What tax changes will we see in the Spring Budget?

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Ahead of the highly-anticipated Spring Budget, Business Leader got some predictions from industry experts on what changes in tax we could see introduced this afternoon.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

Desperate times have called for desperate measures and the huge emergency spending spree unleashed to help the UK cope with the pandemic led to the highest borrowing, relative to the size of the economy, since World War II.

With unemployment forecast to continue rising until at least the middle of the year, a huge number of jobs and businesses still mothballed and a Brexit hangover disrupting trade, the economy is still very fragile.

The FTSE 100 is struggling to regain highs reached at the beginning of January, when relief buoyed the market following the trade deal agreed with the EU.

With many businesses still on the floor, this is far from an ideal time to increase corporation taxes. Yet there is nervousness in the Treasury about the potentially increased costs of borrowing to fund emergency rescue packages. Yields on 10 year government bonds, like Gilts and US Treasuries are rising to levels not seen since last March in line with increased expectation of a stronger economic recovery and higher inflation.

So, the tricky tightrope walk begins, balancing the desire to recoup some of the emergency spending, and ensuring recovery isn’t hampered by a squeeze on companies’ bottom lines.  Any potential increase in corporation or capital gains taxes, should be part of a clearly thought out review, rather than a spate of salami slicing.

The roadmap out of lockdown has provided hope for some sectors worst hit by the crisis, including travel, leisure and hospitality, but recovery is still likely to be difficult with only a phased return to business as usual.

On the flipside of the coin, some businesses have thrived on the shift to digital sales and there is increasing clamour for a sliver of those profits to be redistributed.

While there is little public appetite for increases to personal taxes, the mooted tax on online marketplace sales would be politically more palatable and even a small slice of turnover could add up to a big pie of tax revenue. There are plenty of hungry mouths hoping for a share of that pudding. Not least, struggling independent retailers and local authorities who have been landed with the problem of reviving struggling town and city centres, stripped bare of many of the big names which used to dominate high streets.

With record savings expected to be unleashed once the economy does open up again, the cavalry does seem to be on the horizon. But before it arrives, there are likely to be many more casualties and calls on the chancellor to provide more than sticking plasters to save them.

Tracey Wright and Erika Jupe, Partners at Osborne Clarke 

An extension of tax support measures for business is possible but it is questionable whether now is the right time for tax rises to pay for the costs of the Covid-19 pandemic.

With the country still firmly in the grip of the Covid-19 pandemic, Wednesday’s Budget will have to balance the need for further spending to help businesses survive against the mounting deficit caused by the crisis.

We highlight some of the key tax issues we expect to be announced in the Chancellor’s Spring Budget, along with measures that we expect to be included in the Finance Bill 2021.

Capital taxes

There has been much speculation that the rates of Capital Gains Tax (CGT) could be increased. Our prediction is that a CGT rate increase is likely but it is questionable whether this Budget is the time to be raising the rate.

Aside from the possible rate change, the Chancellor has other options available to him should he wish to increase CGT revenues. These include scrapping or limiting some of the CGT exemptions and reliefs (such as Business Asset Disposal Relief – formerly Entrepreneurs’ Relief). However, the Chancellor will be mindful that encouraging investment in business and supporting entrepreneurial activity will be crucial for the recovery of the economy and to ensure the UK’s competitiveness on the international stage.

Although there are suggestions that the Chancellor has rejected the idea of a wealth tax, it is possible that he may look at changes to inheritance tax. Private client lawyers are keen to see whether the inheritance tax nil rate band will finally see an increase for inflation (having been frozen since 2009, while the Retail Price Index has increased by 40 per cent and house prices by 60 per cent). The latest freeze, announced in 2017, promised a return to normal service from April 2021.

Business Property Relief has been little mentioned in recent times but remains very generous and was raised by the Office of Tax Simplification in its second report (in 2019) on inheritance tax. We still await a government response and it is possible that the Chancellor might choose this as his opportunity to cut the relief down.

Corporation tax

The UK’s corporation tax rate of 19 per cent is the lowest in the G7 countries, leading many to call for an increase in the rate. Even a single point rate rise would raise around £3.4 billion for the Treasury, so with the current UK deficit we can expect the Chancellor to at least be considering a rate increase. However, he will have to weigh this against the need to support businesses through the pandemic so that the economy can grow when the country comes out the other side.

We expect the government to take forward its proposal to introduce a limit to prevent the abuse of Research and Development (R&D) tax relief for SMEs. The changes will limit the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300 per cent of its total PAYE and NICs liability for the period. This change has been widely trailed (its implementation already having been delayed). Draft legislation was published last November and we expect the cap will have effect for accounting periods beginning on or after 1st April 2021.

The Finance Bill is also expected to include some technical changes to the corporate interest restriction and the hybrid rules, draft legislation for these changes having been published in July and November last year.

Green agenda

Last November, the government set out a ten-point plan for a “green industrial revolution” covering clean energy, transport, nature and innovative technologies. The blueprint will help the UK meet its commitment to achieve net zero carbon dioxide emissions by 2050. The government has already made some tax announcements – such as the extension until 2025 of the 100 per cent first-year capital allowances for electric vehicles (which would have ended on 31 March 2021). With the COP26 climate change summit taking place in Glasgow in November this year, it would be no surprise if the chancellor announced new or improved tax reliefs for R&D or otherwise in relation to technologies which promote the government’s green agenda.

