Nigel Bostock, Chief Executive
Balancing the books or relying on economic growth?
Signposted as the post-pandemic economy Budget, the Chancellor came into it on the back-foot with the country having a significant financial burden arising from the much-needed, critical and valued government support that has been given throughout the last 18 months. However, the optimism of green shoots of recovery, economic growth, investment and prosperity in a post-Brexit Britain must also be measured in a Budget against inflationary pressures, supply chain challenges and perceived wage and public sector spending increases. It appears clear that the government is hedging its bets that economic growth and investment will create tax revenue to drive funding for public sector growth and meeting the cost of COVID-19, with a pledge to cut taxes by the end of the current term of parliament.
From a businesses and individual perspective, there is also a need to balance the books, though the Budget has not delivered the equilibrium needed. There are ongoing challenges faced by our clients (both businesses and individuals) and the wider economy as they recover from very different financial positions post-pandemic. While some encouragement was given today around annual investment allowances, business rates relief and universal credit taper relief cut to support the lowest earners in the country, overall, it appeared a fairly uneventful Budget to address the challenges many face.
On first glance this Budget makes it difficult to see how the Chancellor, business and individuals will be able to easily balance the books from the proposals made. The sense of a better-off Britain for all may not be seen in the short-term as the country recovers and pays for the impact of both the pandemic and Brexit, with many challenges still ahead of us over coming months in a growing but capacity-constrained and inflation-driven economy.
Jane Mackay, Partner and Head of Tax
The 'economic scarring' from COVID-19 may not be as bad as predicted, but we're not out of the woods yet, and there's a huge COVID bill still to deal with. The Budget statement hasn't really given us clarity on who will pay that bill. The tax increases that were announced before the Budget, including corporation tax rising to 25%, and the additional NICs and tax on dividends of 1.25%, might suggest the strategy will spread the burden as widely as possible, rather than to make the structural changes to our tax system that may be what is really needed.
It is great news that unemployment is expected to peak at only 5.2% but this doesn't reflect the pressure businesses feel due to additional employment costs.
Rishi Sunak’s statement acknowledged that COVID-19 isn’t over yet. After a very difficult 18 months retail, leisure, hotels, pubs, clubs and music venues will be relieved by the 50% business rates relief. They’ll also be pleased by the extension to the £1 million Annual Investment Allowance to March 2023, which makes it easier to claim tax relief on refurbishment costs. These reliefs, however, don’t address either the structural problems in the business rates system or the fact that one of this sector’s biggest current challenges is finding staff to hire. Going forward, being able to afford to pay them enough to account for inflation and the 1.25% additional cost of the NHS and social care levy will become more worrying.
In the special episode of Crowe Casts our Partners, Jane Mackay (Head of Tax) Laurence Field (Corporate and International Tax Partner), Rebecca Durrant (National Head of Private Clients) and Robert Janering (Corporate VAT Partner), discuss the impact the Chancellor's statement is likely to have on business and individuals.
Laurence Field, Partner, Corporate Tax
This was a spending Budget - the biggest increase in government spending ever – the challenge will be whether the country can actually afford it or whether the Chancellor secretly hopes inflation will do the dirty work for him.
On innovation and encouraging investment: Aiming to increase investment in R&D to 1.1% of GDP by the end of the parliament will mean that government will be looking to fund the technologies of the future. That will mean making choices and picking winners. Government hasn’t historically been great at doing this – now will be the time to prove that it can.
Moves to encourage the onshoring of R&D from 2023 will be dependent on the UK having the talent available to carry it out. If skills are in short supply or too expensive, the activities will still be undertaken overseas regardless of the tax reliefs available.
The extension of the Annual Investment Allowance seems like the minimum the chancellor could do to carry on encouraging investment.
On business rates: The thorny problem of business rates has been kicked down the road. No changes until 2023 and then there will be more frequent revaluations. One of the challenges was that businesses investing in their property would be stung with higher rates. Deferring the increase for 12 months doesn’t really align with the long term planning for investment.
Discounted business rates for retail, hospitality and leisure companies will be a welcome short term relief, though.
On continued complexity: Outdated, complex and full of historical anomalies. That was the description of alcohol duties. It could describe the whole tax system.
On ‘freedom’ from EU regulations: Six years after the referendum the government has at last set out the vision for what it wants to do with Brexit. Tonnage tax for ship owners and air passenger duty on domestic flights wouldn’t have been the most obvious starting point.
