bannerImage.png

Beyond the balance sheet

The Budget 2021 - revealing what future UK tax rises could look like

Chris Thompson 02/3/2021 21 minute read

Chris Thompson talks to Tom Biggs ACA CTA about the upcoming Budget 2021 and the likelihood of tax rises.

COVID-19 has led to a lot of additional government spending to try and prop the economy up. UK public borrowing is projected to reach a post war record high of £350 billion for 2020/21. That in turn means our national debt is also rising. In response the Chancellor, Rishi Sunak, has made several statements about the need to mend the nation's finances.

The question is how will Sunak go about plugging the gap to reduce the budget deficit? His pronouncements suggest that as the economy opens up and recovers, the emphasis is likely to be on raising taxes. The question is which taxes could go up and when? Could it happen in the Budget on 3 March 2021?

We explore all of this in the video and transcription below, to provide you with a feel for the tax rises that might be coming and how to go about potentially planning for them.

Concerned about the Budget 2021 and future tax rises? Get in touch for tax  planning >

This transcript covers speculation on tax rises and/or changes that could happen in the following areas:

1. Capital Gains Tax

2. Inheritance Tax

3. Stamp Duty Land Tax

4. Corporation Tax

5. Dividend Tax

6. Online Sales Tax and Business Rates

7. Hospitality trade

8. A Carbon Tax

9. A Wealth Tax

10. A Property Tax

Chris Thompson:

Welcome to another episode of Beyond the Numbers and where before we were a podcast, we are still a podcast, but this time we are now also a vlogcast for our new season. So, we are into video as well which is wonderful and on this occasion we are focusing on the upcoming Budget 2021, next month. What is the Chancellor, Rishi Sunak, planning? To provide me with a bit of thought and analysis is one of our very own tax specialists, Tom Biggs.

I thought I'd start off with what do you think is the biggest outgoing in your lifetime, the single biggest outgoing item of expenditure in your world Tom?"

Tom Biggs:

Gut instinct it's got to be a house isn't it? I would have thought your house, your mortgage.

Chris:

That's what most people would answer and it's actually the second one, but the biggest outgoing in your lifetime is your government Tom, that's correct, tax and the tax you pay to your government is the single biggest item of expenditure in your lifetime .

It's always good to recall why we pay tax and what it's for. It covers all sorts of public services including health so given the Covid-19 pandemic there's had to be a huge amount of expenditure around that and I believe the UK is one of the nations that has the biggest spend per head related to the pandemic. You could debate all day long how well that's gone in terms of the economy and the human toil but if we look at things from a tax perspective, Rishi Sunak faces a bit of a dilemma.

The budget deficit, what we overspend versus what we take in tax as a country, stands at £271 billion. So, there's a gap and apparently that is up £212 billion on last year. Furthermore £86 billion in December 2020 went on COVID support schemes. We're in February, it'll be even more than that and that deficit will be getting bigger because we're in another lockdown which requires more support.

This means if you look at the UK's total debt pile, that now stands at £2.1 trillion! The interest on our debt is £20 billion, and it comes with a warning that interest rates won't stay low forever.

Tom:

I was going to say that I think a lot of what I've read recently suggest that the rates being low like they are now is probably going to stay the same for a while because there's no incentive for raising them.

Chris:

Given the amount of debt, yes but with supply chains smashed because of Covid, when we all finally emerge from these restrictions, or peel them back slowly in you like, there could be an unleashing of quite a lot of demand. Whilst there's a lot of unemployment, plenty of people have stayed at home and saved a lot of money.

They’ve not gone out, no traveling or eating out, so there might be a surge in demand with not enough supply. That might put the price of things up and of course if you get inflation then interest rates may have to rise. So, as you say it doesn't look like it's going to change any time soon but a little bit further ahead there may be some warnings. It leaves Rishi Sunak with what effectively looks like two options:

Either he cuts spending, or he raises taxes!

I think we can agree Tom that he's very unlikely to cut spending.

Tom:

It's difficult politically isn't it at the moment, given what happened in the previous governments, it really wasn't met with an awful lot of enthusiasm was it?

Chris:

Exactly. We’ve already had a decade of a form of austerity, is it politically going wash down with the electorate to have another 10 years of it? I think politically that's probably committing suicide. He's very unlikely to do that and that means that his next option is raising taxes.

