Come the Spring Budget, all eyes will be on Sunak’s recovery plan. But how much room for manoeuvre will he have?
In theory, the ‘big three’ taxes – income tax, national insurance, and VAT – should be his most powerful levers, as they make up two thirds of the government’s tax take. But the Conservative Party ruled out increasing any of these in their election manifesto pledge.
Two areas that have attracted some media speculation are:
Outside of the ‘big three’, Sunak’s other main options are CGT and the taxation of assets more widely, taxes on corporate income and an increased focus on green taxes such as taxing carbon emissions. Whilst there’s no dispute that business rates need an overhaul, any reform is unlikely to present short-term opportunities to raise additional revenues given the impact the pandemic is having on the main ratepayers.
The government published a consultation last year on the introduction of a carbon emissions tax to replace the UK’s membership of the EU emissions trading scheme following Brexit. The measure only covers around a third of UK emissions and the consultation noted that ‘to deliver on our net zero commitment by 2050, the carbon emissions tax would need to evolve’. Of course, a fully successful carbon emissions tax should lead to no increased tax take, but given the timeframe involved and the scale of the decarbonisation challenge it could raise revenue in the period in which public borrowing levels will need to be reduced.
Asset taxation is a tough one to call. The Wealth Tax Commission concluded just before Christmas that the UK would benefit from a one-off wealth tax on all assets. These are not government proposals and the report is put forward in answer to a question about how a wealth tax could work, rather than addressing the question ‘should there be one?’, but the analysis does arrive during the backdrop of a government commissioned review of capital taxes by the Office for Tax Simplification. Whilst raising wealth taxes and land taxes isn’t natural Conservative policy, the potential revenue raising capability that the paper quotes will be difficult for politicians to completely ignore.
CGT, by contrast, may be an easier target given the current disparity between its rate compared to that for income tax. I think we can expect an increase in CGT rates, and a reduction in the number of reliefs available. The question is when: is it too soon to take this step without damaging economic recovery?
Also, could the Treasury look to protect the reliefs for the entrepreneurship that it hopes will lead to enhanced growth by maintaining reliefs related to business activities while increasing rates for disposals of more passive forms of ownership?
Vicki Heard, KPMG
To introduce tax rises in the next Budget would be too much too soon, particularly when many businesses and individuals are still struggling.
Corporation tax rises are convenient political headlines, but more often than not they end up causing more pain than gain. At a time like this, it would be far more sensible to introduce a temporary loss carryback to pre-covid years. That way, businesses can obtain tax relief when they need it, and also become a potential source of tax revenue for the government at a later stage once they become profitable again.
While aligning the CGT rate with that of income tax would simplify matters by removing the need for many anti-avoidance rules, it could also be seen as turning its back on small businesses and the genuine entrepreneurship that goes into them were the government to introduce such a move. It could also have knock-on effects for commonly-used management incentives (such as EMI schemes), as well as the private equity industry, which already has a higher rate of CGT for carried interest (28%) than the standard rate (20%).
Given the current state of the economy, it would make more sense at this stage to review existing exemptions and reliefs across the board to ensure that they are being appropriately targeted. Revenue gains from this exercise, if any, could (for example) go towards supporting those who missed out on CJRS and SEISS grants (such as owners of small businesses) and a temporary loss carryback.’
Sarah Gabbai, McDermott Will & Emery
Among the Budget rumours is a suggestion that the rate of corporation tax could rise from 19% to as high a rate as 23%, which would raise almost £14bn a year for the Treasury.
According to some reports, Sunak thinks a corporation tax rate of up to 23% is reasonable, given that the OECD’s average rate for developed nations is 23.5%.
However, any increase in the rate is going to be a difficult sell at present, especially when businesses are still reeling from the combined pressures of the pandemic and Brexit.
When announcing the Budget date last year, the chancellor insisted that he would focus on measures to protect jobs and businesses. A sudden hike in corporation tax would seem to go against this pledge.
Of course, the counter-argument is that such a tax would only affect profitable businesses. But this argument misses the point that many companies will need time to recover from recent economic shocks and may be saddled with new debt, despite reporting a profit.
Raising rates by up to 23%, as has been suggested, could entirely scupper the recovery of some businesses. And for those with greater profits, it will reduce their ability to invest in new equipment, infrastructure and people, at a time when they are likely to need it the most.
Additional corporation tax bills will also reduce a company’s ability to pay dividends. For many businesses, this will reduce their ability to seek outside investment from shareholders, who may be less willing to invest their money into a business with a lower chance of returning dividend payments.
The chancellor must also consider, that for many owner-managed businesses, government support for company directors has been scant. Typically, owner-managers have extracted a low salary under PAYE and higher dividends, to ensure that their remuneration was tax efficient. Unfortunately, this meant that they were unable to take advantage of furlough payments in any meaningful way. Any increase in corporation tax is likely to be poorly received by SME businesses, which may have returned to profit but are in a pretty fragile state.
Following Brexit, the UK also has an opportunity to ensure that its economy, labour market and tax system, is attractive for external investment and job creation on the world stage. Low corporate tax rates are one means of attracting inward investment, and a sudden increase in corporation tax is likely to do little to settle post-Brexit nerves amongst the international business community.
Whilst pandemic support measures undoubtedly need to be paid for, we are still some way from emerging from the economic shock caused by the pandemic. If a corporation tax increase is needed, it would be far better delayed until an economic recovery is well underway.
