“When the Chancellor announced back in December that he would hold his second Budget on 3 March he might have hoped that the UK would already be on the way to its post-Covid-19 recovery. Instead, the Budget will arrive with restrictions still in place across the country. Despite eye watering levels of public debt, the immediate focus is likely to remain on the ongoing need to protect jobs and livelihoods. But buoyed by the early successes of the vaccination programme, the Chancellor will be keen to use the Budget to herald the start of better times to come.
“At some point in the near future he will have to turn to the unenviable task of nursing the economy into recovery while repairing the country’s public finances. That will probably mean some tax changes. While immediate wide-ranging measures are unlikely, the Chancellor may take the opportunity to set out a roadmap to recovery that will show the landscape for future revenue raising measures and set the economic narrative for this Parliament. This may well provide the clearest picture yet of the Government’s vision for a post-Brexit UK and set the tone for what’s to come in the Autumn when we may see what will amount to the second Budget of 2021. With the environment at the top of the agenda, it’s likely further steps will be taken towards using the tax system to incentivise more environmentally friendly behaviour among the public and businesses as the Government looks to emphasise its green credentials ahead of COP26.”
“The most recent forecast produced by the Office for Budget Responsibility (OBR) suggests that the Government will likely borrow £372 billion between April 2020 and April 2021. That’s equivalent to 17% of GDP or roughly £14,000 for each household in the UK.
“Even with such a large deficit, the Government has still not been able to stop the Covid crisis hitting the most vulnerable households and workers hardest. Structural problems relating to unemployment are also starting to emerge and trade with the EU is down significantly - there is no quick fix.
“However, there is a cause for some optimism: GDP figures for 2020 were not as bad as expected, data is suggesting that from a purely economic perspective, the UK is becoming more adaptable to lockdowns, is ahead of the curve on our vaccine rollout program and borrowing remains cheap.
“Given the current conditions, acting early to ensure a sustainable recovery is likely to be the most effective option - even if that means borrowing more over the next couple of years. But for this to work, Government spending needs to be well targeted towards the households and businesses that need it most.
“We must also accept the reality that economic competition will be tougher than ever in a post-Covid world. We won’t be the only country looking to create an export and investment driven recovery, so it will be important to create a strong environment that makes the UK economy more distinctive and attractive to foreign investors. To underpin this, we might expect the Chancellor to build on his Spending Review announcements, setting out further plans for how the Government will support key areas, such as upskilling our workforce in the technologies of the future, and rapidly accelerating our investment in R&D.”
“While we are expecting a significant focus on job creation there is growing concern among businesses regarding the cliff-edge ending of the furlough scheme at the end of April. It’s likely the Chancellor will either extend the furlough scheme once more, potentially tapering down the funding over a number of months or revive a version of the Job Support Scheme which was postponed in November 2020 when the furlough scheme was extended. This could be targeted at specific sectors, focusing on those industries hardest hit by the latest lockdown. The Chancellor may also decide to revive the Job Retention Bonus (JRB) in order to encourage business to make a longer term commitment to employees. However, the original design of the JRB was subject to criticism as having a ‘dead weight’ cost because businesses that intended to retain employees anyway could benefit.
“Looking towards job creation, some form of employer national insurance holiday for new employees to encourage recruitment is possible as are more general reforms to make the existing employment allowance (EA) more generous. While the EA is not specifically targeted at the employer national insurance contribution (NIC) cost for new hires, the policy aim is to encourage employers to grow by recruiting more staff, without incurring additional employer NIC liabilities. However, the EA is narrowly targeted at smaller businesses - broadly those with an employer NIC liability of less than £100,000 a year - so would need significant reforms to allow it to be accessed by all businesses that have been impacted by the pandemic.
“The Chancellor has previously indicated that providing support schemes for both the employed and self-employed should naturally lead to a debate regarding equivalent tax and NIC treatment. However, reform in this area would be a huge undertaking, and against a backdrop of a manifesto commitment to not increase NICs. So while we may hear more in relation to the Government's longer term plans, perhaps in the context of the promised Employment Rights Bill, we do not expect significant announcements until an Autumn Budget statement, if any.”
“The Government recently advised local authorities to delay issuing business rates bills for the coming financial year until after the Budget so an extension to the rates relief for retail businesses that was in place for 2020/21 to continue into 2021/22 seems inevitable. With many larger retailers taking steps to return the money saved from receiving the reliefs in 2020/21, any extension will probably be targeted at smaller businesses and those that have been ordered to close.
