This question is asked before every Budget. At first sight it should be easier to answer when the Budget immediately follows a General Election, because the new government can be expected to implement its manifesto commitments. In addition, when an incumbent government is returned to power (or where, as in the present case, the party that formerly led a coalition forms a government by itself) there will normally be detailed technical measures that were in the course of being considered, or implemented, and which the government will simply pick up again from the point where it left them.
Detailed measures already announced
Our news item ‘A Conservative win – what does it mean for tax?’, issued the day after the election, considered the detailed measures to which the government is already committed, which include:
Matters announced only in general terms
- an increase in the personal allowance to £12,500 over the course of the Parliament, and the introduction of a link to the national minimum wage;
- an increase in the threshold for the 40% higher rate of income tax to £50,000 by the end of the Parliament;
- a £1,000 tax-free personal savings allowance from 6 April 2016 (£500 for 40% taxpayers and nil for 45% taxpayers);
- the reduction in the lifetime allowance for pension contributions from £1,250,000 to £1 million from 1 April 2016;
- a transferable main residence allowance of £175,000 per person for inheritance tax that, together with the existing transferable £325,000 nil-rate band, will enable a couple to transfer a home worth £1 million to their children tax-free; the ‘most competitive business tax regime in the G20’, which broadly means maintaining the current 20% rate of corporation tax.
In addition, there are three areas where the government indicated its intention to make changes but only in general terms, and where further details may be expected in the Budget. These are:
The ‘tax lock’
- a reduction in tax relief on pension contributions for individuals earning more than £150,000 pa;
- a ‘significantly higher’ permanent level for the Annual Investment Allowance (a 100% allowance for purchases of plant and machinery), which currently stands at £500,000 pa but is due to revert to £25,000 from 1 January 2016; and a continued ‘crack down’ on tax evasion and aggressive tax avoidance.
The Conservative Party gave a commitment before the election, which was reiterated in the Queen’s Speech at the opening of this parliament, to legislate for a ‘tax lock’ under which:
- there will be no rises in rates of income tax, VAT or national insurance contributions (NICs);
- the NICs upper limit (at which the employee rate reduces from 12% to 2%) will be no higher than the threshold at which income tax increases to 40%;there will be no extension of the scope of VAT (for example, to zero-rated items such as food)
Clearly, by making these commitments the government has tied its hands if it wishes to make tax increases but, in theory at least, that is not a problem for a party whose manifesto declared its intention of cutting taxes rather than increasing them.
Raising revenue – what is left?
The taxes covered by the ‘tax lock’, plus corporation tax, amount to around 70% of tax receipts. What areas has the government left itself, where it could still make isolated tax increases if it decided to do so?
Some commentators are suggesting that an increase in the rate of capital gains tax (CGT) is a possibility. Clearly, this is not impossible, but it seems unlikely. It would have a political cost, in return for minimal tax yield, given that CGT raises less than 1% of total tax revenue.
Of the taxes that remain outside the ‘tax lock’ only fuel duties, at just under 5% of total taxes, offer any scope for raising significant sums. However, an increase in this area would be politically unpopular and would also have an effect on the rate of inflation because fuel costs inevitably filter through to the costs of goods and services.
Possible policy changes
Of course, the Chancellor might make additional tax changes beyond those already announced, not in order to raise money, but simply in order to bring more coherence to the tax system. Some areas that appear to be in need of attention are:
- the long-promised increase in the inheritance tax nil rate band. As indicated above, the government does propose to do this, but only where the asset in question is the deceased’s main residence. It is difficult to comment before more detail is available but at the moment it seems that anomalies will arise where (for example) the deceased sells his main residence in order to fund care in a nursing home, but dies shortly thereafter and thus leaves cash rather than property to his children;
- Stamp Duty Land Tax on commercial property. For residential property a ‘slice’ system replaced a ‘slab’ system from last December, so that each progressively higher rate of tax is charged only on the part of the consideration that falls within the relevant band. For commercial property it remains the case that once the consideration falls within a particular band, that determines the rate of tax that applies to the entire sum. Legislation might be considered appropriate to remove this ‘cliff-edge’ effect.
- the highly anomalous marginal income tax rate of 60% that applies to taxable income between £100,000 and £121,200 because of the effect of the withdrawal of personal allowances for taxpayers with income over £100,000. From any viewpoint, whether one believes the tax system should be more or less sharply progressive, it cannot make sense for the effective rate to go from 20% to 40% then to 60% before falling back to 40% and then rising again to 45%.
- non-domiciled individuals (‘non-doms’). The Conservative manifesto indicated that the government would ‘continue to tackle abuses’ of non-domiciled status. In fact the coalition government has already considerably increased the annual charges payable in certain cases by ‘non-doms’ who claim to be taxed on the ‘remittance basis’, and it was consulting before the election on introducing a minimum three-year period for such claims, so it may well be that no further initiatives are necessary in this area. Press reports have indicated that the Chancellor is considering in particular the status of non-doms who were born in the UK, but many reports have been based on misunderstandings of how the domicile rules function. By definition, no one would want to defend ‘abuses’, but if there are any cases where relief is being given inappropriately it seems likely that the remedy does not lie in amending the tax rules but in a more careful application of the rules under general law for determining an individual’s place of domicile.
Steady as she goes?
It is possible, of course, that the Chancellor will avoid making any further changes to the tax system beyond those already announced (either in principle or in detail). The ‘tax lock’ may indicate that the government’s attention has now turned from revenue raising to the expenditure side of the equation; the lock certainly limits the scope for the Chancellor to pull a rabbit out of a hat on 8 July. However, many a Budget has been preceded by such predictions and nevertheless produced a bombshell. As ever, we must wait and see.
Business tax team
Private client tax team