowances, furnished holiday lets, agricultural property relief and woodlands. One wonders how long it will be before the reliefs are restricted to UK activities only.
Presumably there was some debate in Whitehall about whether to restrict these reliefs, as the optics of doing so may show the UK as pulling up the drawbridge. The argument in favour of protecting revenues, particularly when other countries will no longer give equivalent relief, has won out.
Commentators have generally looked at the amount of tax as a percentage of GDP and have compared it to the last years of the Attlee government. However, that misses the point that it is how taxes are implemented which is of at least equal interest. We are not going back to the 1970s in terms of, for example, a corporation tax marginal rate of 52%, a small companies’ rate of 40%, nor income tax rates of 83% on earned income or 98% on unearned income. It is also noteworthy that the chancellor chose to cut the effective marginal tax rate on the lower paid in receipt of universal credit to 55%, which is the lowest that it has ever been and compares to the 90% marginal rate under the previous tax credit regime.
Some commentators believe that it could have been a Budget delivered by a Labour chancellor. I think this is wide of the mark. A Labour chancellor would have almost certainly kept the bank levy at the higher rate, reduced pension relief for higher and additional rate taxpayers, increased capital gains tax and abolished the residential nil rate band for IHT as well as reducing the allowances and exemptions for those two taxes. Despite lots of discussion in tax publications and by advisory groups, a Conservative chancellor would be very unlikely to follow this type of guidance.
Finally, the Budget might be seen as a high-water mark for both tax and spending. Any chancellor announcing a three-year spending envelope would announce substantial increases over that period, albeit that inflation will erode the real value of those increases.
As the chancellor made clear, both in a powerful conclusion to his Budget speech and in his post-Budget meeting with Conservative MPs, any additional windfalls produced by the economy rising faster than the consistently pessimistic OBR forecasts, are likely to be prioritised to tax cuts – just in time for the 2024 election.
Listening to the Budget, I was struck by how often the chancellor referred to Brexit as allowing him to make tax changes. Of course, he highlighted the potential popular ones, whilst the Budget papers mentioned actions taken to increase revenues.
The changes to tonnage tax, drinks levies, air passenger duty and freeports are part of a strategy to build up a coalition of interested parties who will have benefited from the freedom of manoeuvre afforded by Brexit. We can expect the number of interest groups to grow as more changes come through. This is definitely consistent with the political outlook of Rishi Sunak, who campaigned for leave in the 2016 referendum only a year after first entering the House of Commons.
Practitioners sometimes forget that the principles of EU taxation which have been put in directives are implemented through domestic legislation. Brexit did not automatically overturn the legislation and it remains valid unless and until the UK changes its own domestic law. So far, the UK has made a slow start in diverging from European law. It zero rated VAT for women’s sanitary products and effectively gutted DAC 6 on exiting the transitional arrangements on 31 December 2020. FA 2021 repealed the domestic legislation implementing the Interest and Royalties Directive with effect from 1 June 2021. This means that the UK now imposes withholding taxes in accordance with the relevant double tax treaties.
The Budget also announced the removal of the ability to effectively transfer terminal losses from a company operating in the EEA (European Economic Area) to set against UK profits. This effectively reverses the effect of the CJEU decision in Marks & Spencer v Halsey (Case C-446/03).
It is therefore likely that we will see further moves to take out references to the EEA in UK domestic legislation. For example, in the creative arts sector, the reliefs allowed include expenditure in the EEA. In exchange for the additional reliefs promised in the Budget, it is likely that they will be focused on UK expenditure only. The same is likely to be true of the R&D tax reliefs.
There are other areas where reliefs are given on an EEA wide basis such as personal allowances, furnished holiday lets, agricultural property relief and woodlands. One wonders how long it will be before the reliefs are restricted to UK activities only.
Presumably there was some debate in Whitehall about whether to restrict these reliefs, as the optics of doing so may show the UK as pulling up the drawbridge. The argument in favour of protecting revenues, particularly when other countries will no longer give equivalent relief, has won out.
Commentators have generally looked at the amount of tax as a percentage of GDP and have compared it to the last years of the Attlee government. However, that misses the point that it is how taxes are implemented which is of at least equal interest. We are not going back to the 1970s in terms of, for example, a corporation tax marginal rate of 52%, a small companies’ rate of 40%, nor income tax rates of 83% on earned income or 98% on unearned income. It is also noteworthy that the chancellor chose to cut the effective marginal tax rate on the lower paid in receipt of universal credit to 55%, which is the lowest that it has ever been and compares to the 90% marginal rate under the previous tax credit regime.
Some commentators believe that it could have been a Budget delivered by a Labour chancellor. I think this is wide of the mark. A Labour chancellor would have almost certainly kept the bank levy at the higher rate, reduced pension relief for higher and additional rate taxpayers, increased capital gains tax and abolished the residential nil rate band for IHT as well as reducing the allowances and exemptions for those two taxes. Despite lots of discussion in tax publications and by advisory groups, a Conservative chancellor would be very unlikely to follow this type of guidance.
Finally, the Budget might be seen as a high-water mark for both tax and spending. Any chancellor announcing a three-year spending envelope would announce substantial increases over that period, albeit that inflation will erode the real value of those increases.
As the chancellor made clear, both in a powerful conclusion to his Budget speech and in his post-Budget meeting with Conservative MPs, any additional windfalls produced by the economy rising faster than the consistently pessimistic OBR forecasts, are likely to be prioritised to tax cuts – just in time for the 2024 election.
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