Partner, National Head of Private Clients
Partner, Corporate Tax
Partner and Head of Share Plans and Employment Tax
Partner, VAT and Customs Duty services
Jane Mackay, Partner and Head of Tax
The Chancellor is in a bind. By committing to the Conservative party manifesto promise, he’s seriously restricted his options to raise substantial amounts of tax through income tax, NIC and VAT. He may feel able to introduce a ’Covid Recovery Levy‘ instead and brazen his way through accusations that this is an income tax in all but name. But he’ll be delivering the Budget when it’s clear we are nowhere near through the pandemic. So my guess is that he won’t do anything to risk the fragile state of the economy and population.
I expect the Chancellor will increase corporation tax as rumoured. When the 17% corporation tax rate was announced (though in the end never introduced) the idea was to make the UK “one of the most attractive places in the world to do business”. The global tax environment has changed a lot since then and it seems clear that the UK’s corporation tax rate alone will never in future be the critical factor in deciding a business location.
If he increases the corporation tax rate to 21% it would still fall at the competitive end of the G20 rates and companies will only pay the increase if they have profits. The Chancellor may pre-empt potential opposition to a rate rise with enhanced tax reliefs for expenditure on longer term investment in the economy such as R&D (particularly with reference to vaccine research based on the UK’s well-publicised success) or capital expenditure (to boost the UK’s manufacturing and engineering industries). Sunak may decide to reintroduce the large and small companies’ tax rates. If he did this, larger groups or companies with higher profits will pay a higher percentage of tax. This could be a way of taxing companies that have ‘done well’ out of the lockdowns while limiting the impact on SMEs.
A rate change will not raise more UK tax from the global digital giants and failing to tackle this perceived unfairness will not go down well. However, we do have the Digital Services Tax already, and it may be in the UK’s best interests, longer term, to appear to support a global approach to this global tax problem.
With any luck, the government will provide a roadmap setting out its approach to tax policy so at least taxpayers can start to plan around the inevitable taxes that must be raised at some point soon.
Robert Marchant, Partner, VAT and Customs Duty Services
Organisations have had to cope with significant changes to UK VAT law in recent years. Brexit prompted a lot of changes for businesses trading goods internationally and many are still ‘fire-fighting’ unexpected administration or cost issues that have arisen since the start of this calendar year. While the changes may not have been as significant, services businesses have also experienced changes in VAT rules as a result of Brexit. All UK VAT registered persons have also had to adjust to the Making Tax Digital VAT rules first introduced in 2019 and further requirements come into force later this year that organisations have to invest time and resources in.
Brexit and Making Tax Digital for VAT have had a widespread impact but there have also been sector specific VAT rule changes - such as the introduction of the domestic reverse charge for construction services - that have created additional stress on businesses attempting to comply with the new obligations placed on them. All in all, organisations have had to deal with a significant amount of change and would no doubt welcome a period of stability. This need is only magnified when taking into consideration the effects that the COVID-19 pandemic will have had on their businesses and the wider impact of Brexit on supply chains.
The UK is no longer bound by the parameters set-out in the EU VAT law but I hope, with one exception, that the UK government resists the temptation to amend UK VAT rules. The one area of change I would like to see is a temporary reduction to the UK VAT rate for all sales, which would hopefully coincide with an easing of Lockdown restrictions and help to encourage consumer spending at a time when large parts of the UK economy needs a welcome boost.
Nicky Owen, Partner, Professional Practices
Firms continue to be focused on steering themselves through a challenging and difficult economic climate. The aftermath of Brexit and a year of dealing with the challenges and uncertainty that a pandemic brings, mean that firms are craving stability in our tax system.
Ordinarily, professional firms thrive in periods of change, however, the pandemic doesn’t discriminate and the impact is far reaching and affects all entities working and supporting those businesses in the worse hit sectors and industries.
Firms are paying considerable amounts for office space which is only being used by a few. Returning to offices will be challenging for all but will be essential to drive the economy and to pump life and activity into our towns and cities.
Increasing capital allowances will encourage firms to revitalise their space and encourage a more balanced split between home and office working.
The deferral of the new 'off-payroll' worker rules (commonly known as IR35) were due to come into force from 6 April 2020 and were delayed for a year. Nothing has changed – so a further delay until April 2022 would certainly be well received by Professional Practice firms.