Simon Crookston, Partner, Corporate Tax
In addition to corporate tax rates increasing to 25% in 2023, there was also an announcement in relation to innovative businesses including additional R&D tax relief for cloud computing and data costs. However, some multi-national groups may find their R&D claims are reduced if some of their development is done overseas as from 2023 costs will need to be incurred in the UK. The £1 million Annual Investment Allowance extension to 31 March 2023 is also a welcome relief particularly for smaller businesses looking to invest in plant and machinery as they look to innovate and expand post COVID-19.
Nicky Owen, Partner, Professional Practices
For Professional firms, the temporary Annual Investment Allowance set at £1 million has been extended until 31 March 2023, which is good news in refurbishing offices post COVID-19 and encouraging people back into the office.
As anticipated there was a comment in the detail with regard to the proposed changes to the basis period for partnerships and LLPs. The proposals are going to go ahead from the tax year 2024/25, which is not what I had hoped but provides an opportunity for firms to discuss internally and with advisors as to how they will manage the transition in 2023/24 and whether it is an opportunity to change their accounting year.
Rebecca Durrant, Partner and National Head of Private Clients
Tax by stealth on national insurance contributions and dividends. The 1.25% increase will impact workers, businesses and SME’s drawing dividends in the main, many of whom will have struggled over the last 18 months as they did not qualify for COVID support. The increase in national living wage while welcome will put additional costs and pressure on businesses but may go some way to help the labour shortage in some of the more badly hit sectors such as care workers and hospitality.
This combined with the freezing of allowances and tax rates will increase the income tax take. Tax from earning and spending represents around 70% of the tax revenue. Those expecting any fundamental shake up to the tax system will have to wait a while yet.
The increase in dividend tax goes some way to balancing the perceived inequality between the employed individual and the company director as this increase combined with the increase to corporation tax will mean that the decision to take salary, bonus or dividend will become very much a personal decision rather than the historic ‘default dividend’. Tax accountants all over the country will be crunching numbers as we speak.
Shona Harvie, Partner, Pensions Funds
The regulatory charging cap for defined contribution pension schemes is to be consulted on before the end of the year. Although the cap is designed to keep costs down, at 0.75%, it is widely recognised in the pensions industry to be too restrictive. The government has stated that it is open to finding ways in which these schemes can access more expensive private markets, while protecting member benefits.
From April 2022 employee and employer National Insurance Contributions (NIC) increase by 1.25%, to pay for care costs. Salary sacrifice arrangements (a tax-efficient way to pay contributions) may become more attractive with these increases however, from April 2023 the increase becomes a new Levy, separate from NIC and therefore may not form part of salary sacrifice arrangements.
In 2025/26 top up payments will be made to contributions to those on low pay. Most pension schemes deduct contributions from salary before income tax is deducted, so tax relief is the highest tax rate. However this net pay arrangement means low earners miss out on a 20% boost on their pension contributions, due to their low tax rate.
Johnathan Dudley, Partner and Head of Manufacturing
The headlines might look attractive at first glance for business and manufacturing in particular - investment in roads, rail, broadband and mobile communications should, if spent domestically, be a growth generator for our manufacturing supply chain, as should the continued investment in offshore wind.
Further investment in innovation and Research and Development (R&D) should also be an encouragement, although I wait to see the detail on how this will be spent and whether it will be truly available to UK innovative businesses. It could just be a continuum of the vastly oversubscribed SMART award system, which leaves so many innovative businesses wanting. The proposed reform to R&D tax credits could prove to be less exciting than its sounds.
More money made available to the British Business Bank in the regions, to drive access to finance, is also welcome; but I hope that the method of distribution and the programmes for delivery, take full account of the genuine needs of businesses.
The scale up visas to attract global talent is welcome news. This has been a perennial problem for innovative UK businesses and it will be good to see this starting to work in practice. Our universities have been educating people from across the world, in STEM related disciplines, and it would be great to see the UK economy benefiting from their expertise.
It is also great to see the Annual Investment Allowance (AIA) extended at £1 million until 2023, that is when the headline Corporation Tax rate goes up. So even combining this with the super deduction that the Chancellor reminded us all about, this merely achieves a 24.7% effective tax deduction on capital investment up to that level. Therefore, can we expect AIA to be reduced or removed along with the super deduction when the new 25% rate comes in? Hopefully both will stay, as the value of the super deduction would then effectively be 32.5% tax relief on capital investment.
The business rate reform will also benefit manufacturers but as this doesn’t come in until 2023, the reduced cost will attract higher tax on the resultant profits.
It’s good to see continued investment in skills. Hopefully, however, this will be combined with reform of the apprenticeships scheme as has been called for in Crowe’s successive Manufacturing Outlook Survey.
