Budget changes on our radar

The March 2021 Budget comes at a time of hope that normal life can slowly be resumed as the pandemic subsides, but significant uncertainties remain. Repairing public finances will almost certainly require substantial increases in tax revenues, but it seems likely that the Chancellor will postpone most of these until economic recovery is secured. His room for manoeuvre is further restricted by the Conservative manifesto pledge not to raise rates of income tax, national insurance or VAT so pre-Budget speculation has focussed on increases in corporation tax and capital gains tax, restriction of reliefs and possible introduction of new taxes on those who have profited during the pandemic. The Government has postponed publication of the outcomes of consultations on a number of major tax reforms until 23 March, so it seems likely that the Budget will focus only on matters to be included in the Finance Bill, with more radical or complex measures deferred until an autumn Budget. Increases in tax rates are usually introduced with effect from the start of a financial year, but can have immediate effect from Budget Day, for instance the increase in the capital gains tax rate introduced by the Coalition government in June 2010.

The CMS tax team will report on interesting tax announcements in the Budget. Measures currently on our radar for possible inclusion include:

• Increase in the rate of corporation tax, possibly rising in stages to as much as 25% over this Parliament. At first sight this might appear counter-intuitive for a Government intent on supporting business but, as it would only be paid by companies making profits, it should not affect those worst affected by the pandemic and could be presented as requiring those who have prospered during the pandemic to make a greater contribution. Furthermore the current 19% rate could be increased by a few percentage points and still remain lower than that of most of the UK’s competitors.
• Stamp Duty Land Tax holiday extension: the exemption for the first £500,000 of the price of residential property was due to expire on 31 March but is widely expected to be extended to 30 June.
• VAT on the hospitality sector: the reduction to 5% was due to expire on 31 March 2021 but an extension to late June is also expected.
• Developers’ Levy to fund removal of flammable cladding: The Government has announced that new taxes will be imposed on the building industry to raise the cost of cladding remediation in the wake of the Grenfell Tower fire. There will be a levy on developers seeking planning permission for high-rise buildings, supplemented by a further tax on the residential property development sector. Further details may be announced in the Budget.
• Capital gains tax: The Office for Tax Simplification has recently highlighted the disparity between rates of taxation on gains and income and the distortions this causes, particularly in the case of employee-owned shares and owner-managed companies. CGT is outside the Government’s manifesto pledge so rates could well be increased from the current range of 10—28% or measures taken to tax gains as income in some circumstances. More radical measures are likely to be postponed to a later budget.
• The self-employed: We may see an increase in the NIC rates paid by the self-employed. A previous Chancellor had to retreat from an earlier attempt to increase them as this breached a manifesto pledge, but the Chancellor is understood to believe that financial support during the pandemic removes the justification for lower NIC rates.
• A new wealth tax. A recent report by the Wealth Tax Commission proposes a one-off wealth tax to recoup the cost of the pandemic. If applied to all current and recent UK residents with net assets exceeding £500,000 it could raise enough to cover most of the costs, but would affect many who do not consider themselves wealthy so is perhaps unlikely to be included in this Budget. A change as radical as this would usually be preceded by consultation but immediate introduction, possibly with retrospective effect, would make it harder for taxpayers to re-arrange their affairs to reduce their exposure.
• Online sales tax: This has been suggested as a way to ensure that online retailers, who have prospered during the pandemic at the expense of high street retailers, make a greater contribution to UK tax revenues. This could take the form of a levy on deliveries. Otherwise, such a tax would be difficult to impose and enforce on those operating from overseas.
• Freezing of allowances and thresholds: the Chancellor could raise substantial tax revenues over the course of the current parliament by freezing allowances and tax thresholds. Freezing the lifetime allowance for pension contributions would be less controversial than restricting relief to the basic rate of tax.

In addition, the following measures announced in previous budgets are expected to come into force in March or April 2021 unless postponed in the Budget:

• The extension to the private sector of the IR35 personal service company rules already applicable to the public sector (6 April 2021)
• The additional 2% stamp duty charge on non-UK residents and some foreign controlled companies which buy UK residential property (1 April 2021)
• The VAT reverse charge on specified construction services. Its introduction was postponed but it is expected to come into force on 1 March 2021.