Chris Sanger, EY’s head of tax policy, provides his thoughts and predictions on what direction the Chancellor might take as he plots the UK’s course to recovery and beyond: “With the ink barely dry on one of this Government’s most significant tax announcements – the Health and Social Care Levy – many are asking: is the Chancellor likely to announce anything as substantial and headline grabbing when he takes to the dispatch box on October 27?

“The economy is still in recovery mode from the effects of the pandemic, and with this in mind, the Chancellor may be taking the view that it is simply too early to make any significant announcements that may stunt economic growth or restrict the spending power of consumers. The country is no longer in lockdown but, with still so much uncertainty about the future, the Chancellor may limit what earns a place in his first Autumn Budget. He may opt to wait and see how the UK’s economic recovery pans out over the next six months before making any significant tax rises.

“So although this Budget might be one of ‘care and maintenance’ with some tinkering around the edges, what experience tells us from the Chancellor’s previous speeches is that there could well be a raft of small, detailed changes that may not necessarily grab the headlines but could still have a significant impact on business.

Establishing the building blocks for future growth and prosperity

“Even with the chances of fiscal giveaways looking particularly low, there is still a distinct possibility that we may see some changes that look to encourage business investment – laying the foundation for economic future growth across the UK.

“The levelling up agenda still has some way to go, so he may conclude that now is the time to push ahead with this manifesto pledge with a view to announcing more support to boost the regional economies, through investment incentives.

“Boosting business investment could come in the form of improved R&D tax reliefs, extending the super-deduction on certain capital expenditure or extending the scope of Venture Capital Reliefs to encourage individuals to invest in companies and social enterprises that are not listed on a recognised stock exchange.

Geographically targeted incentives in regions outside of the South-east, such as going beyond expanding freeports and creating enterprise zones and employee growth zones, could also be levers he chooses to use. He may combine this with targeted employment allowances for certain areas, or support for skills developments within existing employment.

He may also look to expand employee incentives (we already have a consultation on enterprise management investment schemes) to encourage the widest participation in future growth.

An opportunity to showcase UK’s green credentials?

“With COP26 only weeks away, the Budget could be used as an opportunity to boost the UK’s green economy and put a stake in the ground ahead of the global climate conference in Glasgow.

“To elevate Britain’s green credentials the Chancellor could use his October 27 speech to expand on the government’s 10-point plan for a green industrial revolution to help position the UK as a global leader and attractive destination for investment.

“Of course, the Chancellor may want to use both the carrot and the stick, firstly incentives for greener homes, environmental business practices, or investment in electric vehicles and vehicle fleets, but also new or higher taxes on emissions or indirectly on products which give rise to those emissions. With the response to the consultations on business rates due, the Chancellor could exclude machinery that delivers environmental benefits (e.g. solar panels) from the valuation for business rates.

Will HM Treasury continue to build a tax system fit for the future?

“Despite the recent delay to Making Tax Digital (MTD), the Chancellor may decide to extend the scope of this to other areas of the tax system. While not a tax revenue measure, it would be another positive step towards establishing a tax system fit for the future.

A Budget to remember?

“The question on everyone’s lips is will the October 27 be a damp squib or a fiscal event to remember? In practice, given the elements of the Budget that have already been determined, the answer is unlikely to be either one extreme or the other, with the Chancellor looking to boost the economy where he can afford to but at the same time tweaking taxes in areas of the economy that he thinks can bear it.”

What’s already in play?

“There are of course measures that are already in play, whether the subject of recently closed consultations or as defined policies waiting for implementation. Whatever happens between now and 27 October, these will need to form part of the Finance Bill that accompanies this Budget.

Such measures include:

  • A new regime for Qualifying Asset Holding Companies to attract investment into the UK
  • The conclusion on the rate of tax that will apply to banks, when the rest of the sectors move up to 25%
  • The requirements on large businesses to disclose their uncertain tax treatments
  • The Residential Property Developer Tax which will apply from 1 April 2022 and which aims to ensure that the largest developers “make a fair contribution to help fund the Government’s cladding remediation costs”.

Tax rises under speculation

Business Rates/Online sales tax

“Recent moves by online retailers taking over well-known fashion brands but not their stores or employees have led to more calls for some ‘re-balancing’. Given this, and in response to the consultation on Business Rates, will the Chancellor take the chance to look at an online tax on retailers, potentially allowing these proceeds to reduce the business rates, something of value to more traditional retailers? This is an area that the Treasury has delayed its conclusions and has been once again put in the spotlight following the Labour Party conference.”

