Describing the general approach George Osborne will have to take, Chris Sanger, Head of Tax Policy at EY, said: “In the upcoming Budget, the Chancellor will have to strike a balance between the commitments he made prior to the election, both in terms of spending and tax constraints, and his need to generate revenue. As history shows, the first Budget post an election is when most Chancellors seek to fill their coffers, hoping that the benefit of spending those additional funds outweighs any initial pain.
“The Conservative Party’s manifesto pledge for a Tax Lock on VAT, National Insurance and Income Tax (that together make up two thirds of the overall tax revenues) limits the Chancellor’s room for manoeuvre. As a result we may expect to see tackling tax avoidance feature heavily, as a means of expanding the tax base, or indeed the number of taxes.”
Offering more specific analysis Mr Sanger added: “On business taxes, much focus to date has been on the interaction of the UK tax system internationally. However, the Chancellor should not forget the UK domestic tax system, and needs to ensure that it is fit for purpose. The focus in the last Parliament was on the 20% headline rate and now the Chancellor should look beyond this to the underlying fabric of the business tax system. Businesses will want a roadmap providing a clear indication of where the Chancellor will take the tax system in the next five years.
Higher Annual Investment Allowance
“This Higher Annual Investment Allowance has changed four times since 2008 and has earned the nickname of the “yoyo allowance”. The Chancellor has promised that it won’t go back from its current £500,000 level to its basic £25,000 and we may hear of the “significantly higher” permanent annual level that was promised in the Conservative Party’s election manifesto.
“This will be helpful for all companies, but a more generous treatment of expenditure above this amount could prompt significant investment by larger companies looking to make major investments in sectors such as in infrastructure. Together with widening the types of investment that get tax relief to include industrial premises, this measure could help the Chancellor move towards his aim of rebalancing the UK economy.”
Country By Country Reporting
“We can expect a reference to the Government reviewing the case for Country By Country Reporting becoming publicly available. Following the release of the draft model CBCR legislation by the OECD on 8 June 2015, the Chancellor may even announce a consultation on the draft secondary legislation needed to implement the detailed aspects of CBCR in the UK.”
“In the last Budget we heard of the Government’s intention to fundamentally review business rates. Now that the consultation has closed, it would be helpful to get an update of where the Government has got to. In particular, the Government has stated that any new system should raise the same amount of money, something that severely constrains reform. Given that this tax doesn’t change with profits, it can be one of the most onerous for retailers and all options should be considered carefully. We would like to see the Chancellor consider expanding the scope of this review.”
Anna Anthony, EMEIA Head of Financial Services Tax at EY, said: “The bank levy was designed to encourage a move away from riskier funding models to reduce systematic risk, which in many ways it has done. It was not designed as a long-term means for the Exchequer to raise revenue. There is no easy option for the Chancellor to take on the bank levy. The choices are either to keep the status quo and continue to disproportionately penalise UK banks with a global footprint, to drop the tax take, or to put the rates up on UK balance sheets. There has been talk about lowering the threshold and extending the tax to smaller banks, but this is a real red herring - it won’t raise much more tax and contradicts the government’s policy on competition and encouraging challenger banks.
“The last thing the industry needs is another ‘surprise’. A number of the recent tax changes for financial services have not been consulted on, and there is huge appetite for a stable and sustainable tax environment, so if the Chancellor announced a consultation on the bank levy it would go some way to reassure global banks that the UK is still very much open for business.”
Support for entrepreneurs and small businesses
“We could see the expansion of enterprise zones to include more areas, as well as an exemption for small properties from business rates. Following the recent consultation, the Chancellor could also announce steps to improve access to R&D credits for small businesses.”
“A new levy, in addition to corporate tax and excise duties, based on a tobacco company’s market share, was part of last year’s Autumn Statement. If this proceeds, this may lay the foundations for levies in other sectors in the future. Given the range of existing taxes, and the Government’s public commitment to simplification, the introduction of yet another tax seems to run counter to many of its principles.”
“Following the Conservative Party’s Manifesto, the Chancellor has set himself a target to raise £5 billion from strengthening sanctions for tax avoidance. At this stage it is not clear where this money will come from and other policies, such as the General Anti-Abuse Rule, may limit the scope for more revenue raisers in this area.”