Support and concessions to the transport sector and the fuel duty freeze will help to hold some cost rises, but the Chancellor is clearly in no hurry to address the immediate power pricing crisis or supply chain issues. This might signal that these factors are a matter for market forces rather than government, as highlighted in the Budget. There was nothing to help businesses unable to attract investment due to the substantial COVID-19 debt on so many balance sheets in the supply chain. The government has a vested interest in supporting those businesses as they have a 80% ‘stake’ in terms of their guarantee to the banks, so I hope that, unless they do listen to lobbying pressure, that the desire to allow market forces to hold sway, doesn’t cost the public finances more than expected.
So the Budget seems to be thin on support for a manufacturing sector, which the government is reliant on, to drive innovation, skills and job and wealth creation as well as delivering their infrastructural projects and levelling up. Without workable funding, access to affordable power and raw materials, manufacturers cannot produce, cannot innovate, employ or improve the skills base. There are good strategic signs for the future but there needs to be more tactical short term measures to get there.
Caroline Fleet, Partner, Corporate Tax
From a Real Estate industry perspective, the long awaited reforms for business rates with more frequent valuations to every three years are welcome and the extended
50% discount for the retail, hospitality and entertainment sectors will bring some breathing space to help with the reopening of social and public
space. The addition of relief from business rates for investment in green technology also provides a tax incentive for green investment, something which
has been lacking to date. There was no real mention within the Budget about the
housing crisis - as well as creating new jobs we need to create homes for people to live in. It is therefore disappointing the government has decided to plough on with another ‘niche’ tax in the form of Property Development tax set, at the rate of
4% from 1 April 2022, creating more complexity when we need to be incentivising
house building rather putting more hurdles in the way.
Once again no change to Capital Gains Tax rates. In my view this should (and perhaps is likely) to be combined with a complete overhaul of capital taxes including Inheritance Tax (IHT).
Seen as the most unfair tax only 4% of the country actually pay IHT at the moment. Amongst the OECD countries the UK is in the minority that taxes the estate of the deceased rather than the recipients. There is a perceived double tax charge with IHT in that many people feel they have been taxed already on the income they earn to buy the asset they want to pass on to loved ones. That said, given the way in which property prices in the UK particularly have rocketed it can be difficult to balance why the wealthiest in our society should not contribute more from growth they have done little to earn, instead of increasing tax on earnings for the lower paid.
The OTS released a report on suggested reforms to IHT in 2019. One of the most radical suggestions was the removal of business relief which exempts the value of a business from IHT. This would predominately affect wealthy family business, many of whom are politically aligned with the government. The changes suggested would be the biggest overhaul to the tax regime in years. It is difficult to see how a Conservative Chancellor would implement these changes with only just over two years left in parliament – the cynic in me would suggest that it is unlikely now we will see any change till after the next election.
Nick Latimer, Partner, Private Clients
For my private clients and family business owners, it was good to see no significant further tax rises beyond the 1.25% increase in the rates of national insurance and dividend tax that were previously announced to fund social care. Nevertheless, the tax burden as a result of this and the previously announced increase in corporation tax to 25% from April 2023 will be historically high.
The freezing of personal tax and other thresholds have a revenue raising effect given inflation in the economy, and further rises might have had the impact of further slowing our recovery from COVID-19.
For businesses, the extension of the £1 million annual investment allowance for business investment until March 2023 will be helpful, though some care will be needed to decide whether this, or the previously announced 130% 'super deduction' for corporates, is more beneficial.
I am pleased the Chancellor did not raise the top rate of Capital Gains Tax from 20%, which has been the subject of much speculation. There is a need to look at whether CGT rates incentivise the taxpayer appropriately, but maintaining a low rate for entrepreneurial activity and a lifetime of work encourages new businesses to set up and thrive. The differential rate of CGT for residential property (up to 28%) has not significantly deterred investors from backing the housing market to continue to perform, particularly with further announced government backed support and investment in affordable housing and earmarked brown-field land for new homes.
Robert Marchant, Partner, VAT and Customs Duty services
The VAT aspects of today’s announcements were more interesting for what was not covered, rather than what was included.
None of the VAT measures were particularly headline grabbing but will still be important to those impacted.
This final point, already confirmed what has previously been announced and will be applicable to any UK VAT registered organisation.
What was interesting is that UK government didn’t take the option provided by Brexit, to deviate from EU VAT law in making headline UK VAT rate changes, for example by reducing VAT on household energy bills, providing a zero-rate for cladding works or further incentivising green measures such as solar panels.
2021 Autumn Budget announcements