The cancelled budget: should we be worried?

Business | 10/29/2020

The cancelled budget: should we be worried?

It wasn’t much of a surprise that, at the end of September, the Chancellor of the Exchequer announced the Autumn Budget would be pushed back, yet provided no specified replacement date.

Whilst it may not have been a surprise, it does however, leave many questions unanswered – particularly in relation to UK debt and what this means for taxes in the future.

Should we be worried?

The below has been taken from the Winter Economy Plan, explaining why the Budget has been deferred.

“The Government’s economic response seeks to protect jobs and livelihoods in those areas of the economy that are most affected in the short term. This targeted and temporary support will continue to promote as rapid a recovery as possible once restrictions are lifted, minimising structural damage to the economy and public finances.

The work of the last ten years in bringing borrowing and debt back under control has meant the UK has been well-equipped to respond to challenges posed by COVID-19. The targeted and temporary policies announced by the Government has led to a significant but necessary increase in short-term borrowing and higher debt. Borrowing costs continue to be very low so the cost of servicing the debt are affordable and sustainable. The Government is committed to fiscal sustainability and ensuring the long-term health of the public finances.”

What’s next?

As the Government has committed to fiscal sustainability and ensuring the long-term health of the public finances, in effect, we don’t need the Budget just yet.

In the interim, the Government need to work to make the public sector debt relationship with Gross Domestic Product (GDP) (which is currently at 100%), more sustainable. This will most likely be done through a combination of factors – without even having to focus on debt just yet. First and foremost, there will be an emphasis on getting the economy moving again to generate more money, which in itself will generate more tax. This will be a large contributor to regaining a more sustainable footing. We are also most likely to see less Government spending, but without full austerity, and finally, a slight chance of an inflation increase.

What about the near future?

Income Tax

The quickest and most extensive way of recouping funds would be for the Chancellor to raise the rates of Income Tax.

If rates were to be raised, there would most likely be a high level of pressure for the Government to target the highest earners. However, making a slight increase to the basic rate tax band (eg. a 1% increase) would in fact recover a significantly larger amount of funds than simply increasing the higher and additional rate bands of the same amount. It’s therefore quite probable that we could see an implementation of an increased percentage on all bands – with increases on the higher and additional rate bands being scaled up compared to that of the basic rate band.

However, increasing Income Tax would actually go against the Conservative manifesto that pledged not to raise the rates of Income Tax, National Insurance or VAT; and so could be a controversial decision if made. A way for the Government to avoid breaking their manifesto would be to simply lower the range of the income brackets instead.

Capital Gains Tax

In July 2020, the Chancellor requested the Office of Tax Simplification (OTS) to “undertake a review of Capital Gains Tax (CGT) and the aspects of the taxation of chargeable gains in relation to individuals and smaller businesses”.

There is much speculation that CGT rates are currently too low and that exemptions are too lenient. Current CGT rates are set at 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayers – 18% and 28% where gains relate to residential property. Given that that those who pay CGT are twice as likely to pay a higher rate of income tax as normal taxpayers, then many believe it would be sensible to align CGT rates and income tax rates.

There is also a call to make the system more simplified. There are currently five different CGT rates which could apply for an individual realising a capital gain – 0%/10%/18%/20%/28%. In order to streamline the scheme completely, there is a strong argument that there should be a single flat rate only.

In tackling both of the above, the Treasury would achieve greater efficiency and the tax revenue received would increase – particularly if the annual exemption allowance (currently £12,300) is either reduced or removed completely.

However, there is actually also an argument that CGT should be abolished completely. A gains tax only commonly arises when someone disposes of an asset, and if there is no disposal then there is no tax liability.

The taxes received from both CGT and inheritance tax (IHT) raises very little for the Treasury in terms of total tax revenue. Yet, there are significant administration costs involved for HMRC to manage the collection of both CGT and IHT. Therefore, there are questions around whether both taxes should be eradicated.

 

Although the November 2020 Budget has been cancelled, we will definitely see one at some point – most likely next spring. The Government will aim to provide a clear structure for the future and there will almost certainly be some structural tax reforms. Therefore, it’s quite possible that Income Tax and CGT could play a key part in potential tax increases to help cover the short-term costs triggered by the COVID-19 pandemic.

As it’s hard to know how things will pan out over the next six months, both from a clinical and economic standpoint, the deferment has taken place to ensure the Chancellor is much better placed to make precise and positive economic decisions with greater information gathered.

If you’d like to know more about the cancelled or future Budget and how this might affect you, get in touch today.

 

The levels and bases of taxation and reliefs from taxation can change at any time.  Tax relief is dependent on individual circumstances.

 

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