February 18, 2021 A look ahead to the 2021 Budget
Our Tax and Accountancy Director Dhruv Patel muses on what we can expect in the 2021 Budget announcement on March 3rd.
Amongst the optimism surrounding the UK’s rapid vaccine roll-out, the country – or rather the chancellor – will soon have to reckon with the cost of business support measures and furlough grants.
Whilst the TaxPayers’ Alliance reports that the UK’s tax burden is at its highest level in 70 years, the last recession taught us that austerity does not work – the UK’s recovery following the 2008 financial crash was sluggish.
I’m no economist and I won’t postulate on quantitative easing and the impact of a historically low-interest rate, but the economy has shrunk by 20%. Surely the solution is to stimulate the economy and increase the tax base, rather than dramatically raise the headline rates of tax. Raising VAT, income tax or national insurance (which collectively raise 57% of tax revenues) will break a manifesto ‘triple lock’ and cost a huge amount of political capital for the government. However, some tax rises are inevitable.
Businesses are an easy target, and a rise in corporation tax costs little political capital. The UK is currently a low corporation tax jurisdiction with a flat rate of 19%; amongst the G20 only Switzerland (18%) and Singapore (17%) have lower rates. A return to the 50% rate of the early 1980s seems unthinkable, but a gradual increase to 30% as it was through much of the ’00s is not. We may well see a return to two bands of corporation tax, with profits below £300k being taxed at a lower rate. It also seems likely that R&D tax relief will increase in scope, but that there will be a tightening of the rules to prevent abuse – most likely a return to the repayable tax credit being limited to the amount of PAYE & NICs paid.
Much has already been done to close loopholes via both targeted and general anti-avoidance legislation not to mention implementation of the various BEPS recommendations where the UK has gone further than many jurisdictions. That said, more has to be done to tax the hidden economy and combat fraud. Government and industry bodies do a poor PR job. They would do well to try to convince people that a major benefit of low taxation on business is an increase in employment and therefore an increase in income tax and NI (which together generate 41% of tax revenue).
The biggest gripes seem to be the relatively low level of tax paid by online giants such as Facebook and Amazon. An extension to the scope of digital services tax and a levy on the sale of goods online would be both revenue generators and vote winners.
The broadest shoulders should bear the biggest burden. However, the top 1% (who generate 13% of total income) already pay nearly 30% of all income tax, with the top 10% of earners shouldering 61% of the responsibility. Meanwhile, the bottom 50% of earners only contribute 9% of total tax receipts. Whilst the government has previously announced an increase in the higher rate threshold it would seem expedient to scrap this. In its place, a rise in the National Insurance contributions threshold to align it with the income tax personal allowance would be a welcome change and would benefit lower earners. SEIS and EIS are poised to stay to encourage investment into new high-risk companies.
There are calls for a reduction in tax relief on pension contributions for higher and additional rate payers. Perhaps we will see tax relief limited to the basic rate of tax or the annual or lifetime allowance being cut. This will generate income tax revenues without breaking manifesto promises but I can’t help but feel that this will disincentivize people from making pension contributions and increase the burden on future generations to support an increasingly ageing population. Furthermore, my understanding is that this might not be something the HMRC computer system can easily handle.
Capital Gains are another easy target. Elemental recently debated whether Business Asset Disposal Relief incentivizes people to start businesses. With a relatively paltry £1m lifetime allowance, we don’t think it does. Of course, scrapping it won’t raise any significant tax revenue. The Office of Tax Simplification (OTS) has argued that it should be targeted towards retirement and that Investors Relief is scrapped altogether. A reduction in the CGT allowance seems likely, as does an increase in the basic rate of CGT (currently 10%/18%). However, we expect the chancellor will wait for the OTS’s second report in Spring before making any decisions.
The temporary reduction on VAT in the hospitality sector should be extended to support an industry that is currently on its knees. Due to lockdowns, those businesses haven’t been able to benefit from this and the money allocated to fund this reduction remains unspent.
When lockdown is lifted there will inevitably be celebrations up and down the country. But we will have to sober up to the reality of a £400bn+ hangover. Some of the spending will have been worth it and necessary, but big chunks will not. There is no easy answer, but it is inconceivable that tax rises aren’t part of the solution.
Dhruv Patel is a director at Elemental, having previously worked at PwC, Mazars and PageGroup. He established our Tax and Accountancy practice to offer a one-stop-shop for UK and overseas clients. He and his team provide a complete suite of ongoing accounting support services. They also regularly advise on SPV and holding company structures, Enterprise Investment Schemes, tax residency and Research & Development tax relief. To see how Dhruv and his team can help you and your business, please contact us.