Rob Chedzoy, Milsted Langdon
Come the Spring Budget, all eyes will be on Sunak’s recovery plan. But how much room for manoeuvre will he have?
In theory, the ‘big three’ taxes – income tax, national insurance, and VAT – should be his most powerful levers, as they make up two thirds of the government’s tax take. But the Conservative Party ruled out increasing any of these in their election manifesto pledge.
Two areas that have attracted some media speculation are:
Outside of the ‘big three’, Sunak’s other main options are CGT and the taxation of assets more widely, taxes on corporate income and an increased focus on green taxes such as taxing carbon emissions. Whilst there’s no dispute that business rates need an overhaul, any reform is unlikely to present short-term opportunities to raise additional revenues given the impact the pandemic is having on the main ratepayers.
The government published a consultation last year on the introduction of a carbon emissions tax to replace the UK’s membership of the EU emissions trading scheme following Brexit. The measure only covers around a third of UK emissions and the consultation noted that ‘to deliver on our net zero commitment by 2050, the carbon emissions tax would need to evolve’. Of course, a fully successful carbon emissions tax should lead to no increased tax take, but given the timeframe involved and the scale of the decarbonisation challenge it could raise revenue in the period in which public borrowing levels will need to be reduced.
Asset taxation is a tough one to call. The Wealth Tax Commission concluded just before Christmas that the UK would benefit from a one-off wealth tax on all assets. These are not government proposals and the report is put forward in answer to a question about how a wealth tax could work, rather than addressing the question ‘should there be one?’, but the analysis does arrive during the backdrop of a government commissioned review of capital taxes by the Office for Tax Simplification. Whilst raising wealth taxes and land taxes isn’t natural Conservative policy, the potential revenue raising capability that the paper quotes will be difficult for politicians to completely ignore.
CGT, by contrast, may be an easier target given the current disparity between its rate compared to that for income tax. I think we can expect an increase in CGT rates, and a reduction in the number of reliefs available. The question is when: is it too soon to take this step without damaging economic recovery?
Also, could the Treasury look to protect the reliefs for the entrepreneurship that it hopes will lead to enhanced growth by maintaining reliefs related to business activities while increasing rates for disposals of more passive forms of ownership?
Vicki Heard, KPMG
To introduce tax rises in the next Budget would be too much too soon, particularly when many businesses and individuals are still struggling.
Corporation tax rises are convenient political headlines, but more often than not they end up causing more pain than gain. At a time like this, it would be far more sensible to introduce a temporary loss carryback to pre-covid years. That way, businesses can obtain tax relief when they need it, and also become a potential source of tax revenue for the government at a later stage once they become profitable again.
While aligning the CGT rate with that of income tax would simplify matters by removing the need for many anti-avoidance rules, it could also be seen as turning its back on small businesses and the genuine entrepreneurship that goes into them were the government to introduce such a move. It could also have knock-on effects for commonly-used management incentives (such as EMI schemes), as well as the private equity industry, which already has a higher rate of CGT for carried interest (28%) than the standard rate (20%).
Given the current state of the economy, it would make more sense at this stage to review existing exemptions and reliefs across the board to ensure that they are being appropriately targeted. Revenue gains from this exercise, if any, could (for example) go towards supporting those who missed out on CJRS and SEISS grants (such as owners of small businesses) and a temporary loss carryback.’
Sarah Gabbai, McDermott Will & Emery
Among the Budget rumours is a suggestion that the rate of corporation tax could rise from 19% to as high a rate as 23%, which would raise almost £14bn a year for the Treasury.
According to some reports, Sunak thinks a corporation tax rate of up to 23% is reasonable, given that the OECD’s average rate for developed nations is 23.5%.
However, any increase in the rate is going to be a difficult sell at present, especially when businesses are still reeling from the combined pressures of the pandemic and Brexit.
When announcing the Budget date last year, the chancellor insisted that he would focus on measures to protect jobs and businesses. A sudden hike in corporation tax would seem to go against this pledge.
Of course, the counter-argument is that such a tax would only affect profitable businesses. But this argument misses the point that many companies will need time to recover from recent economic shocks and may be saddled with new debt, despite reporting a profit.
Raising rates by up to 23%, as has been suggested, could entirely scupper the recovery of some businesses. And for those with greater profits, it will reduce their ability to invest in new equipment, infrastructure and people, at a time when they are likely to need it the most.
Additional corporation tax bills will also reduce a company’s ability to pay dividends. For many businesses, this will reduce their ability to seek outside investment from shareholders, who may be less willing to invest their money into a business with a lower chance of returning dividend payments.
The chancellor must also consider, that for many owner-managed businesses, government support for company directors has been scant. Typically, owner-managers have extracted a low salary under PAYE and higher dividends, to ensure that their remuneration was tax efficient. Unfortunately, this meant that they were unable to take advantage of furlough payments in any meaningful way. Any increase in corporation tax is likely to be poorly received by SME businesses, which may have returned to profit but are in a pretty fragile state.
Following Brexit, the UK also has an opportunity to ensure that its economy, labour market and tax system, is attractive for external investment and job creation on the world stage. Low corporate tax rates are one means of attracting inward investment, and a sudden increase in corporation tax is likely to do little to settle post-Brexit nerves amongst the international business community.
Whilst pandemic support measures undoubtedly need to be paid for, we are still some way from emerging from the economic shock caused by the pandemic. If a corporation tax increase is needed, it would be far better delayed until an economic recovery is well underway.
Rob Chedzoy, Milsted Langdon
