What can UK businesses expect from the Autumn Budget?

Chancellor of the Exchequer Rishi Sunak will deliver his next Autumn Budget and Spending Review to the House of Commons on Wednesday 27 October – and businesses across the UK are wondering what changes and announcements they can expect to see.

Sunak is tasked with balancing the books after the devastating impact of the coronavirus pandemic in every industry, but is also said to be considering Prime Minister Boris Johnson’s alleged ‘urge to splurge’ – a plan that is said to be backed by the majority of Conservative MPs.

With issues such as Income, National Insurance, and Capital Gains Tax set to be hotly discussed in the Commons – alongside the many business taxes and Covid-19 payment schemes – firms in all sectors will be keeping an eye on developments. Also, with COP26 on the horizon, many are expecting green and sustainable plans to be announced.

So, with many areas of the UK economy set to be changed by the announcement, Business Leader has acquired the views and opinions from industry experts from across the country.

Tax increases must be carefully measured to avoid more business shocks

Any tax increases the Government might be planning in order to recoup some of the money spent dealing with the pandemic must be carefully measured to avoid further shocks for businesses as they continue to grapple with challenging trading conditions.

Some reports have suggested that Chancellor Rishi Sunak might be planning to increase the rate of Capital Gains Tax (CGT), possibly as high as 45%. According to the corporate tax team at Menzies LLP, this could stifle entrepreneurial business plans and make it harder for SMEs to invest in job creation and productivity improvements.

Richard Godmon, tax partner at accountancy firm, Menzies LLP, said: “While some tax increases are expected, any decision to increase CGT above 38%, the current rate of tax that applies to share dividends, could have a devastating effect on business activity. Entrepreneurs would no longer have any tax incentive to invest in building up the value of a business in order to realise gains at the point of sale. The flow of investment into entrepreneurial businesses could start to dry up as a result, undermining the fragile economic recovery.”

To avoid further shocks for business, Richard Godmon recommends a measured approach. He said: “Businesses are facing some major challenges at the moment, due to rising costs and ongoing material and skills shortages, and the pandemic is continuing to cause disruption in some parts of the world too. Further shocks for businesses must be avoided and any tax increases should be phased to minimise any collateral damage for the economy.”

With the 1.25% increase in Employer NICs due to take effect in April 2022 and Corporation Tax set to rise from the current rate of 19%, to 25% in April 2023, it is clear that the tax landscape for businesses is getting much tougher for all.

Richard Godmon comments: “For SMEs in particular, as headline rates of Corporation Tax and Employer NICs start to increase, it becomes even more important to manage inflationary pressures on the cost base carefully, to remain viable.”

The Chancellor should also consider doing more to encourage business investment in innovation by exploring ways to enhance R&D tax relief. With a review currently underway, it is possible that the Chancellor might consider removing the separate schemes that apply to SMEs and larger companies, in favour of a single one, for all businesses.

Godmon concludes: “At a time when investment in innovation is a key focus for the Government as the economy rebounds, R&D tax relief has a major role to play in encouraging businesses of all sizes to invest in technologies, which could give them a competitive edge. Merging the scheme could really help, potentially making it easier to access for businesses of all sizes.”

What tax measures can we expect to see?

Erika Jupe, Partner at international law firm Osborne Clarke spoke to Business Leader about the expected changed to UK tax following the Autumn Budget.

With the country slowly recovering from the fallout of the pandemic and the government needing to reduce the massive deficit, next week’s autumn Budget will need to strike a balance between tax rises and stability.

The Budget will take place on Wednesday, 27th October and the government has already announced some forthcoming tax rises: the rise in corporation tax to 25 per cent with effect from 1st April 2023 (announced at the spring Budget); the recently announced increase in the national insurance contributions (NICs) rate; and the introduction of the new Health and Social Care Levy.

Capital taxes

The spring Budget did not increase the rates of Capital Gains Tax (CGT), as many thought it might. While the prospect of a rate increase cannot be ruled out at this Budget, some consider it is less likely now: given the recently announced NICs rise and the view that encouraging investment in business and supporting entrepreneurial activity will be crucial for the UK’s recovery.

There are, however, other options available to the chancellor should he wish to increase CGT revenues: scrapping or limiting some of the CGT exemptions and reliefs such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). The government has yet to respond to the two reports from the Office of Tax Simplification (OTS) in November 2020 and May 2021 on CGT simplification, so it is possible that the government may make some announcements on improvements or changes to CGT.