Will the NIC rates increase for the self-employed? If they are set to change then there should be a proper consultation and time for both the government and businesses to understand and appreciate the far-reaching impact on businesses. It is so much more than just Professional Practices.
Pension contributions: Are partners in Professional Practices going to see their ability to save for their retirement further hindered with a reduction to only basic rate relief on their pension contributions? If so, then a consultation needs to be considered to establish the long term impact on saving for retirement with the current allowances.
Laurence Field, Partner, Corporate Tax
Believes the Chancellor should think creatively and consider the following measures in the upcoming Budget.
Rather than dream up new taxes, why not revive some old ones? The ‘Excess Profits Tax’ which was enthusiastically used in wartime, taxed businesses that thrived in difficult conditions, putting a surcharge on above ‘normal’ profits, defined as the average of previous year’s profits. Sunak could raise the corporation tax rates on ‘excess’ profits to, say 40%. This would increase the tax burden on the companies that have done well in the pandemic, leaving those who have struggled untouched.
Reduce the ability for companies to use brought forward losses. Currently, brought forward losses cannot be used in full by companies with profits over £5,000,000 in a year. Halving this limit would increase the tax take from some of the most profitable companies in the UK, while leaving smaller ones unaffected.
Increase the amount of capital expenditure that can be written off by a company against tax. The last few years have been marked by flat productivity. Why not incentivise an investment-led exit from the pandemic and the EU by increasing the Annual Investment Allowance from £1 million to £10 million a year? With supply chains under pressure through Brexit and COVID-19 challenges, an incentive to return production to the UK could help kickstart the economy. Investment in new technologies could help improve productivity. At £10 million the relief is worth £1.9 million in saved tax – that’s a material amount even for the largest of companies.
Waive the Bounce Back Loans. Aimed at companies requiring £50,000 or less of finance, many small businesses may not have the cashflow to repay them for some time. They could be converted into grants by allowing companies to surrender the right to use a similar amount of losses in exchange for not having to repay the loan. The pressure to find the cash to repay is reduced and the tax take from the companies increases over time. Much of the debt will probably eventually be written off anyway, so why not accelerate the inevitable and increase the chances of many small businesses surviving?
Jeremy Cooper, Partner and Head of Retail
With the current closure of non-essential retail and the boom in online e-commerce retailers during the pandemic, the Chancellor may be tempted to introduce some form of tax on so called ‘windfall‘ profits from the pandemic. This has certainly been mooted in the press but actually what we really need is a proper and thorough reform of business taxation to ensure ’fairness‘ across all sectors. He may also be tempted to introduce some form of ’online‘ specific sales tax – maybe a higher rate of VAT on online sales – but this is unlikely to stem the flow of sales from more traditional ‘“bricks and mortar‘ retailers to non-store ecommerce platforms.
Amazon for example is reputed to pay £293 million in direct taxes on revenue in the UK of £13.7 billion. Many commentators are scornful of what they see as low rates of tax on profits made in the UK by large multinational ecommerce businesses and it will be interesting to see whether or not the Chancellor tries to address this in his Budget.
An example is business rates. We have been calling for reform to the business rates regime for years but with Brexit and other government priorities seen as more important, nothing has been done beyond the temporary rates relief offered to retailers and certain other hard hit sectors last summer. We are beginning to see more failures on our high streets and this will undoubtedly continue as e-commerce continues to take sales from struggling high street shops. Unless the government undertakes a fundamental reform of business rates, then government finances will be hit as shops close down and remain vacant for long periods of time.
Sadly I predict that it is more likely that we may see an extension of business rates relief in some format to help the retail / hospitality and leisure sectors rather than a root and branch reform of an outdated and flawed system.
Johnathan Dudley, Partner and Head of Manufacturing
The government has secured billions in COVID-19 corporate debt, most of which is at least a medium term risk to the Exchequer. To reduce and manage this risk, it is important for manufacturers to be productive and competitive and for the original equipment manufacturer (OEM) supply chains to be secure for the former to survive and the latter to have the incentive to stay around. This requires investment and simple tax relief alone will not justify it. Investment is needed in digital kit and production processes, skills, reshoring, exporting and more in innovation. Using the R&D mechanism will enhance this as a credit against COVID-19 debt to reduce gearing and increase industry viability and security of the government’s debt along the way.
If corporate tax rates are to be increased, then so must the incentive for UK business to modernise and create long term sustainability. This, in turn, will mitigate the government’s risks in terms of lending guarantees.
