Beyond the balance sheet

Predictions for the Autumn Budget 2021

Chris Thompson 01/10/2021 10 minute read

Chris Thompson and Tom Biggs ACA CTA, look at the options open to the Chancellor in the upcoming Autumn Budget.

There's going to be a second Budget in 2021!

Despite the Chancellor's declarations and policies back in March 2021, it was announced there will be another statement this Autumn. 

So, what can we expect this time round, so soon after the last one?

Is there anything left for the government to cover, and if so, what should you be looking out for this time?  

In general, tax changes tend to be introduced at the beginning of the tax year, from 6 April. This means the Budget statement is where the government sets out future taxation rates and policy plans. Budgets can also be used for indirect tax increases, such as removing or reducing reliefs.

The key is therefore to look at when announcements will be enacted, thereby creating a potential timeline to gauge the impact on your income, finances, and wealth. This may also provide some leeway for planning to offset the impact of potential new, or altered tax legislation.   

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In this post we will look at:

When is the Autumn Budget?

The Autumn Budget, alongside a spending review, will take place on 27 October 2021. Arguably, a significant budget announcement was already made, prior to the statement, in the health and social care levy.

The big picture - UK finances

To understand the potential theme of the budget, it helps to look first at the state of the UK's finances. The economic recovery gained pace over the Summer and this was reflected in better tax receipts for the Treasury, that were above OBR projections. If this trend continues then it could ease some of the pressures on the Chancellor to explore further ways to improve the UK tax take.

However, there are a combination of factors that could complicate matters. Wages are rising due to a lack of candidates to fill vacancies, supply chains remain disrupted due to a lack of lorry drivers, and energy prices are going up. This has contributed to an already uncertain environment from the pandemic in which SME firms can't be sure of demand.

Many organisations relied on the furlough scheme during the lockdowns to stay in business. However, this is due to close at the end of September. Consequently the Guardian has projected that 1 in 16 UK firms could face closure as a result. Should this happen then unemployment may rise by up to 1 million. The outcome could be the government spend more on benefits, with a corresponding negative impact on tax revenues, should the recovery take a hit through less consumer spending.

Which taxes could be impacted?

1. The reform of basis periods

The 'reform' of basis periods for the self-employed is being communicated as a form of simplification. The idea being this will help sole-traders and partnerships with the shift to Making Tax Digital (MTD) quarterly reporting commencing in April 2023. However, the reality is it will speed up revenue for the Exchequer in 2023 and over the next 5 years as well.

This would broadly be a welcome reform as under the current basis period rules, unincorporated businesses are effectively taxed twice on taxable profits in the first year of trading unless their accounts are coterminous (aligned) with the tax year. This is referred to as overlap profits and relief for overlap profits is generally not given until the business ceases to trade.

The proposed reform would remove this basis of taxation and replace it with a ‘tax year basis’ which would mean that only taxable profits arising in a given tax year are taxed as part of that particular year.

At a glance this all looks positive, however it does come with some drawbacks in that it may mean that provisional figures have to be used within tax returns due to a need to apportion results which has the knock on effect of having to then submit amended tax returns.

2. Inheritance Tax

Inheritance Tax (IHT) brought in a record £571m for the Treasury in July 2021. The Chancellor may look at simplifying many of the complex IHT rules, reducing exemptions, and potentially cutting reliefs. This means IHT could be set to rise. Such adjustments may not change the tax rates but would likely improve the amount the government collects from inheritance.

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Politically it could be popular too, as IHT still only impacts on a small number of tax payers and is seen as taxing wealth. That said, the freezing of the tax free allowance (the nil rate band) to 2025/26, in the last budget, means more estates are likely to be exposed to IHT anyway, assuming house prices and asset values continue in an upward trajectory. 

3. Capital Gains Tax

For some time there has been speculation that Capital Gains Tax (CGT) will increase. How might the Chancellor do this? Potentially by aligning CGT rates with those of income tax. Similar to IHT, it's likely to only impact a small number of people and typically, capital gains are made from high value items. Such a move also prevents people from turning income into capital to pay a lower rate of tax.

How much such a move might boost the Treasury's coffers by, is hard to say. That said, the timing of when the alignment would come into force could boost tax revenue from CGT significantly. If say, the CGT rise would commence in April 2023, then many people may sell their assets to ensure a lower tax exposure in the 2022/23 tax year. That could lead to a windfall for the government in the short term.

Another mooted option could be to remove the CGT uplift on death. Currently, if someone holds an asset up to the point of death, if there's an underlying gain in the asset value, this is effectively wiped at the point of death. This means the person who inherits the asset gets an uplift in the base cost to the market value at that point in time.

Withdrawing that uplift would result in the effective application of CGT on death. If the person inheriting the asset were to go and dispose of it, then the CGT would be calculated on the gain based on the difference in the sale price compared to the purchase price paid by the benefactor, not the price at the time of inheritance. 

4. A carbon tax

The government is committed to making the country carbon neutral by 2050. With the UN Climate Change Summit taking place on 31 October 2021, the Chancellor has a potential opportunity to show how the government is progressing the UK economy towards carbon neutrality. This could mean a return to fuel duty increases in the future and car scrappage schemes.

Taxation has historically been used to control and alter behaviour. Therefore to encourage a greener future, another option could be some form of carbon tax. What form this might take remains to be seen however, it would likely have an impact on farming, food, drink, and the hospitality trade. The creation of food and drink, in particular, can be very carbon intensive meaning potential cost increases could be passed on to consumers.

5. Business rates

Will the Chancellor reform business rates? This is something that has been discussed for quite some time, how to make them fairer? However, there has been little change in recent years. The government’s Business Rates Review has been delayed by the pandemic. It's unlikely therefore that we will see much, if any, new policies.

Any incentives?

What might Rishi Sunak do to encourage the recovery and help boost the growth of SMEs?

The government, at the last budget, launched a review into R&D tax incentives. Much of this will focus on what constitutes R&D, if the schemes are fit for purpose, and what can be claimed. A possibility might therefore be announcements over higher rates of relief.

Another option could be to encourage investment in businesses. This could be done by enhancing the reliefs for investors that make use of the SEIS and EIS schemes.

A high tax environment and an enormous tax system

A key question for the Chancellor has to be, how much longer can the country keep running a budget deficit, currently standing at £304bn, and adding to the debt pile of £2.1trn. To add to this conundrum, Rishi Sunak is faced with the issue that the tax take already stands at a post war high. Are taxpayers willing to hand over any more?

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Already we have the freezing of the personal tax allowances from April 2022 which was announced in the Budget earlier in the year. This will raise considerable revenue due to fiscal drag, namely allowances not rising as wages and inflation go up mean more people go into higher tax bands resulting in greater tax revenue. Freezing other allowances and thresholds at a time of rising inflation could be a nice little earner for the Chancellor over the next few years.

The reality is the tax system is enormous, legislation amounting to over 10 million words spread across 21,000 pages. Adding to it over successive budgets by various Chancellors has simply made UK taxation ever more complicated. A huge, and elaborate tax book results in inequality as only those able to afford expensive advisors have the means to navigate the rules to achieve an optimal tax profile!

Perhaps what is really needed is route and branch reform, the aim being that of simplification in order to make the system fit for purpose in the digital age. Merging income tax with NICs, matching CGT to dividends tax rates, and an overhaul of property taxation might be a start, explains The Times. Will the Chancellor be brave enough to start that process this time round?

We live in hope, but very much doubt it!

The Autumn Budget 2021 predictions

This post was created on 01/10/2021.
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