“We are still awaiting the Government's response to last year’s call for evidence on business rates reform. When asking for evidence for changes to the system in the short-term, the Government focussed on the operation of reliefs and how the tax rate is set. One particular discussion was whether different sectors or regions could have different tax rates and it’s possible this may now be pushed up the agenda. With the next revaluation now pushed back until 2023 the Government should use this opportunity to provide a roadmap for reform to create a more transparent and efficient system.”
“The business rates holiday was much needed for the embattled high street and, for some, it has been the difference between surviving the pandemic or not. But a review of business rates was needed before the pandemic, as bricks and mortar shoulder a disproportionate burden. The Government faces a difficult balancing act between supporting the high street and ensuring that the local public services funded by business rates are not impacted.”
“The cost of support offered during the Covid-19 crisis is likely to lead to a renewed focus on enforcement. We expect to see more enquiry activity and forensic investigations into taxpayer behaviour, for example where specific reliefs and claims have been made by taxpayers throughout the pandemic. We may therefore see announcements around enhanced procedural and information powers for HMRC.
“Despite the pressures to increase revenue, the Government will also be sensitive to the economic consequences of the pandemic on individuals and small businesses. We could therefore see an extension of some reliefs provided through the pandemic, for example Time to Pay and extension of the VAT opt-in deferral scheme to help businesses as they recover.”
“The Budget provides the opportunity to reaffirm the UK's climate credentials and give it strength as joint COP26 President to guide the international community to collectively do more.
“The Government will want to use the tax system to encourage or discourage behaviour that is consistent with the 2050 net zero pledge. Responses to the current call for evidence into environmental tax might be used to set the tone for future changes or the introduction of new taxes. With the UK set to host COP26 in November, the Government will want to be seen as a leading light in the fight against climate change. This could finally mean a rise in fuel duty after more than 10 years of freezes. A 5p increase would set the average motorist back £100 a year but with environmental issues at the top of the agenda and a need to begin mending the public finances, now may be seen as the time to increase what is the Treasury’s eighth biggest revenue raiser. With an emphasis on greener transport, it would be a surprise if the Government doesn’t extend the initiative that sees drivers of company electric cars pay no benefit in kind tax until April 2021.
“Further investment into the green infrastructure that will be a crucial complement to future carbon price rises will continue to lay the groundwork for the net zero economy. Moving forward, there are multiple levers within the tax system that can be pulled to encourage businesses to become greener. These might include enhanced capital allowances for environmentally friendly equipment, longer decommissioning tax loss carry back for renewable energy infrastructure and enhanced R&D incentives to encourage innovation.”
“The UK is experiencing a serious disruption of the labour market. Some sectors are losing jobs rapidly due to the pandemic. In most cases these are sectors prone to automation and these jobs are unlikely to return. Other sectors are growing but finding insufficient skills supply and, therefore, their growth is either limited by the skills shortage or at risk of investments moving abroad. The current mismatch of skills and jobs is an unusually significant disruption within a short period of time which has been catalysed by the pandemic.
“In line with the net zero objectives and its 10-point plan, the Government is likely to be thinking of incentives supporting the transition to the new generation of green jobs that will demand new qualifications, professional standards, retraining of the current and future workforce. Evidence suggests that the impact of the current disruption is being particularly acutely felt by parts of the UK that were the targets for the Government’s levelling up agenda so this is likely to be where the incentives are targeted.
“The Government has a number of policy levers at its disposal at a national and local level, including direct grants to SMEs to take on additional employees, tax incentives for businesses for apprenticeships, training schemes and funding for targeted ‘skills banks’ in levelling up regions as well as funding for organisations and institutions providing skills training.”
“The pandemic has exposed deep health, societal and economic divisions across cities, towns and regions in the UK, and made them worse. We need a Budget that works locally, including practical action to make levelling up a reality. We’ll hopefully hear more about the Levelling Up Fund that was announced at the Spending Review.
“While it’s the necessary and big ticket infrastructure investments that will make the headlines, our research shows that the public’s concerns are closer to home. After a year spending more time in their homes and communities, it’s perhaps no surprise that housing tops their agenda, with 70% of people saying it’s the most important issue in levelling up inequalities, followed by investment in vibrant town centres and high streets, and access to quality jobs.
“With the current furlough scheme due to come to an end, the Chancellor will have an eye on rising unemployment and needs to keep his focus on ensuring people, particularly the younger ‘Covid generation’, have jobs for today, and skills for tomorrow.
“And we won’t be able to recover and move forward until we address the catch-up that’s needed - be that children and young people who’ve missed out on education; patients who’ve missed treatments; and court cases that haven’t been heard. That will take investment in the public sector and its workforce, to get through the backlog and build resilience in our public services and in our society.”
