Spring Budget – a balancing act for Mr Sunak?

24 Feb 2021

Tax Partner, Paul Brown offers his thoughts on the forthcoming budget.

Paul Brown, Tax Partner

Paul Brown, Tax Partner

Rishi Sunak will deliver his Spring Budget on 3 March with the Covid pandemic still the dominating theme for the UK economy.  Looking back at the measures announced in the Spring Budget last year – an extension to statutory sick pay, a £500 million hardship fund and time to pay for tax liabilities – no one would have predicted the scale of the pandemic or the measures introduced reduce its impact.

No one is any doubt that in time, all the financial support given out will all have to be paid back.  The question for Mr Sunak is whether now, is the right time to start that process.  With national lockdowns in place in all four nations and the economy still struggling now does not seem to be the time for sweeping tax rises, stripping further cash out of the economy at a time when it needs consumers spending and businesses investing.  My guess (and it is little more than a guess) is that the focus will be on supporting the economy and businesses with any sweeping tax rises being left until an Autumn Budget and perhaps not coming into force until 6 April 2022. 

That is not to say that there won’t be changes.  Much of the speculation around the Budget relates to capital gains tax (“CGT”) and the potential for rates to rise, even to be aligned with income tax rates which would represent an effective doubling of most of the CGT rates that currently apply.  CGT seems undoubtedly to be a “softer” target than income tax rates as most people never even pay it – but that also means that raising CGT rates is likely to be of limited impact.  In 2019/20 the UK raised just shy of £10 billion in CGT (from a total tax take of around £634 billion) – so in theory would a doubling of rates raise an extra £10 billion? 

I highly doubt it – faced with that sort of tax rate many would hold off from selling assets, as it simply ceases to be worth it while the provisional wing of the tax planning industry would doubtless click into a higher gear to generate “ideas” as to how taxpayers may “mitigate” their liability.  That is not to say rates will not go up – I suspect indeed they will, probably from 6 April rather than Budget day itself – but in terms of impact on the bill for the pandemic it feels more like a gesture rather than a meaningful attempt to raise additional revenue.

One obvious target is Business Asset Disposal Relief (“BADR”) – the catchily named replacement for what everyone still refers to as Entrepreneur’s Relief.  The last Budget reduced the lifetime BADR limit from £10 million to £1 million and it would be a relatively straightforward matter to abolish it altogether this time round.  The impact it would have in total tax terms would be negligible but it would make for a very good story – with the government making sure “fat cats” pay their share of the bill for the pandemic – fat cats including corner shop owners and other small traders who likely make up the majority of BADR claims…  I expect BADR will go from Budget day, perhaps to be replaced by some kind of retirement relief for older business owners – though I doubt the Government will have had time to work up a meaningful replacement in time for the Budget.

The Stamp Duty Land tax holiday in England and Northern Ireland is due to end on 31 March – there is speculation about a short extension but perhaps now is the time to ask whether a property transfer tax paid by purchasers is really fit for purpose in the 21st century.  You only need to look at the impact the holiday had on the housing market to see the scope for taxes to skew a market one way or another.  Now may not be the time to abolish it altogether but perhaps now is the time to consider some much-needed reform.

In terms of a shopping list, now surely is the time for the government to look at ways to encourage businesses to invest – perhaps counter intuitive when the government needs to raise revenue but businesses who invest are surely more likely to pay more tax and employ more people in the long run?  More generous reliefs for capital expenditure would be a nice start, as well as enhanced R&D tax credits for innovative businesses.  Incentives for business to create meaningful jobs would also be nice – to date the Kick Start scheme has sadly been a bit of a damp squib – largely because it has been made so complicated – but that doesn’t mean the principle is wrong, just the execution.

Frankly I would not want to be in Mr Sunak’s shoes at this time – there are some very tough decisions to be made.  However, I sincerely hope he holds his nerve and resists the temptation to introduce sweeping tax rises and squeeze the life out of any economic recovery before it has a chance to start.

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