Capital Gains Tax
David Kilshaw, Private Client Services Partner at EY, said: “We are likely to see changes to the main capital taxes, Capital Gains Tax (CGT) and Inheritance Tax (IHT). And with the Chancellor keen to raise revenue, it could be a case of “capital punishment” for wealthy taxpayers. Following the 2010 Election, we saw CGT rates rise and if the Chancellor has a taste for history the same could be expected this time.
“In 2010, George Osborne increased CGT from 18% to 28% but not, as many feared, to 40%. The Chancellor broke new ground by increasing the rate during a tax year rather than the more traditional route of increases kicking in on 6 April, at the start of a tax year. The Chancellor has shown himself willing to hike tax rates in the middle of a tax year so a summer rise could come as no surprise.”
Limited time to sell
“Given that the last time the Chancellor changed CGT rates he did so with immediate effect, we may see individuals holding assets pregnant with capital gain trying to sell them before the Chancellor stands up on Budget Day. Such assets could include second homes, which will have benefitted from the resurgence in house prices.”
Inheritance Tax reliefs
“IHT reliefs are likely to be in the spotlight too. Agricultural Property Relief (APR) and Business Property Relief (BPR) provide exemptions from IHT and the Chancellor may consider there is not room for both. IHT raised £3.1bn in 2012/13 but the value ascribed to the reliefs was seven times higher. Given the focus of the National Audit Office on reviewing the coherence and continued viability of all tax reliefs, this could give the Chancellor a platform for change. APR may therefore be restricted, abolished or refocused.
“On a more generous note the Chancellor is likely to fulfil the Conservative Party’s manifesto promise to introduce a £175,000 transferable main residence allowance which would increase the effective nil rate band to £500,000 and allow spouses and civil partners to pool their reliefs. On this basis, a family home of up to £1 million would escape this tax.”
“The Chancellor has been drawn like a magnet to taxing residential property and we expect this trend to continue. We may well therefore see a rise in the level of the Annual Tax on Enveloped Dwellings (ATED) charge and potentially the CGT rates charged on the disposal of homes held via offshore structures.”
“Although the Chancellor has indicated that he does not propose to abolish the non-dom status he might be expected to announce a full review of the non-dom concept and, pending the outcome of the review, announce a few anti-avoidance measures. He may increase the Remittance Base Charge (BRC), which is the fee that a taxpayer must pay each year in order not to be taxed on his worldwide income and gains. At present the highest RBC is £90,000 but we could well see the first six or even seven figure sum for the RBC in April 2016.”
Income tax rates
“The Chancellor, through the Conservative Party’s manifesto, has pledged to increase the personal allowance to £12,500 and the higher rate threshold to £50,000 over the lifetime of this Parliament. Through the so-called Tax Free Minimum Wage law the personal allowance will be set at a level that at least ensures that those working 30 hours a week on the national minimum wage are not subject to income tax.
“However, this Budget is about raising finances so we do not predict any increases on July 8th. A Summer Budget may not be the time for the Chancellor to play Santa Claus. In contrast, he is likely to use the Summer Budget to get out his Scrooge like tendencies potentially avoiding needing to do so later on at the time of the Autumn Statement. Tax raising measures could include restricting reliefs within the income tax system – we already know that one of those that will be targeted is pension tax relief for high earners.”
“We expect the Chancellor to announce yet another restriction of the pension tax relief with the lifetime allowance reduced to £1m and the tapering of pension relief for those earning over £150,000, resulting in a level of £10,000 annual allowance for those earning over £210,000. The funds that this generates have been earmarked to cover the £175,000 transferable main residence allowance.”
On changing pension tax relief to a 30% flat rate, Jason Whyte, Director in Insurance at EY, said: “First raised by the former pensions minister Steve Webb, a flat rate of 30% would in one move give lower earners a bigger incentive to save, reduce the tax ‘leakage’ from high earners by closing the gap between the tax relief they receive and the (usually lower) tax they pay in retirement, and cut the overall ‘bill’ for pensions tax relief. A flat rate of tax relief would reduce the overall tax relief bill, create an incentive for lower earners to save and bring tax relief for higher earners closer to the tax they might actually pay in retirement. Under a 30% flat rate, everyone would pay 70p to save £1 in their pensions. A basic rate taxpayer saving £1,000 per year today could keep the same take home pay but see their contribution rise to £1,142, while an additional rate tax payer wanting to save at the £40,000 annual limit would have to pay in £28,000 rather than £22,000 today.”