Against an ongoing backdrop of high inflation and current economic uncertainty, the Chancellor has been facing growing pressure from MPs, businesses and industry leaders for some time, to deliver on tax cuts and policies for both businesses and households.
However, with a stark warning from the IMF recently against tax cuts, and unfavourable analysis from the OBR and fiscal thinktanks, does the Chancellor have any room for manoeuvre for cutting taxes, and if so, in which areas?
One line of thinking is that productivity increases leading to higher GDP is the answer, and that lower taxes encourage this.
Our tax specialists look at potential tax cuts across business and personal taxes, where the challenges lie, and what the Chancellor may need to pull out of his hat for an election winning Budget!
Income Tax
There are many other areas of personal tax where the Chancellor is thought to be considering changes, such as raising the level at which people lose access to child benefits or removing limits on Lifetime ISAs. However, it can be hard for people to visualise just how these changes to marginal taxes and benefits will help them.
Instead, a cut to the headline rate of income tax is easier for people (and voters) to understand, hence making them more likely - a 2p cut to income tax, similar to the one made to National Insurance in the Autumn Statement, is one of the changes the Chancellor is rumoured to be considering. It would leave someone earning £35,000 a year with roughly £450 of extra income.
Stamp Duty Land Tax
A change to SDLT looks increasingly unlikely, given that the Chancellor has less room for fiscal manoeuvre than he hoped, but Stamp Duty Land Tax (SDLT) was the obvious candidate for cuts. A give away costs a fraction of potential reductions in other taxes.
The Chancellor should be conscious of sign-posting a future break in SDLT. All this will achieve in the short term is the deferral of completions, as buyers look to bank future savings. This would cause unintentional harm, at a time when sector finances are under duress.
We would hope to see more on the planning reforms introduced in the Autumn Statement. As with many policies, the headlines look good, but if local authorities don’t have the means to efficiently implement them, they are dead on announcement.
Read the full comment on potential cuts to SDLT here
Business Taxes
Following the decision in the Autumn Statement to make ‘full expensing’ on capital spending a permanent fixture, businesses will be watching closely to see what the Chancellor does next.
We already know that a single research and development tax relief regime comes in from April 2024, so we’re unlikely to see further changes there. Corporation Tax was raised to 25% last April for businesses with profits above £250,000, therefore further changes here are not foreseen, except potentially the introduction of some specific reliefs.
Capital Gains Tax and Carried Interest Rules
We are not expecting any changes to the carried interest rules in the Spring Budget. Whilst changes have been made to the carried interest rules under the current Government, there is likely to be a wholesale review should a Labour Government be elected later in the year. Official Labour Party documents refer to ‘closing tax loopholes for private equity fund managers’ and the Shadow Chancellor has stated that ‘private equity bosses say that their income is capital gains…we would close that loophole’.
Removing capital gains tax status from carried interest would increase the rate of tax payable from 28% to possibly 45% (plus NICs), if carry distributions are treated as income. In light of the potential changes to the UK tax treatment of carried interest, it is important for fund managers to take proactive steps to mitigate their tax risk including:
Reviewing the impact of any changes by modelling the potential difference in tax liability
Considering alternative structures for their investments.
We currently do not know how the abolition of carried interest would be implemented or whether transitional rules would apply but undoubtedly the removal of the current rules will have a significant impact on how funds are structured.
Read the full comment on the tax outlook in 2024 for Investment Fund Managers here
VAT Changes
One area where we may see action is VAT, where there continues to be more scope for changes following Brexit. Could we see simplification and easing of some VAT restrictions for businesses in certain sectors?
Raising the VAT registration threshold from its current £85,000 is potentially an easy win for the Chancellor, as it will encourage small businesses not to put the brakes on growth to avoid registering for VAT.
Here are two key changes which the Chancellor should consider as a means of easing the red tape for micro businesses, encouraging growth in that sector, and boosting a key sector for the UK economy.
- Substantially change the VAT registration requirements. In March 2023, the Office for Budget Responsibility published its thoughts on the consequences of the frozen VAT registration threshold of £85,000 per year, which has not changed since 2017/18. The OBR recognised the trend for businesses’ turnover to “bunch” below £85,000. By way of illustration, if a retailer’s turnover exceeds £85,000 and it cannot increase its prices to compensate for the additional 20% VAT, it will not make a penny in additional profit until its turnover exceeds £102,000. The turnover threshold is a cliff edge. A substantial increase to for example, £250,000 or the removal of the cliff edge, so that only turnover in excess of the threshold is taxed, would remove a tax driven disincentive to grow the business and thereby increase tax revenues.
- Reintroduce the reduced rate for hospitality and holiday businesses. The UK travel and hospitality sector competes for business with the EU and beyond. In many cases, its competitors in those markets benefit from a substantially reduced rate of VAT. By making the UK more competitive, we would see increased revenues with corresponding increases in tax revenues from the sector.
