In the final Autumn Statement before next year’s election, what can we expect in terms of tax giveaways?
The challenge facing the chancellor is that anyone promising post-election tax giveaways is going to find it very difficult to live up to their promises.
The harsh reality is that whichever party wins the May 2015 election, tough new austerity measures will be necessary. With disappointing tax receipts and lower than expected public spending efficiencies, the IFS has estimated that the government will have to find an extra £45bn a year in tax rises and spending cuts by 2017/18 to meet its own forecasts.
In a nutshell, any tax giveaways which benefit some will have to be paid for by tax increases for others, by cuts in services or by increased borrowings.
So who are going to be the main winners and losers?
We’ve recently seen all the main parties creating caricature figures – ‘bogeymen’ – whom they propose to tax heavily in an effort to drum up votes in the May 2015 general election. Bankers, owners of valuable property, non-residents and immigrant workers have all come under the spotlight. This vilification of certain groups in society has proved particularly divisive, so I’m hopeful that the chancellor will adopt a more inclusive and balanced approach to the UK tax system.
What will be the main underlying themes of this year’s Autumn Statement?
The chancellor will, no doubt, wish to address some of the unanswered questions around his plans to liberalise pensions. The proposed rules have proved to be sketchy in the extreme and raised great uncertainty among individuals, pension fund trustees and investors. Whether those answers result in an even higher tax yield won’t be known until we see the Treasury Red Book on 3 December.
Undoubtedly, the attack on personal and corporate tax avoidance will continue, both via UK-specific initiatives and also as part of the broader changes being developed by the OECD. Recent calls for HMRC to tackle tax avoidance and evasion both harder and faster are sure to be reflected in new powers in the Autumn Statement.
Although we’ve recently seen the government retreating slightly over its proposals for the direct recovery of debts, we can still expect to see moves to increase the department’s civil powers for tackling offshore tax evasion, the introduction of a strict criminal liability power for offshore tax irregularities, a strengthening of the disclosure of tax avoidance schemes (DOTAS) and VAT disclosure regime (VADR) rules, and specific targeted measures to further reduce the use of aggressive tax avoidance schemes.
And the most likely headline-grabbing measure?
We wouldn’t be surprised if the chancellor announced a reduced VAT rate for restaurant and catering, hotel accommodation and admissions to amusement parks, concerts and other cultural events.
One newspaper has been running a very high profile campaign in favour of a reduced VAT rate for the tourism sector. A VAT ‘giveaway’ such as this would play very well with its readers (among others), relieve some of the pressure from the arts lobby and could help to lessen the impact of any future removal of VAT zero and reduced rates.
What can we expect in terms of personal taxation?
We may see moves towards restricting non-UK residents’ ability to claim the UK personal allowance. This could give rise to significant complexity, but it may prove popular in the run up to the forthcoming general election.
David Cameron has also hinted that he would like to raise the inheritance tax threshold, so the chancellor could announce a rise in the IHT nil rate band from £325,000 per person to £1m. This could well be a vote-winner from middle England.
Less popular perhaps might be the introduction of a lifetime cap over the total amount that can be invested in ISAs by an individual. This was mooted prior to the 2013 Autumn Statement but could rear its head again.
Finally, we may see some changes to the way tax reliefs apply to pensions contributions. While the annual allowance of £40,000 per year and the lifetime allowance of £1.25m are unlikely to change, tax relief on pensions contributions could either be set at a single rate, or restricted to a maximum rate, rather than continuing to allow tax relief on contributions at the individual’s highest marginal rate of tax.
And what about property taxes?
We are predicting that there will be a comprehensive review of the operation of main residence relief (MRR). MRR is probably the single most valuable relief in the tax system. While there have been piecemeal changes to MRR in recent years, the government could tighten up the rules, for example by establishing a minimum occupation period before a home is accepted as a main residence or requiring that the exemption is only available if the proceeds are invested into a new residence.
Should businesses be worried?
The chancellor will be keen to ensure that there is a continuing low corporate tax environment with favourable reliefs available to support the economic recovery. Where we may see some movement is in the annual investment allowance of £500,000, which is due to expire on 31 December 2015 when it reverts to £25,000. I would not be surprised if this were to be extended for another year or even longer. We could also see a tightening of the rules for entrepreneurs’ relief to prevent abuse.
