The latest economic update published on September 28 on the Commons Library Insight site confirms that while earlier in the summer there was a positive bounce-back across the UK economy, it cooled off pretty quickly.
This slowdown, coupled with the National Audit Office tracker showing an estimated lifetime cost of government spending at £370bn as a result of Covid-19, sets the economic backdrop for Rishi Sunak’s Budget speech and spending review.
There are several other issues that will also play an important role in Sunak’s review, including the impact of future spending and fiscal requirements post-Brexit, climate change and net-zero ambitions, and the funding of health and social care.
A review of proposals and progress to date
A year ago there was much debate by independent bodies about the imposition of a new wealth tax, but the acknowledged difficulty of introducing such a tax means this is not a likely route to solving the country’s fiscal issues. This leaves the option of solving of the funding deficit with existing taxes.
To some extent the NHS and social care funding issue has seen some movement with increases to national insurance contributions and dividend rates, to be introduced from April 2022 and then made permanent in April 2023 as an ongoing levy.
Back in March the chancellor decided on something of a wait-and-see approach with the Budget, while kickstarting the repair of fiscal shortfalls through a couple of key changes including the freezing of personal income tax, capital gains tax and inheritance tax bands and allowances. The chancellor also announced a rise in corporation tax rates from April 2023, when the environment for business is anticipated to be on a surer footing.
Sunak’s announcement that he would freeze allowances and leave tax rates unchanged was welcome news for savers, and the ongoing impact of inflation on wages will see tax inflows increasing – win-win.
Where does this leave the upcoming budget?
At the Conservative party conference, the chancellor made clear some priorities – "with national debt at almost 100% of GDP, public finances need fixing", and he was clear on technology, innovation and development being key to sparking economic recovery and growth, with an emphasis on helping the development of small and medium-sized businesses.
In addition, the Office of Tax Simplification, an independent body, has over the past two or three years analysed inheritance tax, capital gains tax and the alignment of the tax year to a calendar year or March 31. The last review of aligning the tax year concluded that while there may be benefits, it is fraught with difficulty and cost.
This leaves outstanding recommendations from the inheritance tax and capital gains tax reviews.
The OTS report commissioned by the chancellor in July 2020 made a number of recommendations, including aligning capital gains tax rates and income tax rates, effectively doubling capital gains tax rates – but this tax produces only a modest overall income. So, the doubling of rates may not be the only change.
Another way to raise capital is not to increase tax rates but to reduce reliefs or allowances. The OTS made a recommendation to scale back the capital gains tax exemption to below £5,000, which would bring more taxpayers into the capital gains tax net, tax growth on wealth, and increase tax take. With online reporting of gains, this could be achieved with little extra work for HM Revenue & Customs.
Another area addressed both in the OTS, IHT, and CGT reports was the removal of the capital gains uplift in value on assets held at death that also benefitted from inheritance tax reliefs such as business reliefs. This would impact not only the business owners that benefit from this relief but all those involved in the financial advice market assisting clients with their IHT planning with the range of BR investment opportunities available.
One benefit of the exit from Europe is the increased freedom to arrange tax incentives for smaller and medium-sized businesses, both to promote business investment but also individual investment. With the Enterprise Investment Scheme set to end in 2025, and with the tax advantages afforded to R&D, Seed Enterprise Investment Scheme and Venture Capital Trust investment, there is an opportunity to overhaul the tax breaks and promote investment in entrepreneurial businesses to generate business growth, employment, profits and taxes.
This, together with the increased corporation tax rate that will be introduced from April 2023 and employer NICs being included in the NIC rates rise, demonstrates that businesses will be expected to contribute to fiscal recovery. Yet there is a fine balance between increasing the tax take and not stifling business growth.
Another perennial favourite on the pre-Budget watch-list is increasing tax take from pensions or reducing reliefs available. Again, the idea that those with more wealth, in this case earned, should bear a higher tax cost could be achieved by removing the higher rate tax relief on personal pension contributions.
The March Budget, billed as 'Tax Day', saw the launch of a number of tax consultations, including those aimed at businesses. Following this, we know that on October 27 we will see the introduction of a tax on residential property developers, designed to meet costs associated with cladding remediation.
Further consultations could be expected around wider tax reforms, but for now we will just have to sit tight and see what Sunak announces on Wednesday.
Gill Philpott is tax and trusts specialist at Ascot Lloyd
