In March, the new Chancellor of the Exchequer, Rishi Sunak, is scheduled to announce the Budget.
A landslide victory at the general election in December means the Conservative government will have a strong base of support in Parliament for their economic agenda.
While it’s unlikely that all campaign pledges will be included in the first Budget announcement since October 2018, a glance at the Conservative election manifesto offers businesses an idea of what to expect from Mr Sunak in a month’s time.
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The rates of income tax, National Insurance and VAT will not be raised for the duration of Parliament. This is likely to be five years, although the Conservatives have also pledged to repeal the Fixed Term Parliament Act, which governs the date of the next election.
The Chancellor is expected to announce an effective cut to National Insurance. This will involve raising the NI threshold from £8,632 to £9,500. The Institute for Fiscal Studies (IFS) estimates this change to be an £85 annual tax cut for those who pay the basic rate.
Because of the large size of the Conservative majority in Parliament, Mr Sunak could also consider a potentially unpopular reform to pensions tax relief in this upcoming Budget.
Reducing the rate of pension tax relief for savers who earn more than £50,000 per year would limit the growing costs caused by the introduction of auto-enrolment. According to previous reports, the Treasury has considered a cut in pension tax relief for high earners from 40% to 20%.
High earners are currently able to claim an extra 20% of pension tax relief, on top of the basic 20%.
There will be no cut to corporation tax, which will remain at 19%.
The Conservatives had previously planned to reduce the rate of corporation tax to 17% by 2020, but Boris Johnson has scrapped the planned reduction in order to increase spending on the NHS.
We can expect a cut to business rates in the Chancellor’s announcement.
The discount for businesses in England with a rateable value of below £51,000 will be increased from 33% to 50% – but for one year only. After 2020, there will be a 0.03% cut to business rates in each year until 2024.
In October 2019, the Treasury Committee’s report on business rates described the system as broken. The committee found that business rates punished smaller shops with a high street presence and the relief system was too complicated.
In an offer to struggling high street businesses, Mr Sunak is expected to confirm a fundamental review of the business rates system.
Before his recent resignation, the former Chancellor Sajid Javid also announced an extra £1,000 discount on business rates for small bars and local pubs.
The Conservative manifesto also promises a review and reform of Entrepreneur’s Relief. This scheme currently means entrepreneurs who sell a qualifying business are only required to pay 10% capital gains tax, instead of 20% as a higher rate taxpayer.
In January, the Prime Minister said he was concerned about the fairness of Entrepreneur’s Relief. Mr Johnson warned that staggeringly rich people were “using that relief to make themselves even more staggeringly rich”.
While it’s unlikely that Entrepreneur’s Relief will be abolished, a reduction in the life-time cap from the current £10 million is possible. The Chancellor could impose a £1 million life-time cap, as it was when Entrepreneur’s Relief was introduced by Labour in 2008.
Entrepreneurship and innovation
The Research and Development Expenditure Credit will be increased from 12% to 13%. This change will further reduce corporation tax liability for larger companies who carry out R&D.
Small to medium sized companies are currently able to claim a 130% tax deduction on top of 100% of costs already incurred, effectively a 230% tax deduction. From April 2020, this will be capped at three times the value of a firm’s PAYE and NICs liability.
We can expect more spending on this tax credit to come, as the Conservatives also pledged to review the definition of R&D to include investments in cloud computing and data.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) will continue in the next Parliament. The British Business Bank will also be given more funding in the Budget to expand start-up loans for entrepreneurs.
Employment and training
The Conservatives have pledged to explore how the Government can better support the self-employed, including changes to the tax system. The manifesto also included a commitment to improve access to credit and finance for self-employed workers.
The Chancellor is still under pressure from business to clarify the roll-out of new IR35 rules for the private sector. These new rules mean the burden for deciding whether a contractor is within IR35 rests with the end client for large and medium-sized businesses.
In January, the Government launched a review of the upcoming IR35 reform – but this review is focused on its implementation, not the expanded IR35 legislation itself.
It may sound strange for a firm of accountants to take an interest in social care funding – but we’ve been working with domiciliary care businesses for more than 10 years.
For more detail on the current issues facing the industry, check out The State of Domiciliary Care.
The Government announced an extra £1 billion of funding for social care per year in the Spending Round in September.
The Budget will offer the opportunity for more clarity on this issue, although detail has been in short supply so far. Cross-party talks on social care funding are expected to begin in March.
Enforcement and HMRC
We can expect a tougher line to be taken on tax avoidance and evasion in the Finance Bill that follows the Budget statement.
The Conservative manifesto included a commitment to create a single dedicated unit in HMRC to tackle tax evasion. The unit will cover all duties and taxes and will also have legislative powers.
There is also a specific promise to end tax abuse in the construction sector. This will involve implementing the previously delayed VAT Reverse Charge legislation in October 2020, in an effort to combat VAT fraud in the construction industry.
The new rules mean contractors will retain VAT and pay it directly to HMRC, instead of transferring it to their subcontractors.