The Chancellor’s forthcoming budget is only a few weeks away (27 October) and as usual there is plenty of speculation regarding what announcements he might make. There seems to be a growing consensus that the really big announcement has already been made – the introduction of the 1.25% Health and Social Care levy from April 2023, the revenue from which will be ringfenced to support UK health and social care bodies. By way of reminder, prior to the introduction of the levy there will be a temporary 1.25% increase to both the main and additional rates of Class 1, Class 1A, Class 1B and Class 4 National Insurance contributions for the 2022 to 2023 tax year. There is also going to be an increase to dividend tax rates adding 1.25% to each of the current rates.
The Chancellor may want to take this opportunity to boost business investment to encourage recovery. This could come in several different forms. For example: revised or more generous R&D tax credits; changes to the capital allowances regime granting greater relief for specific forms of investment; or extending the existing tax-advantaged venture capital schemes (being the VCT, EIS, SEIS and SITR schemes) are all possibilities.
Since corporation tax is already set to rise substantially in 2023 and various forms of pandemic support are being phased out this autumn it seems unlikely the Chancellor will want to increase business taxes directly. There are other ways of raising revenue less directly of course. A focus on errors, avoidance and fraud relating to the various forms of pandemic support might garner some much-needed income for example.
Staying with business for a moment, we know many businesses are clamouring for radical reform of the business rates system. The Chancellor promised to publish the final findings of the Business Rates Review this autumn – having delayed the final report due to the ongoing pandemic. It seems unlikely that any announcement will happen before then. In the longer term we could see an online sales tax to rebalance the economy and ensure physical and online businesses are on a more level playing field. Raising the cost of online purchases would be a pretty brave move though,given the amount we shop online nowadays .A foray into digital taxation would not be entirely ground breaking for the UK. We already have a digital service tax (DST) which imposes a 2% tax on the gross revenues of large multinationals operating search engines, social media platforms and online marketplaces to the extent that their revenues are linked to the participation of UK users. DST applies regardless of where the corporate owner of those revenues is located and irrespective of the physical presence that the corporate has in the UK.
Capital gains tax (CGT) and inheritance tax (IHT) changes are high on the list of predictions. We have already looked at the possibility of an increase in CGT rates in a recent blog (click here). There is a very real possibility that CGT and income tax rates might be aligned which would see CGT rates climb as high as 20%, 40% or 45%! That said, this might not actually collect a great deal relative to the UK’s total tax take. Of course, announcing a tax rise for say April 2023, could incentivise asset owners to sell up in 2022/23 and bring a nice cash boost for the Treasury in the short term. Making technical changes that cut back CGT reliefs is another option. Remember, the Treasury is still to respond to two consultations by the Office of Tax Simplification (OTS) into CGT and IHT that looked to address the future of taxing unearned income. The Chancellor may wish to pick parts of the two reports’ recommendations but discard others.
Pensions tax relief has been a target in past Budgets for revenue raising, with reductions in the annual allowance for pension contributions and related restrictions in terms of tapering tax relief for high earners (though the Government was subsequently forced to back down and raise the thresholds for those restrictions).
There are a number of rumours circulating in this area. These include removing the higher rate of relief; introducing a new single rate of relief of 25%; reducing the lifetime allowance; and changing the rules around salary sacrifice pensions. Whether the Chancellor makes any of these changes on Budget day remains to be seen.
It will be interesting to see what, if anything, the Chancellor is planning in the area of green taxes. The UK will host the 26th UN Climate Change Conference of the Parties (known as COP26) in Glasgow between 31 October and 12 November 2021 so now might be an opportune time to demonstrate the UK’s commitment to the green agenda. This could come in the form of tax incentives like those for greener homes; environmental business practices; and/or investments in electric vehicles. Higher taxes on emissions directly or indirectly could take a number of forms.
Finally, there are a number of changes which have already been announced but are yet to be fully implemented. This will need to be done in the next Finance Bill. These include:
• the new regime for Qualifying Asset Holding Companies to attract inward investment;
• The decision on the rate of tax that will apply to banks, when the rest of the sectors move up to 25%;
• the requirements imposed on large businesses to disclose their uncertain tax treatments; and
• the Residential Property Developer Tax which will apply from 1 April 2022 and raise much needed money help fund the Government’s cladding remediation costs.
We will wait and see whether the Chancellor tweaks and tinkers or makes significant changes this time around.
If you would like to know more and in particular if you would like our assistance in planning for the potential changes to the UK’s CGT regime in advance, then please contact us.