Since the onset of the pandemic and the rollout of the Furlough Scheme, billions of pounds have been pumped into the economy to assist those in need. However, as the age-old adage goes, what goes up, must come down. The Chancellor is now tasked with the job of collecting a considerable portion of the funds that were distributed through the lockdown period and not all of it can be reclaimed by pursuing fraudulent Furlough claims.
The Chancellor will have to tread carefully on the tightrope between stimulating regrowth and paying off debt while buffeted by global uncertainty but the first thing to say is that there will be little point in raising tax rates if there is no activity to tax. He will also no doubt be hoping for strong inflationary growth that doesn’t get out of hand: inflation has always been the Chancellor’s friend, at least fiscally, because it erodes the value of tax reliefs, allowances and lower rate bands.
That will be especially true in the realm of property tax because property values, often fuelled by speculative investment, consistently outstrip other measures of inflation. The SDLT holiday is unlikely to be extended and is capped at £500k residential property transaction but the beauty of it in the eyes of the Chancellor is that it applies to the full value of a property every time the property changes hands.
But SDLT alone will not cover more than a modest part of the debt which the Country owes (largely to the Bank of England and so effectively to itself on printed money) and so the taxpayer will have to contribute to the deficit and that will mean tax. The tax most often cited is Capital Gains Tax.
The Office of Tax Simplification (OTS) has already recommended 11 changes to CGT design and principles and its report on technical and administrative issues is due in early 2021.
The OTS suggests reducing the Annual Exemption from £12,300 to between £2,000 and £4,000 depending on an individuals’ income threshold. This would catch all gains but those too small to be worth the administrative cost to HMRC.
Aligning income tax and capital gains tax rates.
The ebb and flow of CGT rates away from and towards those applying for income tax is almost cyclical and currently has more widespread support in some quarters than it has had for some time.
Entrepreneurs’ relief has been reduced to a bonsai version of itself in the form of business asset disposal relief already but although it has been watered down its unnecessary complexities and inconsistencies remain unaddressed so (rhetorical question alert!) why not do away with it altogether.
And if the BAD relief goes there will also be the temptation to abolish its sister, investors’ relief which offers similar CGT advantages to investors who don’t participate in the business.
Employee Share Incentives
The EMI scheme rewards employees by offering equity in return for contributions to the growth of the business. The same is true of all employee share schemes but they have always faced criticism on the basis that they may be open to abuse and chancellors always find it easier to sell tax increases as countering abuses.
Aligning employed and self-employed tax and NIC
Ever since the IR35 provisions were introduced every chancellor has striven to remove the problems (for them) of employment being ‘disguised’ as self-employment or hidden in personal service companies. Aligning the effective rates of tax paid by employees and self-employed could be trumpeted as a simplification, reform and anti-avoidance measure all in one: a virtuous triple-whammy!
Insulate yourself against shocks
It would be much too simplistic to suggest that pre-emptive measures against tax rises are easy and the tax tail should never wag the commercial dog but now is definitely the right time for people to review their financial affairs to see what future upsets may be in store.
When Michael Faraday first demonstrated the power of electricity Sir Robert Peel asked him what use it would be. Faraday’s answer to the inventor of income tax was “I do not know but I feel sure you will find a way to tax it.”