The government should reinstate some kind of job retention cash bonus, or even credit against debt repayment, VAT or PAYE deferral.
Incentives and support for UK banks to open new accounts for new customers or for customers expanding overseas (exporting rather than importing or offshoring) would also be a welcome move.
Innovation grant funds that are genuine should be put forward. ‘Competitions’ are over-subscribed and are routinely taken up by big businesses before SMEs get a chance to apply. The process, freed from the restrictions of EU red tape, needs to be simple and provide a clear route to qualification and remove uncertainty of eligibility, quickly.
Matteo Timpani, Partner, Corporate Finance
Speculation continues to mount regarding the approach the chancellor will take with capital gains tax. With a pandemic to pay for, a raid on capital gains is seen by some as an easy political win and a potential fundraiser for the Treasury. Whether changes are limited to amendments to Business Asset Disposal Relief – formally ‘Entrepreneur’s Relief’ - which was meaningfully scaled back last year, or will go further and wholesale increase the rates of capital gains tax we just do not know.
What is clear, though, is that any notable increase in Capital Gains Tax (CGT) will almost certainly have a significant detrimental impact on M&A activity in the UK market. In a market where deal activity has remained relatively buoyant, despite economic headwinds, we would expect entrepreneurs to take stock and think twice about immediate exit plans if their tax burden is to increase significantly overnight.
One would hope that the Chancellor has taken counsel and considered the impact any significant tax raises would have on an economy struggling to emerge from the impact of the COVID-19 era and, at the very least, defer any such tax raises until the economy has recovered significantly. The increase to Capital Gains Tax is almost certainly a matter of “when” rather than “if” – we just hope the “when” is not now.
My hope is that CGT is left alone in this Budget to allow the economy some room to breathe and recover with any mooted tax increases deferred until later in 2021 or 2022.
Darren Rigden, Partner, Audit and Business Solutions
The huge cost of the pandemic needs to be paid for and the question is will the government try to recoup the cost quickly or over a longer period of time? The latter would be more beneficial for the economy and may ultimately generate more sustained revenues for the government without further pain to individuals.
In order to fuel a strong and sustained rebound, a range of schemes for employers to recruit more employees, along with tax breaks to encourage capital investment and owners to invest in their businesses such as through enhanced capital allowances, would seem sensible.
I would like to see some investment and incentives for exporters and our ports, air and sea, which have had a tough time with the pandemic and Brexit. The ongoing issues over the red tape for those trading with Europe, along with increased costs, will impact on the amount exported. If the government is really committed to driving up exports now is the time to support these businesses directly through tax incentives and also indirectly through investment in the associated infrastructure.
It would seem sensible to continue to support the sectors hardest hit, notably hospitality and leisure, otherwise the economy may fail to rebound if support measures are removed prematurely. Examples would be an extension of the reduced rate of VAT on hospitality and leisure.
Some of the key ideas to raise taxes which have been floated include:
Further reductions to pension contribution tax relief is likely, resolving what some perceive to be an unfairness in the system, for example through a single flat rate of relief, of 20 or 30%. Alongside this, the Chancellor could loosen the tapering of contributions for tax relief so that the amount people can save into their pensions is the same across all income bands.
Stuart Weekes, Partner, Corporate Tax
When the rate of corporation tax started to reduce from 2008 the intention was to boost the investment of companies into the UK. This was a welcome move and has benefitted the UK economy. If rumours that the Chancellor is considering increasing the rate of corporation tax are to be believed, this would be a curious move. At a time when many companies are struggling to make profits the question is what is this seeking to achieve?
The UK is a hotbed for innovation. The government has stated its commitment but it needs to do more to increase the research and development undertaken in the UK to meet its target. Now the UK is not in the purview of EU State Aid rules, this is a superb opportunity for the Chancellor to review the tax credit system for R&D and increase the benefits for companies. This will encourage companies to invest more in R&D and benefit from the tax credits, especially if corporation tax is increased.
The UK’s two main R&D tax credit schemes focus on non-capital expenditure. While companies can claim relief for capital expenditure on R&D there is no enhancement available and profit-making and loss-making companies have different outcomes. Given that companies need buildings to enable them to tackle vaccines, this is a perfect time for the Chancellor to enhance the R&D tax scheme and reward companies that invest in capital expenditure.
