Spring Budget 2021 – predictions
Spring Budget 2021 – predictions
“We have a responsibility, once the economy recovers, to return to a sustainable fiscal position” said the Chancellor of the Exchequer Rishi Sunak.
But, with the end of the Coronavirus pandemic nowhere in sight, and businesses still coming to terms with the effects of the Brexit deal, The Chancellor’s focus will be on supporting people and businesses rather than rebuilding the economy.
In fact, the Spring Budget 2021 was announced in a statement which read “The Budget will set out the next phase of the plan to tackle the virus and protect jobs” - which would somewhat mirror the approach taken last year to scrap the Autumn Budget 2020 in favour of a ‘Winter Economy Plan’ that focused on more immediate needs.
The Coronavirus Job Retention (“Furlough”) Scheme, after having been extended four times already, is expected to come to an end on 30 April 2021.
Business support schemes; such as, the cut in hospitality and tourism sector VAT to 5% and the property-based business rates holiday for retail, hospitality and leisure facilities, are due to cease on 31 March 2021.
The Chancellor is likely to extend these schemes until the third national lockdown ends, and then phase them out in line with the easing of industry-specific restrictions - so as to stem the threat of mass redundancy and to avoid creating a huge financial cliff edge for employers.
We could also see another unconventional method to stimulate consumer spending and support local businesses – such as last year’s popular ‘Eat Out to Help Out’ scheme.
After borrowing and spending billions on the Coronavirus response, an obvious response is to increase taxes so as to repay this borrowing – but at this stage, major tax rises (or even an overhaul of the system itself) could impede growth and obstruct the transition of the economy back to pre-pandemic levels.
Whilst the full impact of Coronavirus remains unknown, we predict less ‘radical’ tax changes to be more likely, and any major tax changes delayed until the Autumn Budget 2021 (or beyond).
The greatest tax yield is received from Income Tax, VAT and National Insurance contributions – though the Conservative Party (in their pre-pandemic manifesto) pledged not to increase these rates.
Increasing Corporation Tax (from 19% to as much as 24%) also appears unlikely. It is counter-intuitive to discourage those we need to invest in the UK, create jobs and generate economic growth in the coming months, by saddling them with additional costs to fund out of currently declining profits.
Speculation has been rife in professional adviser communities, and in conjunction with reports published by The Office of Tax Simplification and The Wealth Commission. We predict one or a combination of the following measures to still be ‘on the cards’:
- Alignment of Capital Gains Tax (‘CGT’) rates with that of Income Tax (though perhaps with relief for inflationary gains) – preventing the incentive for taxpayers to structure their income as gains.
- Loss of CGT uplift on death, particularly on those assets which qualify for spousal exemption or Business/Agricultural Relief for Inheritance Tax (‘IHT’) purposes – so as to catch ‘death-bed planning’ and encourage lifetime giving. The incentive for business owners and farmers delaying passing on assets, perhaps to the detriment of the business or farm, would be lost.
- Reducing the CGT annual exemption (currently £12,300 per individual per annum) to as low as £2,000. Though this would only have the effect of bringing those with modest wealth into charge.
- Curtailment of CGT reliefs – which is already a few years ‘in the making’. Letting Relief has been abolished for all scenarios where a lodger is not involved. The lifetime limit for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) was recently reduced from £10m to £1m, and the qualifying period increased from 1 to 2 years.
- The introduction of a one-off wealth tax – at a flat rate of 5% on individual wealth above £500,000, payable over five years, for everyone tax resident in the UK at that time to raise an estimated £260 billion.
- Increasing the ‘trading’ threshold for Business Property Relief to 80% trading in line with CGT reliefs, rather than the current “wholly or mainly” threshold which is generally taken as meaning more than 50%.
The above measures predominantly focus on CGT, which, although not being a significant revenue raiser, is the least controversial of the taxes since it targets those who are deemed to have broader shoulders to bear the financial burden.
That being said, too much of a radical overhaul could result in changes in taxpayer behaviour and lead to less, rather than more tax being paid. In the residential property sector, the consequences of holding onto second properties to avoid increased CGT bills are fewer house sales, less Stamp Duty Land Tax (‘SDLT’) receipts, and a cessation in growth for those businesses associated with moving house.
Stamp Duty Land Tax
The SDLT holiday has helped keep the housing market buoyant over the last year, and in order to maintain this momentum, there is much public pressure for it to be extended beyond 31 March 2021. Otherwise, we could witness house prices plummeting and purchasers withdrawing mid-transaction if they fail to complete in time.
With an extension already seemingly being ruled out, we predict a (more likely) tapered withdrawal for those purchases that have exchanged but not completed, and perhaps even for those agreed purchases that are already in the pipeline.
Online Sales Tax
There have been calls from businesses with a physical presence to address the disparity in taxes paid by them and those paid by purely online businesses (particularly technology giants, such as Amazon) – and the current digital sales tax does not go far enough.
With the forced temporary closure of the high street, traditional brick-and-mortar retailers have lost out on trade, and at a time when they are facing the re-introduction of costly property-based business rates from April (unless relief is extended). Shopping habits have had to adapt and with more of us shopping online, it is argued that online firms have “profited” from lockdown.
HM Treasury is already exploring options for the introduction of an ‘online sales tax’ on those businesses operating online – ideally, with some regard to physical retailers with online operations, and we predict some announcement to be made in the Budget.
A tax of up to 2% has been mooted by interested parties to help level the competitive playing field. There are ideas for receipts to be used to both help plug the current economic deficit and reduce future business rates paid by bricks-and-mortar retailers to curtail ‘the disappearing high street’. But, will this tax disproportionately affect smaller businesses with tighter margins and a lack of internal resources to deal with the new tax as efficiently as their larger competitors? And will this simply be another cost that is passed onto the consumer?
The Chancellor faces the difficult task of walking the fine line between restoring public finance whilst not discouraging economic activity – all with an eye to political acceptability in these uncertain times. We, like many commentators, will be interested to see how the Chancellor tackles this.
Author: Harman Bains
Harman is an associate at Charles Russell Speechlys. For further information, please contact Harman at Harman.Bains@crsblaw.com