2021 Spring Budget Predictions
The Chancellor will present the much-anticipated 2021 Budget on Wednesday 3 March 2021.
In 2020 the UK suffered its worst economic slump since the Great Frost of 1709, contracting by 9.9% and narrowly avoiding a double dip recession. The UK economy has faced many challenges over the years, but nothing on this scale in living memory. Since the pandemic first hit and we were told to stay at home for the first time almost a year ago, the Government has pumped an extraordinary figure of money into the economy to keep it afloat. Last month UK borrowing reached £8.8bn, the highest January figure since records began. This means the national debt now stands at a staggering £2.11 trillion.
With that in mind, the Chancellor has a choice of whether to raise taxes in order to start rebalancing the deficit. Or whether to defer tax rises and continue to support people and jobs until the economy is on a surer footing.
With the success of the vaccine rollout and gradual easing of lockdown restrictions, we hope to see a spring back in the economy this year due to pent-up consumer demand. However, the road ahead may be bumpy, and the decisions made on 3 March are likely to be far-reaching with long-term consequences.
Here are our predictions for what we think may be announced in the 2021 Budget.
Budget predictions: businesses
There have been calls to extend the job support schemes, due to end 30 April, the business rates relief due to end 5 April and the reduced VAT rate for the hospitality sector due to end on 31 March. It is likely that the Chancellor may announce new measures either in a separate announcement prior to the budget or as part of his budget speech.
It has been widely rumoured that there will be an increase in the headline rate of corporation tax, from 19%. At the last Budget, the Chancellor scrapped a planned further cut to 17% from 1 April 2020. It may be that he increases this rate by 1% which would still mean the UK has one of the lowest rates in the G20.
Following the recession caused by the financial crash in 2008 the government extended the corporation tax loss carryback from 12 months to 36 months which made an enormous difference to the cash flows of viable businesses. The Chancellor may opt to reintroduce such a measure, alongside any increase in the headline rate of corporation tax.
Capital Allowances and R&D Incentives
Additionally, boosting business investment will be high on the Chancellor’s agenda. This means that increases in capital allowances rates, particularly those that support the Government’s carbon reduction agenda such as low carbon vehicles and energy-efficient technology, are quite possible.
The government had previously announced that the reduction in the Annual Investment Allowance, a 100% relief for qualifying expenditure on plant and machinery, from £1m to £200,000 would be delayed from 1 January 2021 to 1 January 2022. In order to boost further investment, it is possible a further deferral will be announced.
It is likely he will also look at R&D incentives as another way of boosting the economy. In the spring 2020 budget, the government announced it would consult on an expansion of the existing cost categories to include expenditure on data and cloud computing costs. This consultation closed in October 2020 and it is likely he will use the budget to confirm he will proceed with this proposal.
Similarly, while broadening the scope of qualifying expenditure it is likely the Chancellor will also limit relief on routine, indirect activities, i.e. items which do not contribute directly to technological uncertainty.
It is likely we will hear an announcement on Freeports. Following the UK’s departure from the EU, the government sees the establishment of new Freeports as a means of boosting trade, jobs and investment across the UK. The bidding process closed on 5 February 2021 and over 50 applications have been submitted from sea, rail and airports across the UK.
Businesses will be able to claim reliefs from key business taxes within a Freeport. For example, enhanced rates of Structures and Buildings Allowance and enhanced relief for companies investing in qualifying new plant and machinery assets. As well as these anticipated announcements on Freeports, the Chancellor may seek to announce new Enterprise Zones in areas hit hard by Coronavirus. Current enterprise zones already benefit from some of the tax advantages being mooted for the freeports.
Online sales tax
The UK’s digital services tax (DST) was introduced with effect from 1 April 2020, and generally operates as a 2 per cent tax on the turnover of groups of companies providing certain digital services. However, the relevant de minimis thresholds are set such that the tax only applies to the largest digital businesses, and only a narrow set of activities are in-scope.
Notwithstanding this, due to lockdown some outlets are reporting a boom in online sales, in contrast to the traditional high street retailers who have faced a reduction in footfall and consequently profits as well as suffering business rates and other property taxes. It has been widely reported that the Chancellor is considering introducing a more wide-ranging surcharge on online sales. This would be intended to ‘level the playing field’, given that online retailers do not generally incur significant business rates and property charges. It would be a surprise if legislation to implement an online sales tax was introduced at Budget 2021, but a consultation on the potential design of such a regime is certainly a possibility.
