Following Rishi Sunak’s economic statement to the House of Commons yesterday, Craig Simpson, tax partner at Bates Weston, looks at the tax changes that may be ahead.
Economic Update
The headlines from the Chancellor’s speech were:
- GDP fell by 18.8% in the second quarter of 2020, remained at 6.7% below 2019’s figures in the Summer and is predicted to have fallen again over the final quarter of 2020
- The largest fall in annual output for 300 years
- 800,000 job losses since February
- The economy will get worse before it gets better
- Economic support totalling over £280 billion is helping the finances of millions of people and businesses. “Our economic response is making a difference saving jobs, keeping businesses afloat and supporting people’s incomes”
- Signs of hope, particularly the arrival of the vaccines
- Underlying resilience in our economy – household savings ratio reached record levels, taken as a whole, corporate sector cash buffers have improved and Trading Agreement reached with EU
He ended with:
“Our public finances have been badly damaged and need repair. The road ahead will be tough. Now is the time for responsible management of our economy; taking the difficult but right long-term decisions for our country.”
Budget 2021
The Chancellor seems to be setting out his rationale for what we can expect to be a fairly difficult budget on 3 March 2021. The books clearly have to be balanced and many believe that the levels of government borrowing cannot be tackled through a return to economic growth alone.
Perhaps a combination of schemes to encourage the public to spend again combined with employment incentives and capital investment incentives can be expected. Alongside measures to increase economic activity, we should also expect to see government spending restrictions and almost inevitably, tax rises.
Commentators are predicting changes to Inheritance Tax, Capital Gains Tax and pension contribution reliefs, with some suggesting that green taxes, higher rates of VAT for environmentally damaging goods and health taxes on harmful substances like salt and sugar could be on the cards. Theses taxes would advance the governments green and health agendas with the message that we are being taxed for our own good, making the concepts more palatable.
Craig Simpson comments:
““Given the levels of government borrowing and loss of jobs, tax rises and reform are inevitable. Some of those changes may come in the budget on 3 March with more to follow as the Chancellor assesses the extent of the problem. Higher rate tax relief on pensions and an increase in the main rate of Capital Gains Tax are the obvious targets. But he may have to be more radical and perhaps a temporary small percentage increase in income tax across the board, whilst controversial, would be a fair way of dealing with the issue.”
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