Inheritance Tax
The wholesale abolition of IHT would make headlines, but it would leave an annual gap of at least £6bn in the public purse, at a time when the International Monetary Fund (IMF) wouldn’t recommend the UK making such tax cuts. That’s not to say that IHT does not need modernising. In the 12 months to November 2023, the average house price in the UK was £285,000, which is not much less than the main NRB. Behind this average lie regional differences, so there will be taxpayers in parts of the country where the value of their home far exceeds this.
If we are to see reform of IHT rather than a complete abolition, one possibility is for a tightening of IHT Business Relief to fund IHT cuts for others. Business Relief is aimed at avoiding the need to break up businesses to pay IHT when the owner dies, one view being that this is better for overall economic prosperity and therefore of wider public benefit.
Read the full comment on reform to Inheritance Tax here
Freeze on Personal Allowance
There is a thought that personal allowances could be increased or the freeze on allowances until 2028 lifted. The standard personal tax allowance was £12,500 in April 2019 a mere £250 lower than the current allowance. Had it been raised in line with the consumer prices index it would now be approximately £15,000 since last April. Similarly, the higher rate tax threshold was £50,000 in April 2019 and would be over £60,000 after CPI increases today. This is of course dragging many taxpayers into the 40% tax rate bracket.
It’s fair to say the freezing of such limits is causing a significant fiscal drag and therefore some movement on these allowances would certainly help with the cost of living and put some money back in taxpayers’ pockets.
ISA Allowance Increase
April 2024 will see both capital gains exemption and dividend allowances halve to £3,000 and £500 respectively. This certainly will not help those with investments held outside tax-protected wrappers, such as ISA or Pensions.
We did see the Pension allowance increase to £60,000 last year and therefore an increase in the ISA limit (7 years since the last increase) would be timely to help shelter funds from income, capital gains and dividend taxation. Could we see an increase limit to £30,000 in the Spring Budget?
Increase of Child Benefit Threshold
Another policy idea where there were hopes for a change, but again may now be unlikely - The Chancellor may look to raise the £50,000 High Income Child Benefit earnings threshold. This of course would be popular with voters with young families. Introduced in 2013, the current threshold system is unpopular, as it means one person earning £60,000 doesn't receive any child benefit, but a household with two people each earning £50,000 would each get the full payment.
Currently, earnings between £50,000 and £60,000 require the recipient to repay a proportional amount of the child benefits back to HMRC until all the benefit has been repaid via self-assessment, once earnings reach £60,000 per annum. The Spring Budget could be an opportune time to make changes to this policy.
Inheritance Tax Reforms for Trusts & Estates
In HMRC’s Spring Budget 2023 red book (p4.35), they stated their intention to make changes to Inheritance Tax regulations to remove non-taxpaying trusts from reporting requirements.
This would be a welcome change for many trusts that, despite there being no IHT due on a chargeable event, are still required to submit a return because the value of their assets exceeds 80% of the available nil rate band.
We have not heard anything further on these proposals and the suggestions that the current government may be ‘scrapping’ IHT altogether may mean that these changes will not be forthcoming. This could mean a continued administrative burden for trustees and HMRC alike, where the settlement is not excepted from filing an IHT return but they have no IHT to pay.
It remains to be seen if reporting reforms have been considered further by HMRC and their outcomes, in the upcoming Spring Budget.
The Green Agenda
With the permanent introduction of Full Expensing for qualifying capital expenditure, the previous regime for 100% first year allowances on Energy efficient equipment is now largely redundant. This removes the incentive for companies to invest in greener, more energy efficient capex. It will be interesting to see if the government introduce new ‘green’ measures to re-incentivise companies in this way. One route could be the re-introduction of a ‘super deduction’ capital allowance providing greater than 100% tax relief, but specifically for energy efficient capital expenditure.
Employee Ownership Trusts
We expect the Treasury will clamp down on the sale of companies to Employee Owned Trusts in the Spring Budget, including banning offshore trusts and requiring former owners to give up control. Changes are needed to the scheme, including requiring employees’ involvement in decisions made by the trust. However, banning offshore trusts would lead to the double taxation rate of nearly 63% on the proceeds from any sale of a business in future owned by the trust.
To demonstrate, when the EOT ultimately sells the business to a third-party buyer, if it was UK resident, it would have capital gains tax to pay at 20% on pretty much the whole sale proceeds. Then, when the EOT’s trustees pay the net-of-tax proceeds on to the employees who are beneficiaries of the employee ownership trust, the employees will then need to pay income tax and national insurance contributions on the whole of the net proceeds paid to them at combined rates of up to 47 per cent, while the employer will additionally have an employer’s national insurance contributions bill of 13.8 per cent on the sums paid to the employee beneficiaries.
To prevent this double taxation, many companies setting up EOT’s have chosen to locate them outside the UK. Following a consultation in July 2023, if HMRC do introduce changes to the legislation which prevents an EOT being located outside the UK, we would also urge the government to look at measures to resolve the issue of double taxation.
Read the latest Spring Budget commentary from MHA
Read the latest Spring Budget commentary from MHA – visit our dedicated hub where we will be providing resources, advice and practical guidance on what any new tax measures could mean for you and your business, to help you prepare for and manage their impact.