“After decades of falling corporate tax rates around the world, we may well be at an inflexion point where businesses are asked to play their part in repairing public finances in recognition of the Covid support measures many have received. Having already rowed back on plans to drop the rate to 17%, a one percentage point rise would mean the UK still has one of the lowest rates in the G20. But when considering any changes, the Government will be mindful of the need not to deter post-Brexit inward investment and may wait until the economy is stronger.”
“An apparent renewed commitment to the Government’s tax triple lock means that any increases to income tax, national insurance contributions will be off the table for now.
“If the Chancellor does look to start collecting more money immediately, a doubling down on enforcement of the current tax system and more efficient collection of taxes is also more likely than big tax rises. Whilst the Government has already met its commitment to increase the tax free personal allowance to £12,500 and the higher rate threshold to £50,000, both had been due to continue to rise in line with inflation. These could be frozen to bring in more revenue without raising tax rates. Another option would be to freeze the upper rate tax threshold at £50,001 and raise the Class 1 NIC upper earnings limit upwards from £50,000. This move would mean more employee earnings would be subject to employee NIC at 12% rather than 2%, and would impact earners over £50,000 a year.
“ISA regimes, tax on rental income and other savings are unlikely to be top of the Chancellor’s list this time round so we do not expect any significant changes.”
“Capital taxes feature in Magna Carta so it is perhaps not surprising that the prospect of enhanced taxes on wealth or increases to capital gains tax continue to be the subject of much debate.The difficulty with these taxes is that they tend to be complex to administer, particularly relative to the income they generate, and while capital taxes are undoubtedly important their contribution - accounting for only 1% of tax revenue - is dwarfed by the major three revenue raisers, income tax, national insurance and VAT, which make up two-thirds. The importance of capital taxes tends to be in their interaction with other taxes and the way that they fall on the wealthier sections of society - by definition those with capital assets. A lot of work has already been done in recent years by successive Chancellors in terms of scoping capital taxes and their associated reliefs and it is unlikely that we will see a change in approach now. We would expect to see capital gains tax and inheritance tax kept under review with perhaps some changes in the reliefs, scope and even effective rates; it is probably too early for significant reform but the Chancellor will want to show that taxes in this area remain aligned to the Government’s goals.”
“Rumours about changing the current tax system, especially the lifetime and annual allowances and the tax-free cash lump sum at retirement, circle around the industry all year along. In practice, for the last few years there have been few major changes, albeit several smaller technical changes. Despite pressures on the Chancellor to start recovering revenues to pay for pandemic borrowing, now would not be the time to go after pensions. The pensions industry is already under strain from having to keep up with a regulatory backlog, even before the disruption of Covid-19 hit, and the burden of other new legal developments.
“Elsewhere, levelling up the pension saving opportunities between the employed and self-employed would be a welcome step. The furlough and self-employed support schemes have highlighted a long-standing challenge around how different groups of workers are treated as part of our overall tax system. Another ongoing concern is how the self-employed are left out of the auto-enrolment savings system, which allows employed workers to benefit from company top-up contributions.
“The Government’s decision to not make changes to the RPI index until 2030, even though it is otherwise widely discredited as an inflation measure, has left pension schemes in a fix. A Government override, enabling all schemes to make an immediate change to their benefit formulas, would be a welcome simplification.”
“The Chancellor will need to balance the nation’s immediate health priorities as we continue to navigate the pandemic, with the longer-term structural changes for the health and social care sectors, as well as establishing the National Institute of Health Protection (NIHP).
“Continued funding to support the NHS with its Covid-19 response and the vaccination programme will be required, and this will include flexibility of funding and resources to accommodate an ongoing vaccination programme.
“Given the health inequalities exacerbated through the pandemic, the Chancellor may take this opportunity to consider plans to tackle levelling up of health inequalities, including funding for mental health and community outreach services. The Health & Social Care White Paper sets out a blueprint to remove red tape to empower local health providers to deliver services to best meet the needs of their communities.
“The newly-created NIHP will play an important role in ongoing public health protection and management of diseases to boost the UK’s ability to recover from COVID-19 and protect citizens' health. Given its long-term focus on health prevention it will require adequate funding from the Chancellor to ensure we are well equipped to respond to other health threats now and in the future.
“The Chancellor will need to be on the front foot in providing the finances required by the NHS to tackle waiting lists for treatments. Investing in quality validation of data, workforce capacity and infrastructure will be critical for the health service to effectively reduce patients’ waiting times.
“The pandemic has accelerated the pace of technological change in the NHS. A focus on investment in tech-enabled healthcare, for example innovation funding for systems to make efficiencies through technological solutions, would help seize the long-term benefits technology provides for the health service, patients and carers.”
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