Whenever you ask a tax professional one of the reasons they enjoy working in tax, a common answer you will hear is that there is always something new to learn as the rules are constantly changing.
The Chancellor of the Exchequer presenting their budget to the House of Commons is one of those points in the year that provides an opportunity to learn something new, and this is especially true when it is a new Chancellor, of a new government, presenting their first budget.
On 30 October Rachel Reeves will present the first budget delivered by a Labour government since March 2010. Following the election, the Government has painted a very gloomy outlook for the UK, with announcements that there will be some pain coming in the Budget. I am asked on a daily basis, by clients and colleagues alike, what my budget predictions are, and just how bad I think it will be. My standard answer is, “I have no idea”, although I am coming round to thinking that whilst there will undoubtedly be some form of tax rises, I’m not sure these will be quite as bad as being predicted by the press.
Last week’s Labour Party Conference provided little in terms of positivity, and in my view, the Budget needs to provide some good news. We are already hearing stories of falling consumer confidence and lack of growth in the economy. Tax policy is a lever that the Government can use to stimulate growth. Without growth, the country will continue to have a deficit in its finances, regardless of how much taxes rise. Tax policy needs to be managed carefully to both stimulate growth, and to raise funds for country’s finances.
In terms of what I do expect at the Budget, in their election manifesto, the government committed not to increase National Insurance, income tax rates or VAT, but they remained silent on the other taxes.
We already know that VAT will be applied to private school fees from January, and whilst that may be seen as an increase in VAT, in reality it is the removal of an exemption, which begs the question “could any other exemptions be removed moving forwards?” I don’t expect any such announcements in October, however this could be one to watch going forward.
Capital Gains Tax (CGT) has been prompting a lot of discussion since the election was announced, and this is definitely the one that is causing the most concern to our clients. The current worst case scenario is that the rates of CGT could be increased to align with income tax rates. I think some kind of increase is inevitable, but I do not think it will also mean the removal of some of the CGT reliefs currently available, such as Business Asset Disposal Relief. For as long as I’ve worked in tax there has been some form of CGT relief for entrepreneurs, and whilst the relief has gone by a variety of names (previously known as entrepreneurs relief), its affect has broadly been the same, in that it provides a 10% tax rate for those eligible. I would expect this to continue, although I do think the eligibility criteria may be made more restrictive.
Inheritance Tax (IHT) is another emotive tax for those affected, with many taking the view that it is a tax on wealth that has already been taxed. More estates than ever are suffering IHT, and this is only forecast to increase over the coming years. This is another area where I can see the various IHT reliefs being looked at, and the eligibility criteria tightened up, particularly with regards to gifts and assets that qualify for Business Property Relief.
Pensions are creating lots of headlines at the moment. In a country with an ageing population and a declining birth rate, encouraging savers to make provision for their retirement would seem to be the most appropriate strategy. However, there continues to be talk around reducing the tax-free lump sums that can be drawn from pensions and altering the reliefs available on pension contributions, principally around changing the rate of tax relief on pension contributions to a flat rate of up to 30%. Whilst on the one hand I see the benefit in unifying the rate of relief on pension contributions, I see this causing administrative headaches for company pension contributions, particularly those operated under salary sacrifice. An area that I can see being looked at is the ability to pass pension pots, in certain circumstances, without a charge to IHT.
Budget day is always an exciting one for tax professionals, and I do think that the Budget on 30 October will be more exciting than most.
Armstrong Watson's, tax, financial services and accounting experts analysed the Chancellor’s announcements in our Budget Analysis Webinar.
