With under a month ago to go what does the first Labour Chancellor to make a Budget speech in 14 years have up her sleeve? There’s no doubt she will walk a very difficult line between raising the funds the country needs and disincentivising investment and saving.
There has been a lot of speculation recently on Pensions. The legacy of Gorden Brown’s £5bn tax raid in 1997 is looming large. This time around we could well see a flat rate of tax relief on pension contributions ending the current higher rate advantage or measures being introduced to impose IHT on undrawn pension funds or on death. Similarly, NIC contributions could be imposed on employer pension contributions and the 25% tax free lump sum removed.
Another area in the spotlight is IHT which we see as ripe for reform given the higher effective rates middle earners often pay given the reliefs and exemptions the wealthiest can benefit from. We see changes to Business Relief and Agricultural Relief, Trusts, CGT probate uplift and as discussed pensions and inheritance.
It appears almost inevitable that along with a rise in IHT we will also see an increase in CGT despite frantic pre-Budget lobbying from advisors and in particular the private equity industry. While we don’t believe the new rate will match the level of income tax rates we are dealing with plenty of clients who are sensibly looking to crystalise any gains now. We believe any significant hike would actually be counter productive in raising revenues – something that is supported by HMRC’s own projections. Likewise, a ‘double death tax’ in the form of CGT and IHT.
Given the predictable back lash against the changes to the UK Non-Dom regime begun by the last Government and now apparently to be reinforced by the current one, the mood music from Whitehall has changed recently with a ‘softening’ of the stance from the Chancellor. Given the reaction from our clients these last three months we think this is sensible acknowledgement given the real concerns about the overall negative financial impact of over stringent legislation.
While on the face of it, committing to a 25% cap on the corporation tax rate for the lifetime of parliament provides some level of certainty and stability for business, we don’t think it sends a strong message to the outside world that the UK is an attractive place to invest. We believe moving the UK CT rate closer to the OECD’s global minimum tax rate of 15% and following the very successful example of our nearest neighbour Ireland would make a far bigger positive financial impact and could lead to a significant overall increase in the tax take – perhaps as much as £20 billion based on our research. And this would be in addition to all the ancillary benefits a revitalised UK economy could bring.
We look forward to receiving further details regarding the additional funding for the 5,000 additional tax officers to help close the tax gap of c£40bn. We hope this is a comprehensive long-term plan to support business, with the R&D regime challenges regarding untrained staff leading enquiries not being repeated. As businesses following the rules and HMRC guidance deserve support and certainty rather than a significant additional compliance burden.
The much maligned – from certain parts of the population – introduction of VAT on school fees is the one high profile move on indirect tax that we will see confirmed later this month, even if its implementation is delayed but we are certainly not ruling out other surprises.
Finally, although much political capital has been invested in Labour saying they won’t change rates of Income Tax, National Insurance or VAT, in our view that still leaves a fair amount of wriggle room on changing income tax personal allowances or removing the zero rated VAT treatment of certain items. We wouldn’t rule out a rabbit or several rabbits being pulled out of the hat on October 30th.
None of this is easy. And so given the challenges of any of the potential options the Chancellor has before her we do think she should change how UK debt is evaluated to allow her to borrow money for long-term investment, despite signing up to the rules of her predecessor.
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