There may be specific amendments to VAT rates on some items plus an extension of the reduction of the hospitality VAT rate of 5% beyond the current end date of 31 March 2021. In line with the manifesto pledge we see no further cause to increase the VAT rate. Conversely, there have been calls to reduce the application of the 20% standard rate in an effort to stimulate consumer spending and access the reported £125bn of savings built up by better-off households through the pandemic.
Budget predictions: individuals
The idea of a ‘one-off’ wealth tax, which was mooted by the Wealth Tax Commission to bridge the gap in public finances after Covid, has reportedly been ruled out by the Chancellor. But possible changes to our existing wealth taxes, capital gains tax (CGT) and inheritance tax (IHT), are certainly attracting attention.
Stamp Duty Land Tax
In the Summer Economic Update last July, the Chancellor announced a temporary increase to the Nil Rate Band of Residential SDLT in England and Northern Ireland from £125,000 to £500,000. The tax cut was due to end on 31 March 2021, however there is now pressure for the Government to extend this deadline to enable existing property transactions to compete or risk causing a “cliff-edge” on thousands of sales. The Centre of Policy studies said this would be a “sledgehammer blow to the housing market.”
It is now being reported that the Chancellor will extend the SDLT cut to the end of June.
Capital Gains Tax
Following on from the much-publicised Office of Tax Simplification (OTS) report there has been much speculation that the rate of Capital Gains Tax (CGT) will rise. The report recommended equalising CGT rates with income tax rates. This would more than double rates for some business owners looking to sell and it would also be self-defeating as it may deter investment from entrepreneurs. You will recall Business Asset Disposal Relief (BADR), previously referred to as Entrepreneurs’ Relief, was severely restricted in the March 2020 budget to cover only the first £1m of lifetime gains. The OTS report suggested that the government should look at replacing BADR with relief more focused on retirement. So, it is entirely possible that the Chancellor will announce a review of BADR and Investors’ Relief to a review to ensure the tax system incentivises entrepreneurship in the future.
Other suggestions in the OFT report include reducing the annual exempt amount, currently £12,000 and a review of share-based remuneration and the accumulation of retained earnings within owner managed businesses. The report also mentioned the earlier OTS report on IHT which recommended that, where a relief or exemption from IHT applies, the Government should consider removing the capital gains uplift on death for assets transferred to beneficiaries. This would avoid assets falling out with the tax net and would encourage lifetime giving.
At this stage it is thought that CGT rates will go up, however possibly the Chancellor will wait until the economy is on a surer footing.
Tax relief on pension contributions for higher rate taxpayers
Cutting pensions tax relief has been discussed frequently in the run-up to prior budgets. On the basis the government has to address a huge deficit, the Chancellor may opt to take advantage of cutting pensions relief. He could address this in a number of ways, including reducing the annual and lifetime allowances and limiting carry-forward of unused annual allowances. But the simplest would be to apply a single flat rate of relief, perhaps set at a level of 25%.
It will be interesting to see how far the Chancellor moves to balance the books in terms of tax rises. Of interest in The Times recently was the tax gap (£34 billion) which eludes the Treasury due to mistakes, poor computer systems and avoidance and the fact that HMRC do not need to increase any tax rates to pull in more of these tax revenues! HMRC are already on the case with this with its Making Tax Digital (MTD) initiative. MTD for VAT registered businesses is already in operation; income tax for self-employed individuals and rental income is planned for 2023 and corporation tax is planned to go live in 2026.
These processes will stop errors and ought to reap extra proceeds for the taxman. With the increasing digitalisation programme being contemplated by HMRC, there may be a declaration in the budget to continue and develop these processes further so that tax is calculated as you go or in real-time. An excellent way to raise more in taxation without having to increase the rates!
These predictions are just our speculation and we will just have to wait till the 3 March to see what the Chancellor announces. Keep an eye on our website as we will provide post-Budget commentary for businesses and individuals.
If you have any queries about how any of the above may impact you or your business please get in touch with a member of our tax team on 01903 234094.
A version of this blog originally appeared on the website of PrimeGlobal member firm, Henderson Loggie.