Budget predictions: how to incentivise whilst collecting more tax

The autumn Budget is heralded as a ‘technical’ budget, which broadly means we should expect something interesting on the 27 October! Plans have already been announced to spend an extra £140bn supporting public services, raise £14bn of additional tax to reform social care and boost health spending. Headlines released ahead of a budget worry me. I cynically believe politicians make big announcements to hide something dark and dismal in the small print.

What could the Government possibly sneak into a budget? Having suffered a rough eighteen months, the economy needs to be carefully structured to recover spending whilst encouraging growth. The Government has probably missed that small business owners and entrepreneurs have been suffering for two decades with consistent economic problems and periods of prolonged poor trading conditions: the financial crisis following 9/11, the financial crisis following the resale of mortgage debt into bonds across the global economy, the Brexit campaign, the EU exit debacle and then Covid. The small business owner might just be grateful for some stability.

Within the measures that may be introduced to encourage business growth, entrepreneurship and improving workforce skills there will inevitably be some tax measures to generate increased revenue. HMRC is already focused on identifying and rectifying tax errors and countering tax avoidance. Several measures have been introduced to target promoters of tax avoidance as well as to make it easier for those misled into the use of schemes to get out. Data sharing between countries as well as the increased information powers to obtain third party information electronically and without the taxpayer knowing, will inevitably result in higher enquiries and investigations over the coming years.

HMRC has redesigned itself and is recruiting data scientists to assist in its attempts to crack down on avoidance. The public are more aware that big brother is watching them and are acutely aware it is a matter of time before any known irregularity is identified. If fleeing to a non-extradition country is not an option, disclosure facilities may appeal to both taxpayers and HMRC who will struggle with resources.

We believe HMRC will focus resources to combat tax loss in the following areas:

• Avoidance schemes – its over a decade since disguised remuneration although many are not deterred by legislative changes, although that may be because legislation has arguably not been fit for purpose.
• Those with interest in offshore assets – the increasing information passing to HMRC makes identification of beneficial owners easier and the political stance not to investigate during covid has delayed the opening of investigations.
• Cryptocurrency transactions – HMRC has published their guidance on how the various crypto transactions can give rise to tax and therefore it seems natural they will want to enforce. Furthermore, HMRC has been obtaining information from platforms with which to start investigations.
• Online retailers with understated income – HMRC are targeting those traders it can identify easily through third party information providers such as Amazon, eBay etc.
• UK traders with understated income that used merchant facilities – HMRC before Covid was targeting food providers utilising Deliveroo, Just Eat, Uber Eats to make sales and inevitably this will continue now Covid is settling down.
• Undeclared property income will continue to be a target area but not just for buy to let landlords. HMRC is in possession of information from online services that promote Airbnb or furnished holiday lettings.

HMRC will also be tackling furlough fraud and the normal campaigns on ghost workers and illegal booze and cigarette importers will continue.

Below we set out other changes and anticipated changes expected in this autumn’s budget.

Basis periods

On 21 July 2021 a consultation on the reform of basis periods for the self-employed was issued. The consultation didn’t ask for consultation on whether reform should proceed but more how it should proceed. The impact of the reform will be accelerated revenue for 2023 and the next five years. The reform is broadly to align self employed persons (and partners/partnerships) to account for tax on profits in line with the tax year.

Late payment and penalty

Included in the ‘budget 2021 tax related documents’ was the already anticipated the new late submission penalties, late payment penalties, and harmonised interest announcements. We also had the consultation outcome in respect of ‘Follower Notices and Penalties’.

The late submission and payment penalties follow three consultations between August 2016 and March 2018 and the Policy Paper published on 6 July 2018. It was then proposed that the implementation will initially be for income tax self-assessment and VAT. Corporation tax was not included in the scope then although the government asserted the new approach would apply in the future. Corporation tax remains outside the scope of the new late submission penalties.

The government estimates that the measures will raise £155m per year by 2024/25 so the impact is not insignificant.

IHT and CGT

The All Party Parliamentary Group have recommended the abolishment of most reliefs for IHT. We could therefore be saying goodbye to gifts out of ordinary income, business property relief and agricultural property relief. Instead, the recommendation is to have an annual allowance of £30,000 and thereafter a lifetime tax on gifts at 10%. A further recommendation although this time on death is that the 40% rate of IHT be reduced to 10% for estates with taxable amounts up to £2m. Relief for IHT on business assets is still considered appropriate and it is suggested that the liability could be paid in instalments over ten years.

Further proposed reforms include:

• The beneficiary of an estate receiving assets at deceased’s acquisition costs for CGT purposes,
• The removal of domicile, and
• The alignment of CGT and income tax rates

Corporation tax

We already know that corporation tax rates are to rise in 2023. Corporation tax will increase from 19% (since 1 April 2017) to 25% from 1 April 2023. The rate will apply to companies with annual profits exceeding £250,000. A ‘small profits rate’ at 19% will apply to companies with annual profits below £50,000. Where profits fall between the upper and lower limits, marginal relief provisions will apply between the two rates.

There may be a desire for the Chancellor to implement more post pandemic recovery measures although the reality is its unlikely! Measures like the capital allowances super deduction were announced in the March Budget. Also announced, was the review of R&D tax reliefs and a consultation ran from 3 March to 2 June 2021. We could therefore expect some changes to R&D tax reliefs including:

• A change to the amount of credit and inevitably the financial incentive
• Whether the current two schemes are combined
• A change or clarification in the definition of R&D

The Governments aim is to raise total UK investment in R&D to 2.4% of GDP by 2027 and the objective must therefore be one of increasing the breadth of the relief.

Capital allowances super deduction

The Chancellor announced on 3 March 2021 two new temporary first year allowances:

• the super deduction, and
• the SR allowance.

The new first year allowances provide businesses investing in qualifying equipment a much higher tax deduction in the tax year of purchase. The allowances apply for capital investments made between 1 April 2021 and 31 March 2023. The contract for the plant and machinery needs to be entered into after 3 March 2021 and expenditure is incurred after 1 April 2021.

The super deduction and SR allowance are only available to companies subject to corporation tax.

The qualifying groups are quite wide:

• Super deduction includes all new plant and machinery that ordinarily qualifies for the 18% main pool rate of writing down allowances.
• SR allowance covers new plant and machinery qualifying for the 6% special rate pool, including integral features in a building and long-life assets. 

Job creation and skills shortages

A range of government programmes are available for employers who are considering hiring employees, offering work experience or upskilling existing staff. Some of programmes offer financial incentives although once the furlough scheme ends, the Government is expected to extend schemes to boos youth employment.

Investment boost

The UK is no longer restricted by the EU and a further expected measure is the enhancement of venture capital tax reliefs for investors and therefore changes may be afoot for the Enterprise Investment Scheme and Seed Enterprise Investment Scheme.

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