Another potential target for change or reform may be inheritance tax (IHT) – with the government still to respond to the OTS’s second report on IHT (published in July 2019). The Chancellor may look towards Business Property Relief, which has been little mentioned in recent times but remains very generous (and was raised by the OTS in its report). Changes around the edges of the complicated IHT rules may yield some revenue, even if the headline rate is left untouched.

Employment taxes

Despite the manifesto promise of the triple tax lock (not to increase income tax, VAT or national insurance), on 7th September the government announced tax increases to raise £12 billion a year to be spent on the NHS and social care across the UK. NICs will increase by 1.25 per cent for employees, employers and the self-employed for one year only from April next year. From April 2023, a new ringfenced Health and Social Care Levy of 1.25 per cent will be introduced (and NICs rates will revert back to current levels).

It is possible that we may see some announcements on employee share schemes, highlighting the valuable role such plans can play in supporting the economic recovery by enabling companies to recruit and retain employees. A call for evidence on whether the Enterprise Management Incentive scheme should be extended to include more companies closed in May 2021, and we may see the government’s response to that consultation.

Pensions tax

As part of the announcements made on 7th September, the government also announced (breaking another of the manifesto promises) a one-year suspension of the triple lock on UK state pensions. It is also possible that other changes in the pensions arena could be made – for example, removing or lowering the higher rate of relief or reducing the lifetime allowance.

Funds

The government has been looking closely at the UK funds regime to enhance the UK’s attractiveness as a location for investment funds and their management.

Although we are still awaiting the launch of a review of the VAT charged on fund management fees and the government’s response to the call for input on the UK funds regime, we know that this year’s Finance Bill will make two positive changes to the UK funds landscape. The Finance Bill will introduce (with effect from April 2022) the new taxation regime for asset holding companies in alternative fund structures and will also relax some of the rules relating to the taxation of Real Estate Investment Vehicles.

Business investment and green initiatives

To support the economy’s recovery, the Chancellor may use this Budget to encourage investment in business – especially in areas in which the UK is no longer restricted by EU rules: for example, he could increase tax reliefs available through the Enterprise Investment Scheme or Seed Enterprise Investment Scheme.

The Chancellor may also want to bolster the government’s green agenda by introducing further investment or incentives for electric vehicles and green homes. He may look at improving research and development (R&D) tax relief for green technology. We are still awaiting a response to the consultation which closed in June on improving the R&D tax relief scheme which could see further improvements in R&D investment.

With the COP26 climate change summit taking place in Glasgow next month, the time would seem right for some green tax announcements – that were so lacking from the spring Budget.

Real estate taxes

This year’s Finance Bill will include provisions for the introduction of the Residential Property Developer Tax (RPDT) which will apply from 1st April 2022. The legislation aims to ensure that the largest developers make a fair contribution to help fund the government’s cladding remediation costs. As yet the rate of the RPDT and the annual profits allowance (where the tax will not apply) is unknown, but will be confirmed in the Budget.

We may see the final report setting out conclusions from the fundamental review of business rates that the government said would be published in autumn 2021 (an interim report having been published in March 2021). One of the alternatives to business rates raised in that call for evidence was the introduction of an online sales tax on companies.

While this may need further consideration and would have to be looked against the backdrop of the OECD agreement on the taxation of the digital economy and the UK’s own limited digital sales tax, the Chancellor may make some announcement along these lines.

Tax administration

This year’s Finance Bill will include the proposals (deferred from last year) requiring large businesses to notify HMRC of uncertain tax positions that will take effect for tax returns filed after 6th April 2022, meaning that corporation tax positions being taken today fall within the new regime.

We may also see some announcement regarding the direction of travel for the UK’s Mandatory Disclosure Rules. Following the reduced scope of DAC6 in the UK from 1st January this year, HMRC said it will “in the coming year” consult on and implement the OECD’s Mandatory Disclosure Rules as soon as practicable, to replace DAC6. Nothing came out following the spring Budget, so can we expect an announcement?

VAT

We are not expecting any major announcements around VAT. There has been some lobbying from the hospitality sector that the temporary reduced VAT rate of 12.5 per cent for hospitality, holiday accommodation and attractions (which applies from 1st October 2021 and ends on 31st March 2022) should be extended beyond next March to give those industries more time to get back on their feet.

Despite the tax rises already announced, the Chancellor still has a mountain to climb to reduce the massive deficit caused by the Covid-19 crisis. While wanting to maintain taxpayer confidence and increase growth, it is likely that this Budget will include measures to clawback some of that deficit.

