Budget Countdown: HWB Predictions
With less than a week to go until the next budget, HWB associate tax director, Gemma Hedges, reflects on what changes we might expect to see.
As with every budget now, the tax industry waits, with baited breath, for the inevitable bundle of measures which include some anticipated, some expected but missing, and some completely out of left field, which throw us all into chaos. This year I am sure will be no different, but based on recent reports and shifts in focus, let’s take a look at what we already know is coming in and what we expect we might see:
The increase in corporation tax for large companies from 19% to 25% from 1st April 2023 (which means a marginal rate of 26.5% for profits between £50,000 and £250,000) has already been announced and therefore no further changes to the main rate are expected in this budget, albeit this remains a strong possibility in the future.
Capital allowances changes have also already been announced, with the annual allowance set to reduce to £200,000 from January 2022. The super deduction (applicable from April 2021), which runs alongside the annual allowance, remains in place until April 2023. Potentially we could see the annual allowance reduction delayed and aligned with the removal of the super deduction, to further support and encourage the economy throughout the current turbulent period.
The drive towards reducing climate change has been supported by the Government historically through such measures as the introduction of 100% capital allowances for electric cars and no, or reduced, benefits in kind for employees with electric company cars. Where reviving the economy to increase profits (and the corporation tax receipts for HMRC) is key, we would expect to see further measures included in this budget which promote spend by businesses in energy efficient or green assets.
Research and development
The changes to the rate of Corporation Tax could mean research and development (R&D) relief is also changed from 1 April 2023. This is because without any changes the relief available to small and medium entities would become substantially more valuable and the relief available to large companies slightly less generous. Nothing has been mentioned on this to date and therefore we expect some guidance to be published in this budget.
We also anticipate some widening of the definition of ‘qualifying expenditure’, particularly for cloud computing companies that surely should fall within the provisions, but struggle to qualify for relief within the current legislation.
As the UK is no longer bound by EU VAT rules and definitions, there is now much wider scope for changes to be made. As such, we anticipate that there will be some attempts at simplification, in line with the focus on this for other taxes.
Given the drive against tax leaks, it is also conceivable that there would be increased focus on anti-avoidance provisions, including a possible further extension to the domestic reverse charge as an anti-fraud measure.
Finally, in line with the need to increase the coffers following recent Government spend, it is possible that there may be an increase in VAT rates from April 2022 in an attempt to raise further revenues.
Capital Gains Tax
Capital Gains Tax is the area in which we anticipate the most changes for individuals. The reports completed by the Office of Tax Simplification in July 2019 (Inheritance Tax with Capital Gains Tax implications) and July 2020 (Capital Gains Tax) made a number of worrying tax increasing suggestions and, whilst it is never conclusive that these suggestions will be adopted by the Government, it would be naïve to assume that none of them might become law. Three key areas are worth focusing on:
- The change of name from ‘entrepreneurs’ relief’ to ‘business asset disposal relief’ from 6th April 2020 lead to a widespread fear of this relief being scrapped altogether. As each budget has passed since, we’ve had the usual panic of completing share sales before budget date, but so far have been surprised to see this change didn’t take place. Will this budget be the one which finally removes this relief?
- The proposed alignment of Income Tax and Capital Gains Tax rates to provide fairness between different profits and dissuade taxpayers from artificially converting income to capital could mean a hike from 10% to 45% tax on gains (if combined with the removal of business asset disposal relief). Preventing avoidance in a simple way would, I’m sure, be welcomed by HMRC. Lets not forget also that Income Tax and Capital Gains Tax rates were aligned historically, so it is not inconceivable that this proposed measure would be adopted again.
- Finally the suggestion of removing the Capital Gains Tax free uplift in assets to probate value at death. Whilst this scuppers widespread tax planning that has been put in place for years, this would also create substantial complexity and admin burdens for both tax advisers and taxpayers. Records would need to be kept of assets acquired a number of years ago, and beneficiaries would inherit assets perhaps stood at huge gains, with high risk of computing those gains incorrectly. There have been discussions around the possibility of ‘rebasing’ the assets to a value at a set point in time, not dissimilar to the ‘March 1982’ valuation method brought in previously. Whilst this is of course more helpful than actual acquisition cost, it does not reduce much of the admin burden. Overall, given the complexities with this change, I would be surprised if this measure was brought in.
The 2019 office of tax simplification report indicated the unfairness of the current legislation with regard to business property relief, which it advised is allocated in situations where it is perceived that it should not be, and not allocated in situations where theoretically it should be. As such, a re-categorising of ‘qualifying assets’ in this budget seems a real possibility.
Similarly, the report flagged confusion for taxpayers where ‘trade’ has different meanings for different taxes. While we would hope that any alignment is to the 50% Inheritance Tax test, unfortunately the more likely outcome of any alignment is to the 80% Capital Gains Tax test. If this measure is brought in, businesses will need to be even more conscious of their cash balances and investment activities in order to prevent any unexpected Inheritance Tax burdens for their shareholders.
Income Tax, National Insurance, etc
It was announced last month that the introduction of Making Tax Digital for Income Tax will be delayed again, so it now comes in from April 2024 instead of April 2023. The proposed alignment of basis periods for all businesses will also be delayed, aligning the two measures. Whilst the measures are supposedly designed to simplify the position for taxpayers, there is little doubt that they will present admin and cash flow burdens for all. A delay in the introduction of these measures is therefore very welcome.
The 1.25% increase in National Insurance contributions (Class 1, 1A, 1B and 4) for the 2022/23 tax year has already been announced, which provides an extra 2.5% burden for those in receipt of salary which suffers both employee and employers Class 1 National Insurance Contributions.
From April 2023 the National Insurance contributions will revert to the previous position, but will instead be replaced with a health and social care levy of 1.25% (in reality the same burden for taxpayers, just with a different name!). This again, suffers both employees and employers.
At the same time the increase in dividend tax rates by 1.25% was also announced, which levels the playing field somewhat in the dividend versus salary comparison.
Given the raft of measures already announced, we do not anticipate further changes to Income Tax and National Insurance Contributions in this budget.
Stamp Duty Land Tax
Despite having remained the same for many years, Stamp Duty Land Tax has been given an overhaul in recent years, again with the economy at the forefront of the Government’s focus. Whilst theoretically from 30 September 2021 the applicable rates have reverted back to ‘normal’, we should not forget the introduction of the 3% surcharge for additional purchases and companies, and the 2% surcharge for non-UK resident purchasers, the latter of which came into force for purchases made on or after 1 April 2021.
With the removal of the ‘holiday’ which has been in place recently, we anticipate a surge in the number of taxpayers hoping to qualify for multiple dwellings relief. There has been a plethora of case law in this area and therefore we hope further legislation might be put in place to clarify when the relief can be claimed.
Anti-avoidance and tax evasion measures
HMRC have made no secret of their intentions to battle tax avoidance and evasion and have utilised much of their budget in these divisions in recent years. Given funds are low following the various pandemic support payments, it would not be surprising to see further investment made in this area.
In the first instance, we expect the focus to be on the pandemic support payments themselves and have already seen such enquiries begin to be opened.
HMRC have also engaged valuation specialists to double check the figures provided by taxpayers on Inheritance Tax forms and Capital Gains Tax returns. We can therefore expect further checks on submitted returns and more enquiries raised in these areas.