We can also expect the Finance Bill to include legislation to introduce the new plastic packaging tax (which will take effect from the following year, 1st April 2022). This follows a consultation on the policy design which closed last August. The rate of tax will be £200 per tonne of plastic packaging which does not contain at least 30 per cent recycled plastic. The levy is intended to encourage the use of recycled rather than new plastic within packaging and will apply to plastic packaging which has been manufactured in, or imported into, the UK.

Employment taxes

Over the past year, the government has tried to protect jobs during the pandemic with the introduction of the Coronavirus Job Retention Scheme (the CJRS). It is possible that due to the ongoing Covid-19 crisis, the CJRS – which was expected to end on 30th April 2021 – will be further extended into the summer.

For tax-advantaged enterprise management incentive (EMI) schemes, changes have already been made to ensure that an EMI option holder being placed on furlough under the CJRS will not trigger a “disqualifying event” such as to change the tax status of their options. Further amendments are to be made (in the Finance Bill 2021) to formally confirm that new EMI options may be granted to employees who are on furlough or working reduced hours due to the coronavirus emergency. These changes will apply for a limited period (from 19th March 2020 until 5th April 2021), although we anticipate that this period will be extended (particularly if the CJRS is extended).

The Chancellor commented at the beginning of the pandemic that it was harder to justify the “inconsistent contributions” between employment status. Aligning the NICs rate between the employed and self-employed would break the Conservative Party’s manifesto promise of the triple tax lock (not to increase income tax, VAT or National Insurance). However, the Chancellor could announce further reviews or consultations to examine the mismatches between employment and self-employment status.

Real estate taxes

We expect the Finance Bill will include the legislation (published in draft last July) to introduce a 2 per cent Stamp Duty Land Tax (SDLT) surcharge on purchases of residential property by non-residents. The increase will apply to transactions with an effective date on or after 1st April 2021. This measure, which has been widely trailed, is designed to curb inflated prices and to increase housing supply.

We also expect the Finance Bill to include some changes to the Construction Industry Scheme to tackle abuse of the rules (some draft legislation having been published in November). These changes are expected to take effect from 6th April 2021 although the detailed rules, which will be contained in regulations, have not yet been published. There has been some lobbying that the change should be pushed back by a year to give businesses more time to prepare.

The SDLT holiday for residential property which was put in place last July to stimulate momentum in the property market due to the pandemic is due to end on 31st March 2021. Recent data has shown that since the temporary relief was introduced, transactions have increased. While the government stated on 10th December that it does not plan to extend this relief, recent press coverage of delays in the conveyancing process for buyers may result in a change of heart and a short extension.

It is possible that the business rates holiday for those sectors particularly affected by the pandemic (retail, hospitality and leisure properties), which was due to end at the end of March 2021, may be extended.

We might also see the outcome of the call for evidence launched last July on the business rates system. One of the alternatives to business rates raised in that call for evidence was the introduction of an online sales tax on companies (which would run alongside the current digital sales tax). While this may need further consideration, the Chancellor may make some announcement as the government had originally proposed to set out preliminary conclusions to the call for evidence last autumn.

Tax administration

Although HMRC has deferred proposals for requiring large businesses to notify HMRC of uncertain tax positions until April 2022 (they were meant to take effect from April 2021), we expect the Finance Bill to include other anti-avoidance type measures. Draft legislation published last July provided for two such measures. One of these requires financial institutions to provide information to HMRC when requested about a specific taxpayer, without the need for approval from the independent tribunal. The other targets the promoters and enablers of tax avoidance schemes.

We also expect the Finance Bill to include legislation (which will have an effect on applications made from the following year, April 2022) to introduce a tax registration check linked to licence renewal processes for some public sector licences (such as taxi and mini cabs). This would make it more difficult to operate in the “hidden economy”, helping to level the playing field for compliant businesses.

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.

VAT

In line with the possible extension of other coronavirus support measures, we could see the extension of the temporary reduced rate of 5 per cent VAT for hospitality, holiday accommodation and attractions, which was introduced last July and was due to end on 31st March 2021.

Callum Campbell, CEO of enterprise commerce automation company, Linnworks

A potential online sales tax

For businesses, commerce is about selling wherever your customers are. That includes both high street and online. The idea that the two are siloed to begin with, and imposing a tax on one to offset the shift from the other, is stifling innovation. While there are retailers that have offset their in-store sales decline with successful growth online, there are also brands that started as online-only that have plans to open physical locations this year. The UK economy is very mature in terms of e-commerce, and investing in the future of commerce, holistically, is what will continue to move the industry forward.

Retailers and customers alike have made major adjustments as a result of the pandemic, most of which are becoming more permanent. In fact, a recent study conducted by Linnworks shows that 74 percent of shoppers intend to shop online moving forward because it is convenient. And, people aren’t just purchasing vanity items, they’ve turned to online solutions for necessities. An online sales tax will ultimately fall on consumers, and they shouldn’t be forced to either shop in-store or pay the price to continue utilizing solutions they’ve become accustomed to during a pandemic.

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