While we expect the fiscal event program to get back to normal following the past extraordinary 18 months – so that we have one (autumn) budget a year (followed by a spring statement) – we suspect that headline-grabbing tax rises may be missing at this Budget and the devil is likely to be in the detail of the tax announcements. With the Chancellor announcing “tax rises” at the Conservative party conference, it is likely that we will see a number of tax rises over the next few Budgets.

A chance to bridge the digital skills gap?

Earlier this month, Boris Johnson gave a speech at the Conservative Party Conference where he acknowledged the huge skills gap and pledged to create a ‘high wage, high skilled economy’ – but there are many questions being asked about how they can actually achieve this.

With this in mind, Tony Lysak, CEO of The Software Institute with over 25 years of experience working in the software industry, and an avid commentator on the UK’s digital skills gap, shares his thoughts on the challenge ahead.

Tony believes the budget will be critical to the future of the tech industry. While private investment into the industry is rising, he is calling for the Chancellor to introduce creative reforms to ensure the private and public sectors can overcome the challenges posed by the widening digital skills gap. He can also detail the specific measures he would like to see in place to ensure the UK becomes a hub for tech innovation post-pandemic.

He comments: “At last week’s conference, Boris Johnson addressed party members with a speech peppered with jokes, but light on new policy. Whilst he did acknowledge the huge skills gap facing the country, his pledge to create a “high-wage, high-skilled economy” needs to be taken with a pinch of salt. Simply put, the government has failed to properly understand the fundamentals of the skills gap. What’s also concerning is the lack of effective initiatives to see his pledge through.

“What the government is failing to understand is that the skills gap will always be an ever-present challenge. This is due to the simple fact that technology is constantly evolving. And with many businesses hurrying through digital transformation strategies as a result of the pandemic, the need for highly skilled talent is constantly rising.

“We know that London corporations are being adversely affected by skilled labour shortages – according to the Institute of Directors, 7 in 10 executives admit that their company has been affected by market shortages and in desperate need of new talent.

“The top firms are calling out for the right talent so that they can take advantage of the latest software and technology, but without support and specialisation, even the brightest graduates are being left behind. Companies are trying to look ahead and identify upcoming technological trends so that they can upskill their workforce and meet future demands. The reality is that they can only do so much by themselves.

“To date, companies have been left to tackle the digital skills gap problem themselves – the common strategy employed by firms focuses solely on the training and recruitment. Yes, these elements all play an important part in overcoming the current gap but the only way to provide a sustainable solution and to truly address the scarcity of specialist tech skills, is for the Government to step in and collaborate with the private sector.

“The government’s initiatives to date have consisted of digital skills camps, which can only be deemed pointless and generic given that these programmes teach the most basic of digital skills, failing to upskill and specialise talent, causing the gap to widen. Instead of ticking boxes, my recommendation is simple – I want senior public officials to engage with the private sector; namely, the consultancies and vendors who have first-hand experience of the digital skills gap. This is the only way the government can ensure they are investing in the right areas.

“The point is that there will always be a digital skills gap. Rather than promising to close the void completely, the government must listen to vendors with first-hand experience of the digital skills shortage and collaborate with the private sector to identify where the gap is and sustainably manage the challenges it poses. Ultimately, failing to address the digital skills gap will not only hinder the UK’s post-pandemic recovery but also put the country at risk of being outpaced by competing markets.”

What might impact businesses the most?

Ahead of the Autumn 2021 Budget, solicitor Stephen Newman from Yorkshire-based Ramsdens Solicitors has provided commentary around what he’s expecting, what could impact businesses and his predictions on what businesses need to know/prepare for.

He said: “The level of activity in the mergers and acquisitions’ market suggests that the UK economy, if not buoyant, is recovering from the enforced idleness of the last 20 months and is, indeed, attracting investment from mainland Europe and USA. The Government has borrowed a lot of money that needs to be repaid. Businesses should not expect the overall tax take to go down; therefore, in this year’s Budget, we already know that it will become more expensive, in particular, to employ people.

“Residential developers are also facing a new tax to ensure that large developers make a fair contribution to the Government’s cladding remediation costs. There is a suspicion, however, that the surge in the economy this year is fueled in part by pent-up demand and it is difficult to assess how robust (or otherwise) the UK economy presently is.

“It would be fair to say that UK businesses are facing (and adapting) to a number of challenges at present as we learn to live with coronavirus, and I think that the Chancellor will be reluctant to make many more changes to UK tax rates other than those that have already been announced. I do think that the basic rate of capital gains tax will rise, perhaps to 30%, but he may elect to retain business asset disposal relief in its current form with a view to providing some encouragement to entrepreneurs.”

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