The Government may have decided to use debt to fund the recovery and the post-Brexit transformation; however, the Chancellor failed to address the question on the mind of investors and UK stakeholders: who pays for it all?
To be fair, this is a question no state has yet given an answer to in any satisfactory manner. The primary funding is likely to come from the central bank, which has been increasingly taking on the duty of financing the economy through quantitative easing.
Many believe that debt owed to the central bank is hardly considered "debt", especially if increasing it doesn't lead to inflation. At this point, taxation mainly serves to reduce the burden on the central bank and to make sure society is content with the sharing of burdens. If, however, long-term inflation rears its ugly head, despite deflationary pressures like rising unemployment and perennially subdued demand, then the Bank of England may not be able to sustain its purchases of UK Government debt.
In that case, the Government would have to choose between a weaker Pound and borrowing more from private investors in financial markets, or increase future tax burdens and introduce austerity.
So what measures didn’t the Chancellor announce in the Budget that we might expect in the future?
Capital Gains Tax (CGT)
The Chancellor did not explicitly mention CGT during his address, the only mention of it in the full press release was to confirm that the Annual Exempt Amount for CGT will be maintained at its existing level until April 2026. Like the announcements regarding Income Tax bands, this is a way of gradually increasing tax receipts from CGT whilst keeping the underlying rate unchanged.
What does this mean for business owners and CGT in the longer term? First of all, it will give business owners the comfort that there is no immediate "cliff edge" and they can continue to plan and execute transactions as they did before, with no significant changes to the tax treatment in the short term, a huge relief to many.
Does it mean that the threat of a CGT rate rise has gone away? That is less clear. With the "triple lock" on income, NIC and VAT rates, and with the rise in Corporation Tax announced today, CGT remains open to change in the future if the Chancellor deems it necessary. If nothing else, it gives businesses owners a clear six-month window (until the next Budget in the Autumn) to plan and transact without fear of changes in the CGT rate.
CGT equally applies to individual investors. Before the Budget, there was plenty of activity to crystallise capital gains and 'bank' the current CGT rates by realising gains within investment portfolios and accelerating gifts to family members. It might be that the Chancellor is hoping for the acceleration of transactions to continue, raising more tax in the short-term, before taking action to bring the rate of CGT closer to income tax rates.
The OTS reviewed IHT a year or so ago and identified a number of potential changes, including the complex ‘potentially exempt’ system, the nil rate band and the often generous reliefs for the exemption for many businesses interests . The Chancellor has so far announced a further freeze on the IHT nil rate band but has yet to introduce any substantial changes.
Whilst the year-on-year increase in the amount of IHT collected is increasing, the debate continues around the complexity of the IHT system and the fair application of some of the reliefs, many of which have remained substantially unchanged for decades. It seems reasonable to expect that this desire to simplify the IHT regime will continue, but if the tax collected continues to increase, then perhaps wholesale changes might take longer to materialise.
The Wealth Tax Commission published its review and analysis of the impact of introducing a tax on wealth in December. Again, the Chancellor remained silent on this, but that doesn't mean that the idea will have gone away.
Of course, a delay in introducing a new tax usually means many start to think about ways to reduce their exposure to taxes but the commission carefully considered how to counteract many ideas, including assessing wealth at a point in time that has already passed.
Perhaps a wealth tax may be too radical? It may well just be mothballed for the time being until the success of any post lockdown bounce back can be assessed.
We had already seen the highest earners being restricted to annual contributions to their pension schemes of £4,000 each year , but many speculated that tax relief on contributions would be further restricted. Currently, relief is given overall at an individual's marginal rate of tax.
Whilst restricting relief would deliver a cost saving, there is probably a point where the Chancellor might worry that there is insufficient incentive to contribute to long-term institutional investment funds. These are typically funds that invest in the economy to generate income in the long term to supoort those investors in retirement. again could this be something to revisit when the recovery is underway?
Employment Tax & Reward
The focus was very much on training and development, with no announcements regarding equity reward, employment taxes or employment status. However, as per previous Government papers seen in the run-up to the Budget, there are likely to be future consultations, particularly concerning the more recent topical areasof:
- Aligning income tax and NIC;
- Assessing employment status for tax and legal purposes; and
- What tax ‘self-employed’ workers should pay where they operate via a limited company.
Given the broader corporation tax increase announcement from 2023, this may mean some Personal Service Companies reflect on how they are structured and engaged by their customers, particularly where there may be future changes to dividend tax rates and National Insurance.
This will very much be an area to watch, given the changes being introduced across the Private Sector from April 2021 concerning IR35 and Off Payroll Working. The future of tax will need to balance tax collection, which will be ever more vital as we look to recover from the pandemic's costs, with encouraging progression and success via a tax system that does not become unduly penal.
Online Sales and Digital Services Taxes
There was speculation that a new sales tax would be levied on goods bought online and on consumer deliveries. Speculation on a one-off tax was also considered for taxing the profits of certain businesses, including online retailers and tech giants, whose profits have soared during the COVID-19 pandemic. These measures were not announced today and instead, there was more focus on business support across the board with extended reliefs for capital expenditure, research and development and loss carry backs.
With the corporation tax rate not increasing until 2023, there was a “support now, pay later” theme and therefore it would be remiss to assume these proposals for raising taxes are off the table permanently.
The Chancellor is playing a careful balancing act to encourage investment in the UK whilst also raising taxes on those businesses seen by the public as most able to bear them. Perhaps that is also why he did not choose to fix the Digital Services Tax loophole allowing tech giants to pass the fee on, as campaigners have called for, nor increase the rate of tax in line with other countries’ rates. For now, any increased tax take will come from the measures introduced (as we come to expect in every Budget) to counteract tax evasion, avoidance and non-compliance.
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