Taxing issues for the Chancellor in Spring Budget

Written by Ivan Woolgrove and Helen Kent-Woolsey

It doesn’t seem that long ago that we were taking in a surprise cut to National Insurance that has fed through into our pay packets in the last couple of weeks.

During the time between the announcement and the arrival of that cut we have had a range of stories, from “the time wasn’t right for more tax cuts”, to all of a sudden there being strong hints from the Chancellor that tax cuts were coming and that countries with lower taxes have more ‘dynamic, faster growing economies’.

We then had the IMF warning Jeremy Hunt against further tax cuts and instead he should be looking to favour the preservation of public services and investment.  To cap it all we then had the Chancellor telling the Cabinet there are major structural weaknesses in the economy meaning there is likely to be less headroom for tax cuts on 6 March.

So, what does all of this mean given we are in the lead up to an election?

Initial rumours have abounded about a potential cut of up to 2% in the basic rate of income tax, following the cut in National Insurance referred to above. However, given the recent announcements it now seems unlikely that a full 2% cut will be forthcoming, unless there is some scope found around other taxes to produce the necessary headroom for a cut.

A smaller reduction in the rate, of perhaps 1%, could be the Budget’s rabbit or alternatively could we just see the unfreezing of the current tax bands.

There have been rumours throughout the later part of 2023 suggesting changes to inheritance tax (IHT) could be made; these range from potential reforms to the complete abolition of the tax. Despite this the Autumn statement disappointed many as it did not include any measures towards this, even though reform of IHT is reportedly one of Rishi Sunak’s aims.

IHT is generally considered to be a particularly unfair tax by certain tax paying groups as it can be argued that it taxes wealth that has already been subject to tax as it has been earned, this is effectively double taxation.

The last time the nil rate band was increased was back in April 2009 and it has been frozen at its current rate of £325,000 until 2028. The effect of nearly 15 years of fiscal drag together with rising property prices are rapidly bringing middle income families into the scope of the tax. The IFS predicts that the tax take from IHT will more than double by 2032/33.

At the current time the residence nil rate band tapers for estates over £2million.

Could we see this residential nil rate band removed completely and instead replaced with an increase to the nil rate band to say £500,000? This would certainly remove some complexity from the system.

However, proposing significant reforms to Inheritance tax at a time when the opinion polls show such a large gap between the Conservatives and Labour could further alienate voters/media commentators who see IHT as a tax for the wealthy.

If the preference is instead the headline grabbing 2% cut in Income Tax referred to above then rather than abolishing IHT could we see a restriction to agricultural and business reliefs, the removal of the tax-free uplift for capital gains tax on death and/or charging income tax on all inherited pension funds regardless of the age of the deceased person. The combined impact of these measures could bring in sufficient additional revenue to allow for that.

There have been hints of potential changes to the Lifetime ISA rules to help savers who are trapped by the home purchase price limit of £450,000. Currently the Lifetime ISA rules penalise a saver who wants to acquire a property for over the £450,000 limit; this has been in place since the launch of the Lifetime ISA.

The High-Income Child Benefit Charge or HICBC has been in place since 2013 and levies a charge on the highest earner in a household. If a person is caught by the charge, it claws back the child benefit on a sliding scale through their tax payments.

The HICBC is generally seen as unfair and is also not widely understood. Added to that HMRC has recently been involved in a number of penalty cases related to notification for the charge.

The HICBC requires the highest earner in the household to know that they are the one liable to the charge and then to complete a tax return or otherwise notify HMRC of that fact.

Jeremy Hunt admitted in an interview that the HICBC is ‘one of the many distortions in our overcomplicated tax system’ but has fallen short of a direct promise to review the charge. However, there is mounting pressure on him to fix this issue so will we see an extension of the threshold of when it starts to apply from £50,000 to say £60,000. This would seem to be a relatively easy win for him to show he is both listening and responding to taxpayers’ concerns.

Turning to businesses the proposed rate of corporation tax has bounced around quite of bit during recent times, and certainly on the government backbenches the current rate of 25% is widely disliked and could be viewed as a brake on UK corporate activity and squeezing corporate profits.  Whether this is enough to warrant a reduction in what is a competitive rate in world terms we will have to wait and see.   

April 2024 sees the introduction of a single regime for research and development tax relief, so it is possible there could be changes to the detail of this new regime either to make it more attractive for companies or more secure for HMRC. What we have also seen suggested is a delay in implementation of the new regime of twelve months to allow for the added complications it brings.

Over the last few years Employee Ownership Trusts (EOT) have become a popular structure to benefit employees whilst at the same time providing tax benefits for the former owners. There are concerns that the use of offshore trustees could influence the structure of arrangements to enable the tax-free sale of a company to a third party and so we could see restrictions introduced ensuring the trust remains UK resident.

We could also see restrictions on the amount of influence the former owners of a company have over what is now an EOT owned company by changes to who can be appointed to control the company by means of the trustee board.

It seems as though VAT is rarely part of the budget headlines but in these times where growth is such a key factor for the economy there is the potential that the VAT registration threshold, that has been set at £85,000 since April 2017, could be in line to be increased.

Finally, I wouldn’t bet against yet more changes to the capital allowances rules for businesses as they have in recent times been tinkered with each year.