How did we get here? Rishi Sunak seems to be keen on this strategy; the financial pages of Fleet Street are awash with what he might alter and why. However, he's got a problem because he's a bit limited by what he can raise due to the election pledge of the Conservative party to not increase:

  • Income tax
  • National Insurance
  • Value Added Tax (VAT)

This is where you come in Tom, you're Rishi Sunak, over to you, what are you going to do?

Tom:

It's a tricky one this isn't it really. Obviously as you've mentioned Chris we've got this massive deficit and we're still in a time where because of lockdown and everything, it's a lot to ask of people isn't it?

To raise taxes, especially as one of the points we're going to talk about in this is Corporation Tax, a lot of businesses have been decimated by the lockdowns. We've seen in the news recently the likes of Debenhams at that high level and also at the level of some of our clients, SME businesses that have had to shut up shop.

Chris:

It's tragic isn't it? You know it's people's lives so it is a really delicate balance that Rishi's got to strike here. He’s potentially pushing taxes up and pushing the burden back on the people that are suffering as a result of what's going on.

Two things, why would you raise taxes, or even consider raising taxes, when the economy is semi-closed at the moment and the timing of your tax rises could coincide with the economy re-opening, and barely recovering? I think another thing to say is that in this piece we are speculating and you shouldn’t take action without receiving professional advice.

Tom:

You're right it's all speculative isn't it. A lot has been written about Capital Gains Tax (CGT). I think this is something that Rishi's been quite keen on as I understand it. He commissioned the Office of Tax Simplification to look at it and it's difficult to see that this won't go up at some point. I think politically it's probably an easy win, if it did go up, as relative to income tax it doesn't impact on a vast number of people.

It could be a potentially massive tax intake for the government because obviously when you're talking about capital gains, these are typically high value items. So it could be a second home or shares in a company. Even a slight increase in those rates is going to have a big potential impact on tax revenue. However, that will only affect a relatively small number of people. It's probably a fairly easy win for Sunak from a political perspective.

 

Chris:

I read an FT piece about CGT where apparently there was an unnamed quote from Sunak’s allies claiming the report was written by a bunch of 'wonks'. I guess with these recommendations we have to be mindful there could be smoke and mirrors.

Tom:

I’ve read that people are organising their affairs to effectively turn what would otherwise be income into capital and therefore pay a lower rate of tax. I think that is the main driving force behind this, you might realise a gain on some shares, that would otherwise have generated you an income, and as a result you pay a lower rate of tax.

That would then tie into why there is this talk of aligning capital gains tax with income tax. Doing that removes the incentive to organise your affairs in such a way as to move things that would be income.

Chris:

There’s an element of marshalling tax avoidance to it?

Tom:

By letter of the law there’s absolutely nothing wrong with organising your affairs in such a way. But I think that the argument from the report is that effectively we've got a loss in tax revenue because it would otherwise be taxed at income tax rates. That seems to be the driving force behind it. 

If we take residential properties and we align that with income tax then someone who is an additional rate taxpayer would go from 28% to 45% tax on the sale of a second property. It is a big increase, it's significant!

Chris:

What sort of things should people be thinking about and talking to their advisor about in relation to this?

Tom:

The main thing really is going to be about the timing of when you realise any gains. If you're considering some sort of disposal of an asset there might be a question as to bringing it forward.

There is also talk as part of this of reducing the annual allowance so at the moment it's £12,300 a year and that could be brought down. Again that has a potential impact concerning when you realise gains. It's one of those things really where you need to be talking to your advisor about it quite frankly.

There's so many varying factors with all this and as we said at the start it's all speculation. It's wise to reach out and speak to your tax advisor to discuss your own personal circumstances.

Chris:

If you're wondering about CGT, and want to know more about it and all the details around it, be sure to check out our blog, what is capital gains tax in the UK.

Tom:

One thing that the OTS report suggests should be looked at is removing the CGT uplift on death. At the moment where someone has a capital asset that they hold up to the point of death, if there's an underlying gain within that, it effectively gets wiped clean for want of a better term on death. Then, whoever inherits the asset would get an uplift in the base cost to the market value at that point in time. The report talks about taking that out so there would be capital gains tax on death.

Chris:

This is a tax on wealth, so to speak, and that may be more politically acceptable because it seen to be making the rich and wealthy pay which has been a debate for the last decade.

