Tax increases - what does the future hold?
As news of the UK’s largest economic collapse emerges, with April seeing the economy shrink by over 20%, thoughts not turn to what the future may bring. Speculation has already begun as to when the next Budget will be held and what it may contain. Whilst this may not be the moment to commence tax increases it is likely only a matter of time before they arrive. Ryan Harrison of Leathers looks at what may lie ahead.
Although the latest news reports suggest that the Chancellor is now delaying his emergency Budget, it is becoming increasingly apparent that the sizeable hole in the Treasury’s purse will continue to grow as a result of the forecasted economic stimulus package. The contraction in the UK economy is now three times greater than the whole of the 2008 to 2009 downturn.
The overall deficit created by the Coronavirus pandemic is likely to reach £337 billion, according to estimates from The Financial Times, which is a staggering sum, but it is not clear whether this includes the continued implications next year and beyond. How many deferred VAT payments will go unpaid? How many bounce-back loans will be written off? Will the furlough bailout return? What new stimuli will be introduced to ‘kick-start’ the economy?
What is clear, however, is that that there will be a bill to pay and a seismic economic hole for Chancellor Rishi Sunak to fill. The Bank of England have already predicted the worst economic downturn in 300 years and it now feels inevitable that tax changes are on the horizon.
Many commentators have been considering the potential tax changes to cover the cost, with speculation around the introduction of a one-off wealth tax, a new tax in the form of a capital levy charged on the value of your home, investments and savings.
The rationale for such an approach is that the cost should be borne by current taxpayers as opposed to future generations. Whilst a one-off windfall tax might make financial sense, there would be concerns as to how this would be collected from those who may be asset rich but cash poor. Its implementation, in practice, would face serious issues, and that is before you even consider the public reaction to discovering they are facing ‘double-taxation’.
The changes are more likely to come in the form of increases to existing tax rates and the tightening of specific areas currently viewed as abusive; the cynic would suggest these are easier to present to the media.
In fact, a National Audit Office (NAO) report has already resulted in a Government review of the tax interventions or reliefs which they believe are too costly to the Exchequer. The largest tax expenditures currently are the reliefs on pension contributions, not charging VAT on food/new dwellings, and not charging capital gains tax (CGT) on people’s main home which alone costs £27bn per year.
Mr Sunak has already hinted at an increase in National Insurance contributions (NICs) for the self-employed, pulling the rates in line with those who are employed, so 12%. This would perhaps be justified as a way of paying the Self-Employed Income Support available for those earning, on average, under £50,000 per year.
However, in order to generate the funds likely required, more significant changes to National Insurance rates would be required, perhaps with a future corresponding increase in the rate of National Insurance for both employees and employers. Taxes which apply to the masses generate far more income for the Government, for example, IHT raises only £5.2bn compared to NICs whopping £137bn. Or, removing the upper earnings threshold such that NICs are payable at 12% beyond the current £50,000 limit (currently the rate drops to 2%).
Despite that, changes to capital taxation do look likely. The main rate of CGT has remained at 20% for several years. Some small tweaks were made from 6 April 2020 with the reduction in the Entrepreneurs’ Relief Lifetime Allowance and the shortening of the final period in which Principle Private Residence Relief will apply to only 9 months, although these have gone under the radar somewhat.
Inheritance Tax (IHT) changes were widely anticipated despite the current crisis and despite generating much lower levels of revenue. The process for change was initiated through the Office of Tax Simplification second report released during summer 2019 and the removal of various valuable IHT exemptions now looks even more likely. Business Property Relief is under real threat as is the Normal Expenditure Out of Income Exemption.
No tax increase will ever be popular but this time it feels like we may have to face up to some significant overhauls.
For any advice in relation to personal and capital taxes Ryan can be contacted on:
firstname.lastname@example.org / 0191 224 6760 or 01423 740 761