The October 2021 Budget, which is now only a few weeks away, is likely to be of interest to many following the announcement of tax rises in recent weeks. In this article, SLJ Accountants explains what we can expect from the upcoming Budget.
With the October 2021 Budget fast approaching, the Chancellor Mr Sunak has a difficult balancing act – a huge budget deficit, an economy where the recovery is still fragile suffering from the effects of the ‘pingdemic’, and recent tax increases which have breached Conservative party manifesto pledges.
The increases in National Insurance (NIC) and the tax rates on dividends coming in next year were a surprise to many, me included. It has been quite interesting reading the ill-informed comments doing the rounds with one leading politician suggesting that, instead of increasing NIC, the government should have simply increased taxes for landlords!
Will Mr Sunak now push for further tax increases, or would that be a step too far? If he does not, could that be viewed as delaying the inevitable? Future tax rises must still be a possibility, but they are unlikely to take effect immediately and are much more likely to be of the ‘stealth’ variety.
What we hope to see in the October 2021 Budget:
- No immediate changes to Capital Gains Tax for entrepreneurs;
- Further reliefs for businesses in advance of the increase in Corporation Tax in 2023; and
- Anti-avoidance and tax recovery measures to deal with the ‘Covid fraud’ which has sadly been one unwelcome feature of the pandemic.
What could we see in the October 2021 Budget?
We had the introduction of the capital allowance super deduction in March. Might we see further, or enhanced, reliefs for businesses? An improvement to the reliefs under the R & D scheme would be welcome and would hopefully stimulate investment in innovative technologies in the UK.
With the ending of the furlough scheme, might we see incentives to encourage employment? A lot has been written about the shortage of lorry drivers – a targeted initiative to deal with this issue perhaps?
Mr Sunak might view the increase in Corporation Tax in 2023 as enough for business to absorb for the moment, so I do not expect any increase in direct taxes for businesses. However, there is still work to be done to address tax avoidance and the abuse we have seen of the pandemic related reliefs. I expect to see further measures here which may generate material tax receipts.
The freezing of allowances and bands from April 2022 should generate considerable income for the Treasury. Freezing other allowances and thresholds, at a time of rising inflation, could also be a nice little earner for the Chancellor over the next few years.
We may see some technical changes in the October 2021 Budget and the announcement of further consultations. One current issue is the potential reform of the tax basis periods for the self-employed. This is being held out as simplification to help sole-traders and partnerships move to MTD quarterly reporting for income tax from April 2023. In reality, this could be viewed as nothing more than a revenue acceleration ploy for the Treasury for 2023 and the 5 years beyond. However, as we have seen with the announcement last week the MTD initiative has now been delayed a year. Full marks for common sense.
Capital Gains Tax
On the Capital Gains Tax front there has been talk of the possibility that the rates of CGT might be aligned with income tax rates. This may not raise a great deal of tax, when set against the total tax take, but if the increase where to be postponed, as with the increase in the rate of CT, this might prompt business owners to sell early thus creating a nice little ‘windfall’ for the Treasury.
I had hoped that the recent NI and dividend tax increases might encourage Mr Sunak to lay off CGT for the moment. Any increase in CGT rates now would have the feel of kicking a taxpayer (the business owner) when they are down.
Potential investors will not doubt be hoping for an improvement in the tax reliefs offered to them under the SEIS, EIS and VCT schemes especially now that we are no longer restricted by the EU rules. Changes here could help to stimulate the economic recovery which in part is going to be helped by the incorporation, and expansion, of fledgling companies.
I have mentioned this before, but there are certain businesses which have done well in the pandemic – online retailers and the like. Might the Chancellor make changes – one off taxes, VAT changes etc. to try to reduce the advantage they have over traditional retailers?!
There are also the perennial topics which appear before every Budget as potential targets:
- Inheritance Tax simplification. IHT is increasingly seen as a good source of revenue for the Treasury – £571 million in July 2021. Simplification could be relatively straightforward for the Chancellor which would result in increasing future revenues without directly changing headline tax rates. The real plus here would be that most taxpayers would be unaffected by any changes;
- Pension contribution tax relief. The fear that the current high rates of wages growth would push up pensions faster than general inflation has resulted in the ‘temporary’ setting aside of the triple lock on state pensions. The current political climate may mean that a review of the tax relief for private pensions may be too difficult an issue to address now. However, with an annual cost of £40 billion to the Treasury we may see some technical changes; and
- Second homeowners. Always deemed a legitimate target for the Government for so many varying reasons, which I will not address here.
Finally, the UK is hosting the Climate Change Summit shortly. The Chancellor will want to outline his plans for making the UK economy carbon neutral. This is likely to mean higher costs for fuel suppliers rather than direct tax increases for consumers. However, these costs will inevitably be passed on to consumers – making a switch to ‘greener’ forms of home heating more attractive. It is likely that any such measures would not take full effect until the economy has shown consistent recovery.
There are plenty of other topics I could mention, and I think one thing is for certain – there will be a surprise or two on October 27th!