Tom:

Yes, there's quite a bit of planning around that, quite a bit to think about and you can start thinking about it now, so talk to your advisor.

Something where there hasn't been an awful lot of change in recent years is the nil rate band. This is effectively a threshold at which you don't pay any Inheritance Tax (IHT). That's currently £325,000. That band has been at that level since, I think, 2009.

We're now at a point where asset prices have gone up significantly since then and yet the nil rate band has been kept at the same level so there hasn't been an awful lot of change to IHT.

Chris:

It hasn't risen with inflation then?

Tom:

Generally it's been kept at the same level and again I think the OTS had a look at it in 2019. There was a report that they wrote which effectively said that there's, I think, only 25,000 estates in the UK that actually pay IHT. About 10 times that amount actually have to fill in IHT forms. That means there's a lot of a lot pen pushing for want of a better term.

The suggestion is that Sunak is looking at some sort of change. There may be a review of gifts out of income. Typically where you make a gift to someone out of your income it doesn't affect your way of living, there's no set amount as long as there's proof to show that your way of living hasn't deteriorated as a result of making the gift. So as long as you can sustain a way of living there's no limit as to how much you can gift. That then is something of an additional exemption outside of the nil rate band I spoke about.

There's talk of reforming that possibly and potentially removing it, it's all speculation. There's an annual allowance for IHT in the same way that there is for CGT and it's currently £3,000 a year. They're possibly looking at increasing that so there would be a slightly higher amount of money that you'd be able to give each year and not have to worry about.

However, the offset would be that there's currently an exemption on gifts, such as a gift for a wedding, that could then fall within the allowance. It’s a case of they give you more of an annual allowance but then they take it away somewhere else.

Chris:

The Chancellor gives with one hand but takes away with the other?

Tom:

Exactly yes. It sounds great but actually you'd lose something else. Another interesting one that might impact some of our clients is that they're talking about removing Business Property Relief (BPR). Subject to certain conditions being met, if you give away a qualifying business asset, that is potentially exempt from IHT.

Now, there’s speculation about taking that away unless the shareholder has a controlling interest in the company. That could have a big impact on succession planning especially where people were expecting BPR to be available in the future. It could have a quite big impact on family businesses and any future successions. The key is to talk to your advisor.

Chris:

The reason we're saying this is because everything is so specific to people's circumstances, there’s rarely a one size fits all approach. That's the danger of DIY tax isn't it because people read something, think it applies to them and then try and implement it. Then they’re into all sorts of potential complications and problems.

Tom:

Like I say it would be interesting if things do change because there's not been an awful lot of change to IHT in the last few years so it's due for some sort of reform.

Chris:

What's next Tom?

Tom:

Stamp Duty Land Tax (SDLT). There was a temporary reduction in SDLT as part of the Coronavirus measures. The rationale behind it being to try and keep the property market buoyant through the lockdowns. It’s due to finish on 31st March 2021 meaning you need to complete on your purchase by then to benefit from the temporary reduction.

Chris:

That explains why lawyers and estate agents are so busy right now?

Tom:

Exactly. The most recent lockdown means again there's been delays on property transactions in terms of getting them through and as a result there'll be certain people that were expecting to benefit from the reduced SDLT that might now struggle. They may not complete within the timeframe.

Chris:

Property transactions are a notoriously slow process in the UK.

Tom:

This could have quite a big impact in terms of their costs and how much they have to pay.

Chris:

Given this was created early in 2020 and Sunak couldn't foresee that we'd now be locked down again, do you think he's going to extend it potentially?

Tom:

I think so. It's quite an attractive thing that they've already brought in. I think back in 2017 there was a reduction in SDLT for first-time buyers up to a value of £500,000. So they’d already brought in something similar to try and get people on the property ladder. This has  been extended to other people now, not just first-time buyers.

It's quite an attractive thing and given the current lockdown and the fact that as we've just said property transactions take longer in the UK I'd be very surprised if that isn't extended.

Chris:

So, fingers crossed for anyone who's in the process of all the questions and answers with lawyers in property transactions. Hopefully he extends it for a few months maybe, who knows, another quarter perhaps. So that's SDLT Tom, what’s next?

Tom:

I've seen some news doing the rounds on Corporation Tax, currently it stands at 19%.