Amber Mace, EY tax partner, consumer products and retail, adds: “Consumer Products and Retail groups will be watching closely to see whether there is more detail in the Budget on an online sales tax or the business rates review. The impact of an online sales tax would need to be carefully considered alongside the investment being made by physical retailers and consumer goods groups to grow their online presence. With retailers currently paying almost a quarter of the total business rates burden, whilst representing only 5% of the economy, they will be keen to know whether this gap is likely to close going forward.”

Personal Tax

Redistributing wealth from the few to the many and taxing unearned income

Tom Evennett, EY’s head of private client services, comments: “There has been continuing speculation that personal taxes, such as capital gains tax (CGT) and inheritance tax (IHT), may be next in the firing line, if the Chancellor is seeking new ways – on top of the recently announced Health and Social Care Levy – to bolster the Treasury’s coffers.

“Many consider these two taxes are ripe for reform. These appear to be attractive targets as the revenues both currently raise are dwarfed in comparison to amounts generated from income tax, national insurance and VAT. Even without changes, future tax receipts may be higher, particularly given inflated property and asset values and the anticipated transfer of significant wealth to younger generations in the coming years. Increasing headline rates or limiting reliefs for either of these two taxes may not be popular with the Government’s traditional core voters and many would see rate rises, or the curtailing of reliefs, as a brave move given the responses to the Health and Social Care Levy.

Evennett adds: “The Treasury is still to respond to two consultations by the Office of Tax Simplification (OTS) into CGT and IHT that looked to address the future of taxing unearned income. While it is unlikely that we will see the implementation of the OTS recommendations, there is a chance that the Chancellor may pick out certain areas and launch consultations on those smaller parts – with one eye on building for the future. How much additional revenues may ultimately be raised from targeting these taxes is also debatable, but many see the direction of travel to be one way only i.e., rate increases and/or restrictions of reliefs, and some taxpayers are planning for this by, for example, taking steps to accelerate gifts and disposals where possible, to lock-in gains at current rates and to take advantage of existing reliefs.

“There are other indications that significant changes to taxing property and assets are not likely to be afoot this autumn. It is telling to note Jesse Norman MP, then Financial Secretary to the Treasury, responded earlier this year to Fairer Share’s led online petition calling for the replacement of Council Tax and Stamp Duty Land Tax (SDLT) with a proportional property tax. In his response, Mr Norman, whilst recognising certain limitations with the existing tax rules, suggested that radical overhaul would inevitably bring disadvantages as well as advantages, perhaps signalling significant reforms are unlikely at this time.

Pensions Tax Relief

Evennett continues: “Pensions tax relief has been a target in past Budgets for revenue raising with reductions in the annual allowance for pension contributions and related restrictions in terms of tapering tax relief for high earners (though the Government was subsequently forced to raise the thresholds for those restrictions).

“There are currently four areas where they could possibly make changes – two of which are well known and two which are relatively new. Those which are well known include removing the higher rate of relief and introducing a new single rate of relief of 25%. The other more recent rumours include reducing the lifetime allowance from £1,073,100 to £900,000; and changing the rules around salary sacrifice pensions which currently don’t cover NI contributions. However, whether the Chancellor changes these on Budget day remains to be seen as changing the rules would be complex with little reward for Treasury’s coffers.”

Financial Services

Richard Milnes, UK banking tax partner at EY, comments: “It was signalled in the Spring Budget that the bank surcharge rate would be reviewed this Autumn in light of the 6% hike to UK corporation tax coming in April 2023. While it is commendable that the Chancellor is alert to the negative impact that not addressing the surcharge would have on banks’ marginal rates - and as a result the UK banking sector’s ability to compete internationally - as of yet there has been no indication where the review will land.

“The surcharge rate currently stands at 8% on banks’ profits. This is on top of the bank levy on their balance sheets, which incidentally, no other major financial centre charges. Even halving the current surcharge rate would still mean an overall increase in banks’ tax burden come April 2023. This would impact competitiveness and could result in the UK losing business to other markets. Just to keep marginal tax rates at the current level (27% total), UK banks need the surcharge rate fall to 2% ahead of April 2023.”