On 11 March, Sajid Javid will present his first Budget as Chancellor of the Exchequer, which will also be the first Budget in nearly a year and a half. It’s also the first Budget presented by a government with a sizeable majority in Parliament for a decade or so.
The first Budget of any new Parliament is normally the one where the Chancellor has the political capital to make some major reforms, as it gives, potentially, five years to major on the welcome news and five years for people to forget the bad news!
What can we expect?
We don’t yet know what sort of Chancellor Mr Javid will be; more like George Osborne who liked to pull rabbits from hats, or more like Philip Hammond who adopted a cautious approach of announcing, investigating, and only then implementing changes.
Encouraging business investment will be high on the Chancellor’s agenda and it has already been announced that the rate of research and development expenditure credit (RDEC) will increase from 12% to 13%. But I’m hoping that the proposed re-introduction of the “PAYE cap” for SMEs claiming repayable R&D tax credits will not be implemented. Equally, the Structures and Buildings allowance will be increased from 2% to 3% to encourage businesses to start building new business facilities. And will the Chancellor finally make large scale investments in green technology?
Tax raising measures
There will, of course, be tax raising measures although, as usual, most are likely to be portrayed as action to prevent tax avoidance and refocus incentives.
Capital Gains Tax and Entrepreneurs’ Relief
I hope not, but I fear that there will be significant changes to Capital Gains Tax (CGT), with a review of Entrepreneurs’ Relief (ER) having featured in the pre-election material of the Tory party, with an increasing amount of speculation that ER might be reformed or even abolished at the Budget.
CGT is often perceived as a tax on the wealthy and increases in CGT rates may well be popular amongst the newly converted Conservative voters in former Labour strongholds. At 20%, the headline rate of CGT is fairly low, although the 28% headline for residential property is more significant. My prediction: a flat rate of CGT at 30% with a modification of ER or the re-introduction of Business Asset Taper Relief (remember it?) to tax long-term entrepreneurial gains at a lower rate (maybe 15%?).
Some taxpayers may be considering triggering gains, looking to lock into current regimes ahead of the Budget announcements, or otherwise ahead of the tax year-end.
Another area in which change is rife is off-payroll working – freelancers and the so-called gig economy. The latest planned changes to the so-called IR35 rules (extending to the private sector the rules introduced for public sector workers a couple of years ago) are subject to a recently announced review. The review is due to be finished by mid-February and any changes arising are likely to feature in the Budget in time to be implemented by the scheduled change date of 6 April 2020. Those working on a non-employed basis certainly need to keep appraised of developments and the likely changes they are going to face in the new tax year, although current thinking is that the scheduled changes will not be altered significantly, and contractors will need to prepare for the new regime.
This has been a recurrent topic in recent Budgets, and one could be forgiven that tax avoidance is the answer to the former PM’s “money tree”. Immediately after the election, we saw the publication of the loan charge review and HMRC’s surprisingly swift response to it. Most of the changes recommended will need to be legislated, so are likely to feature in the Finance Bill.
My wild cards
Let me pull two rabbits out of the hat. Both are ripe for changes for differing reasons.
Inheritance tax: an all-party parliamentary group of MPs has recently recommended major reforms to inheritance tax (IHT) – and echoed comments from the Office of Tax simplification last year that IHT is far too complex and outdated. The Chancellor might choose to increase the basic relief (the nil rate band) but collect more tax in the long term by removing/restricting complex reliefs (the main residence nil rate band, exemption for gifts out of income, business property relief qualifying rules etc.). My prediction: a flat rate of IHT on both lifetime and death disposals with no nil rate band, no reliefs, and no complex anti-avoidance rules such as the gifts with reservation or pre-owned assets test.
VAT: EU membership has prevented us from doing very much with VAT. Now “this thing has been done” we can be more flexible with VAT. Not a prediction but my wish: Varying rates of VAT, so, for example, a rate of 25% on “luxury” items, 15% on normal items, zero% on essentials such as light, heat, food, children’s clothing etc.
As always, we will be analysing the Budget speech and the press documents that are released by the Treasury the moment the Chancellor sits down, and posting our analysis soon after the end of the speech.