Chris:

You can find out all about Corporation Tax in the UK on the Wellers’ blog, so be sure to look that up to understand it, how it works, who it applies to, and the potential reliefs available.

Tom:

Currently the rate is fairly low in the UK at 19%. An article I saw suggested that there were talks of that being increased to 24%! That’s quite an increase, it was 24% not that long ago, I think it was back in 2012 and it then got brought down gradually.

Chris:

The government were at one stage pledging to decrease it to 17% before the pandemic struck and in the last budget they reversed that policy so it stayed at 19%.

Tom:

It's a tricky one, I struggle to see how at the moment that's going to get through Parliament. Obviously businesses have post Brexit arrangements to deal with and many have been hit very hard by the pandemic. Many won’t be making much, if any money. So, many businesses are in a loss making position, this rise wouldn’t make much of a difference to the Treasury’s coffers in the short term as it’s a tax on business profits.

Even for those businesses that have done well over the last year, I think it would be difficult to put a big tax burden on them when obviously people have been trying to keep their head above water. Don’t get me wrong, it could happen, but you know I think he'd struggle to do that this time around.

 

Chris:

It has always been a controversial area, I remember a few years ago there was a huge amount in the news about some of the big corporations and the tricks they deploy to reduce their corporation tax bills. There was a big emphasis at one time on reducing corporation tax to get more investment and more business into the UK.

So you don't think he can get it through Parliament, an increase to 24%. Would Rishi Suank be facing his equivalent moment of George Osborne's pasty tax if he tried?

Tom:

I struggle to see how it would be acceptable for all the MPs to be seen to be putting more pressure on businesses, given what happened last year. As we said before it's all speculation, but I think it would be a tough one to justify to the electorate.

Chris:

Okay, what other tax levers might the Chancellor adjust?

Tom:

I think there's been some talk of looking at how dividends are taxed. It feels like we're going through all the taxes here Chris but at the moment it’s a lower rate than income tax.

Chris:

Sure, but that's because of the willingness to take on the stress and risk that comes with opening and running a company.

Tom:

Yes now I think it's been a focus in recent years to try and align tax rates between people that are employed and also self-employed. I think this is why they started looking at National Insurance contributions (NIC) a few years back. There's talk of the dividend tax possibly now being subject to NIC. How exactly that would work I'm not sure.

It could be a new class of NIC but there is plenty of talk around subjecting dividends to NIC which is kind of in keeping with trying to align things more between the self-employed and employed. When we talk about people who are self-employed, people who operate through a limited company, the standard model, if you like, is to take a low salary and top up with dividends so most of your income comes from dividends.

By subjecting dividends to national insurance it potentially then marries up self-employment with employment.

Chris:

So, the reward for entrepreneurialism is potentially narrowing?

Tom:

Yes, to be honest that started, I think, in 2016 when George Osborne introduced significant reforms around how dividends were taxed. It meant the beneficial tax status narrowed. The dividend allowance that came in was £5,000 and then it was reduced to £2,000. It's been chipped away at.

Chris:

What do you need to think about in terms of potential planning? I say potentially because this is all speculation.

Tom:

Yes, it comes down to timing when you take your dividends, when you pay out from the business but obviously there are other factors to keep in mind as well so it's not a one-size-fits-all matter, it depends on circumstances. There are things to keep in mind and there's often a risk with decisions that are taken purely from a tax perspective, whereas often there are additional matters to keep in mind.

Chris:

What's the expression, don't let the tax tail wag the dog! Or, something like that? It's just a case of having a discussion with your advisor again without sounding like a broken record.

What’s up next Tom?

Tom:

There's been pressure from the likes of Tesco, lobbying the government to introduce an online sales tax.

Chris:

This is to do with business rates right?

Tom:

Exactly and the fairness, or otherwise, of business rates. If you look at the supermarkets, for example, they've got all the stores and they've got the rent and all the costs that go with it. Then you've also got retailers that operate online solely so I think that's the rationale for it. In the article I was reading, Tesco were suggesting a 1% surcharge on corporation tax effectively for online retailers.

They’re trying to level the playing field. Again, it's a difficult one as to where you would draw the boundaries as to who this would be subject to. It would probably require a lot of thought if it did come in. Arguably there's a question as to whether it would be fair because if someone's got a different business model, do you then start subjecting different industries for example to different rates of corporation tax?