Caroline Harwood, Partner and Head of Share Plans and Employment Tax
With a large hole to fill in the Treasury purse, and the increasing demand from business for a flexible workforce, it is very likely that the Chancellor will press ahead with the changes to the off-payroll worker regime, commonly known as IR35. HMRC originally envisaged that lack of compliance in this area would cost £1.2 billion per year in lost tax/NIC revenues by 2022/23 with approximately a third of contractors working like employees. Recouping this loss, together with the expected changes to the Construction Industry Scheme, following the 2020 consultation 'Tackling Abuse in the Construction Industry' will only go a small way towards meeting the costs of the pandemic.
It will also be important to help employers get people back to work. While there have been some suggestions that a reduction in National Insurance Contributions might be effective, I think this type of cost cutting measure is unlikely unless it is targeted at new jobs akin to the NIC breaks for employers taking on former Armed Services personnel from April 2021. Indeed the recent changes to the 'kickstart' scheme suggest that we are more likely to see the introductions of grants and allowances for those creating new jobs, especially for the young.
Simon Warne, Partner, Private Clients
With public debt heading for the stratosphere and austerity-style spending cuts unable to bridge the gap, significant tax rises in the short to medium term look inevitable. This gives Chancellor Sunak a once in a lifetime opportunity for wide-ranging tax reform.
Rebecca Durrant, Partner and National Head of Private Clients
In my view it is too early for the Chancellor to make any radical changes to the tax system and keep the public on side. We are still in the midst of the pandemic and until people can see a more positive view on the horizon they will be reluctant to put more pressure on their finances.
That said, this Budget could be a time for the Chancellor to make some relatively simple, incremental changes such as a couple of percentage point increase to corporation tax while setting out a roadmap for significant reform in the future.
Capital Gains Tax changes, a wealth tax and inheritance tax reform have featured heavily in speculations in the press and professional community, largely based on the reviews the Chancellor launched last year. It is likely that there will be some changes coming here but it is unlikely that they will bring in a significant enough increase to plug the COVID-19 hole. Clients in this bracket are often able to organise their affairs sufficiently well to mitigate the problem. The complexity of these changes may push reform back till later in the year anyway.
A reform that would have the most impact is a change to the ‘three person problem’. This would mean the rebalancing of the tax position of an employee, the self-employed and the owner manager. This ‘problem’ has been highlighted throughout the pandemic as owner managers and some of the self-employed have missed out on much of the support that the government has given to employers and employees. There are, however, tax advantages to structuring earnings this way.
Income tax and national insurance represent around 45% of tax revenue compared to 8% for corporation tax and 5% for capital taxes. If HMRC were to align tax and NIC or increase dividend tax rates this would correct the imbalance and could significantly increase revenues.
The impact for business owners could be significant. The self-employed and the owner manager do not have the same security as an employee in terms of benefits, employment protection and financial risk. Any changes would need to take this into account and balance increased tax with additional support. The alternative is that we start to suppress the entrepreneurial spirit within the business community that we will rely on to get our economy moving again.
The focus in the last year on the COVID-19 Pandemic and relief measures has masked some of the issues facing the Real Estate sector.
Simplification is urgently required: The system has become too complex and requires a well thought-out overhaul to reduce barriers and complications. There have been too many tax changes in recent years, which has unsettled the market. Aside from any measures aimed at simplification, we’d like to see no further changes for the next few years in order to stabilise the market. This would bring much-needed stability.
We would like to see an extension of the SDLT holiday which is due to end in March 2021, and/or a reduction in the SDLT rates, which will help to open up the market and encourage property purchases.
SDLT distorts the market between residential and commercial properties, so SDLT differentials should be addressed. Residential rates should be reduced down to be more in line with commercial rates.
Given the impact of COVID-19 on the high street, a fundamental re-think of business rates is needed . While the government issued reliefs for business owners in response to the pandemic, they are really just a sticking plaster to the already battered high street.
To tackle the empty shop conundrum, a simple process for the repurposing of retail units is vital, which is why we are calling on the government to make it easier to convert commercial spaces into residential space.
Avoid cliff edge changes: One example of this would be the end of SDLT holiday. The sudden change in policy distorts the market and creates bubbles, which can often be swiftly followed by a collapse.
Planning protocols should be freed up to allow some rejuvenation of high streets and other new builds.
Landlords must not be forgotten, amidst all of this. Further support is needed for landlords facing the uncertainty of tenants not paying, leaving them no recourse by virtue of the eviction ban. This was supposed to be a short term measure, so it can’t keep rolling month on month.