A tax raising Budget?

With one week to go, speculation is rife on what will be in the all-new Autumn Budget. Interest is of course heightened by the fact that this is the first Budget for the new Parliament and the first to be held since Article 50 was triggered and the countdown to Brexit began.

The problem the Chancellor faces is record national debt, and one obvious solution, in part, is to raise taxes in targeted areas. The Chancellor now has more freedom to do this following June’s snap election, which saw the Tories abandon previous pledges not to increase Income Tax and National Insurance (NIC). However, he will presumably want to balance this against maintaining the image of being the tax cutting party for millions of people.

So, what measures might the Chancellor introduce?

‘Intergenerational fairness’

Whilst few tax giveaways in the Budget are expected, there could be a glimmer of hope for younger people as it’s widely thought the Chancellor will offer them some form of financial help. Cuts to NIC rates have been suggested, including a special rate for under 25s. Increasing the Inheritance Tax gifting allowance, along with measures to reduce the level of student debt and support young renters and home buyers are also options.

To help pay for any tax giveaways and address so-called ‘intergenerational unfairness’, there could also be changes to increase the amount of tax paid by older workers, including changes to tax relief on pensions for those close to retirement. An HMRC clampdown on tax relief claimed by wealthy investors on certain investments, including the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT), is also anticipated.

Entrepreneurs’ Relief and Business Property Relief

Perhaps the most poignant issue for entrepreneurs and business owners is the potential for changes to Entrepreneurs’ Relief (ER) and Business Property Relief (BPR).

Under current measures, ER allows the sale of qualifying businesses to be taxed at the rate of 10 per cent, rather than the current Capital Gains Tax (CGT) rate of 28 per cent on gains (up to a lifetime total of £10m). Whilst BPR also permits business owners to exclude the whole value (or 50% in some instances) of certain businesses, shareholdings and physical assets from their taxable Estate when they die, different rules apply to CGT.

We have heard rumours that some of the rules might be brought more in line with each other, with one potential impact being that it could be more difficult for some businesses to qualify for BPR. There may also be restrictions introduced on certain types of shareholdings that currently qualify for BPR.

Whilst we would hope any changes shouldn’t have an overly negative impact, there’s always a danger that entrepreneurs become dis-incentivised should any changes prove too aggressive.

Disguised Employment

In the Spring Budget the Chancellor announced National Insurance increases for certain self-employed workers in line with the employed rates. Although the measure was swiftly pulled, it’s clear that NIC remains a target. A blitz against perceived disguised employment in the private sector now seems likely and would be in line with similar Public Sector reforms introduced in May.

This HMRC initiative would target contractors and consultants who are paid for through personal service companies. For example, could companies using these workers soon be forced to effectively employ them if they don’t pass certain freelance tests?

Such a change could have a big impact on businesses in terms of driving up staff costs. It’s estimated that in the first three months of the Public Sector reform, the Treasury effectively added 90,000 staff to its payroll, for example.

Listening to property investors?

Finally, having talked to some local landlords who run significant property businesses providing much needed accommodation for its tenants, the restrictions in interest relief and the 3% stamp duty surcharge will hit some very hard.

Rumours of potential relaxations in these two measures have been mentioned. It might be wishful thinking, but any positive announcement could make a difference to the future viability of some genuine property businesses, and possibly the rental market generally.

Summary

Whatever measures are introduced, the Chancellor has a difficult balancing act to perform in raising money to tackle the Budget deficit, whilst being careful not to introduce changes that will stifle the economy and alienate businesses and entrepreneurs. We can only hope he gets it right!

By Jon Miles, Director of Richardson Swift