I'm not sure where you'd stop. It will be interesting one see where it goes, it's been debated for quite a long time and is a hot topic of conversation.

Chris:

Yes, it has been ongoing for quite a few years now. Any others Tom?

Tom:

The last one I wanted to sort of speak about Chris, was the hospitality trade. The sector has taken an absolute hammering, the businesses that have been hit hardest you'd say probably would be within that industry. Last Summer the government temporarily reduced VAT for the hospitality industry, down to 5%.

Given the latest lockdown, I'd be surprised if the reduction isn't extended to help the hospitality industry get back on its feet. Similarly I suppose there's a question as to whether the eat out to help out scheme will be brought back in some sort of form. This would once again be to encourage people out, because even if lockdown is eased there might be a bit of uncertainty amongst people concerning returning to public venues.

Chris:

I’ll add to that, interestingly I was watching Channel 4 news and they did a piece on a potential Carbon Tax. They didn’t detail what form it would take, or how it would work. I think there's speculation that a carbon tax could be on its way, maybe not in this budget, possibly in the future.

This could potentially have a massive impact on things like farming, food, and drink and that could also impact on the hospitality trade. The creation of food and drink, in particular, can be very carbon intensive meaning potential cost increases could be passed on.

I wonder if this is inevitable given how much more focus there is now on climate change and sustainability. It's such a hot topic. In a similar manner to which we started, taxation has historically, and will continue to be an effective means to alter behaviour. A carbon tax in whatever form it may eventually take could be that push to go green.

The government have carbon emission targets that we've got to reach, so this would make sense at some stage.

Tom:

There was also talk of a Wealth Tax on the value of someone’s overall assets, being applied where the value is over £500,000. I think it has in fact been dismissed.

Chris:

There have also been rumours that Council tax could eventually be done away with and instead there'd be some sort of Property Tax. The issue this then raises is that some people who are quite asset rich, but cash poor. They may for example be pensioners who have been living in an area for many years that's really come up in terms of property prices over time.

Where they're over 65 and living on a pension, they might not have a huge amount of income. If they're then being taxed on the value of their property which could be three-quarters of a million and up in parts of London, potentially a lot more than that, then that could be a huge undertaking for them.

Tom:

Similarly the main issue with a wealth tax is people being subject to it even though they haven't got any liquid assets. The government would have to find a balance between income, wealth, and property. It could get very complicated very quickly.

Interestingly I was reading that some academics were suggesting that if it was brought in it could raise £260 billion! We're talking a massive potential boost.

Chris:

You say £260 billion, if we go back to earlier in this conversation the budget deficit stands at £271 billion, it almost solves that problem.

Tom:

I mean there's obviously a lot of other factors around it and what would happen if someone left the country for example? First it would have to be voted through Parliament and I don't think it's unfair to say that there are a lot of backbenchers who probably favour a low tax post Brexit Britain.

Chris:

Rishi Sunak is going to have to tread quite carefully to get some of these things through.

Tom:

Yes I’ll just add that these things are based on what we've read and it’s speculation. That's the key thing here, to keep in mind that we haven't got a crystal ball but we’re looking at all the Chancellor’s options.

Chris:

To bring it to a close, apparently the tax burden is currently at its highest since the 1950s! I think that’s since Clement Atlee's post-war. government That shows you where we’re at and yet the Chancellor is talking about potentially raising taxes. The economy is not necessarily recovering from the pandemic yet either.

Interestingly I read a book by Dominic Frisby called, Daylight Robbery. It’s about the history of tax. Frisby also notes that a lot of wars and revolts have historically been around the level of taxation. Examples include the peasant’s revolt, the American Civil War (caused by the import tax on agricultural machinery), and there was also the Poll Tax that effectively ended Thatcher's time as Prime Minister.

Perhaps there's a lesson in this in so far as government’s can only get away with taxing so much. History is not kind to those on the wrong side of the tax argument.

The Budget 2021 predictions, will taxes rise?

The content of this post was created on 24/02/2021 and updated on 02/03/2021.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

 

LEAVE A COMMENT -

Popular posts

How to understand the different types of shares & class of shares
What are the different types of business structures in the UK? How to choose one
What is the purpose of a business plan?