The new government could be targeting tax reliefs as it looks to make good on its promise to increase spending and lock in a trio of taxes.
The Conservative party saw a landslide victory in last week's general election after promising to increase spending and keep income tax, VAT and national insurance locked in at current rates.
But George Bull, senior tax partner at RSM, believes the new government will not be able to implement its policies without raising money elsewhere. The Conservative Party manifesto contained pledges to spend £100bn on infrastructure projects and 3bn per year extra of day to day spending.
He said he believes the increases will be by “stealth”, with tax reliefs being removed.
Mr Bull cited a government report entitled 'Measuring tax gaps' from August 2019, which highlighted a 5.6 per cent “tax gap”, that is the gap between the amount of tax the government can collect and the amount that has been collected.
The report identified the “entrepreneurial small business sector” as an area where this tax gap could be closed.
Mr Bull said: “Given that statement, it is likely to be those areas that get targeted by tax changes, so advisers who have clients that run small businesses, and many advisers themselves, should be prepared for pain to come as the new government seek new ways to raise taxes.”
Mr Bull said the Enterprise Investment Schemes and Seed Enterprise Investment Schemes were likely to come into the government’s focus.
Investors in those schemes receive an income tax break in exchange for investing in early stage companies.
Mr Bull said changes to the EIS rules introduced in recent years have been generous, so the market could be seeing the reverse now.
The government in 2017 tightened the rules around the types of companies that are eligible for EIS tax reliefs but increased the amount of capital that can be placed into those companies to £1m.
Stuart Adam, a senior research economist at the Institute for Fiscal Studies, said the Conservatives “may come to regret” their triple lock tax policy, as there was little margin for error to implement the spending plans and the tax cuts.
In its review of the Conservative party manifesto the IFS stated the government's level of borrowing was likely to be higher as a result of recent changes in the way it is calculated, while the party's manifesto has pledged to spend billions.
Mr Adam said the cost of those spending commitments, coupled with the commitment not to raise those three taxes, would leave the Conservatives in a difficult position.
david.thorpe@ft.com
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