What will be in the Budget on 16 March?

Good news at the Autumn Statement

In the Chancellors’ Autumn Statement on 25 November 2015, it was announced that there was an unexpected "£27 billion improvement in our public finances over the forecast period, compared to where we were at the Budget."

The Chancellor took advantage of this more favourable forecast by the Office for Budget Responsibility (OBR) to "borrow less, invest more and smooth the path of consolidation", perhaps most notably by abandoning the plans announced in the July Budget to restrict tax credit payments in certain circumstances. Commentators criticised him for opportunism in making use of forecasts that (like all economic forecasts) included significant elements of uncertainty. However, this criticism seemed misplaced. There would have been little point in the Chancellor’s waiting for the OBR to perform its statutory function of making new forecasts, and then taking his budgetary decisions on the basis of the superseded figures.

Underlying the criticism, however, was the suggestion that the Chancellor had not left himself sufficient room for manoeuvre, given his objective to bring the public finances into surplus in 2019/20. On that point, only time will tell.

Bad news later

More recently the Chancellor has begun to sound a less optimistic note, acknowledging the progress that has been made in improving the UK economy but warning of the risks posed by developments in the global economy. In a recent speech he described 2016 as "mission critical year" and warned that "unless we finish the job of fixing the public finances, all of the progress we have made together could still easily be reversed".

This point was reinforced by comment from the Institute for Fiscal Studies, stating that in order to achieve the targeted surplus in 2019/20, the Chancellor could be forced into additional spending cuts or tax rises.

The scope for tax rises

The scope for tax rises is considerably constrained by the Conservative Party’s general election commitments (many of which have now been now incorporated into legislation) that there would be in the course of this Parliament:

• no rises in the 20%, 40% and 45% rates of income tax, or the rates of VAT or national insurance contributions;

• an NIC upper limit (at which the employee rate reduces from 12% to 2%) no higher than the threshold at which income tax increases to 40%;

• no extension of the scope of VAT (for example, to zero-rated items such as food);

• an increase in the personal allowance to £12,500;

• an increase in the threshold for the 40% higher rate of income tax to £50,000; and

• measures to ensure ‘the most competitive business tax regime in the G20’ (which, in broad terms, rules out any increase in corporation tax).

The taxes covered by these ‘tax lock’ commitments amount to around 70% of tax receipts. What room for manoeuvre is left to the Chancellor?

There are, broadly, six options as discussed below. Some of these have already been employed by the Chancellor in the 2015 Summer Budget.

The options for change

To broaden the tax base by taxing revenue or gains that are not currently taxed

From 6 April 2015 Capital Gains Tax was extended to gains on the disposal of residential property in the UK that arise to non-UK resident individuals and trusts (and some companies). The Government might consider extending this principle to non-residential land and buildings, or indeed to other categories of assets in the UK.

In many cases, because of the way in which the relevant double tax treaties apply, imposing a tax on the disposal by non-residents of further categories of UK land and buildings would simply result in a substitution of a UK tax charge for an overseas tax charge. It would thus raise revenue in a relatively painless way. With other categories of asset the double tax treaty is likely to prevent a UK charge, so the tax yield is unlikely to be significant and the introduction of such a measure is correspondingly unlikely.

To broaden the tax base by withdrawing existing reliefs

There are a number of tax reliefs that have been introduced specifically to encourage particular types of investment; this can be witnessed in expenditure on plant and machinery, research and development, and the production of films or television programmes, and investment in the share capital of small trading companies.

Any of these reliefs could be reduced or eliminated to raise tax revenues, at least in the short term. However, this would be at the cost of the perceived benefits of the investment to the UK economy which were the motivation for their original introduction. It is certainly possible that some of these reliefs could be reconsidered in the Budget, particularly in the light of the ‘deadweight’ cost of subsidising expenditure in situations where some of it would undoubtedly have taken place in any case.

Compared to other jurisdictions, the UK has a generous regime for the deduction of interest in the calculation of the taxable profits of businesses. Recent recommendations from both the Organisation for Economic Co-operation and Development and the EU have suggested that member countries’ tax regimes should limit net deductions for interest to a fixed percentage of a company’s earnings before interest, taxes, depreciation and amortisation (EBITDA). The Government has been consulting on this topic, and changes in the Budget are therefore a possibility.

To limit tax reliefs that are currently given at the individual taxpayer’s marginal rate so that they are given only at the basic rate

The July 2015 Budget reduced the tax relief given for interest on loans to acquire buy-to-let property, so that from 1 April 2017 it will be gradually reduced until relief is available only at the basic rate rather than at an individual’s marginal rate. The Budget might well see the same approach applied to other reliefs, and there is widespread speculation that the relief for employees’ pension contributions will be restricted in this way.

The Gift Aid relief for donations to charities is another area where the same approach could be applied.

To raise the rates of tax on dividends, which are not included in the manifesto commitment

The rates of tax on dividends were increased by the July 2015 Budget with effect from 6 April 2016, in conjunction with the introduction of a £5,000 tax-free ‘dividend allowance’. It seems unlikely that these rates of tax would be raised again so soon after the last increase. Nevertheless, this is a change with the potential to increase tax revenues considerably without breaching the ‘tax lock’, so it cannot be ruled out.

To increase the rates of some of the lower-yielding taxes that are not covered by the manifesto commitments

There is scope for increasing the 18% and 28% rates of Capital Gains Tax, or limiting the scope of the entrepreneurs’ relief which reduces the CGT rate on certain business disposals to 10%. However, this might not be a significant revenue-raiser; CGT currently accounts for less than 1% of total tax revenue and increasing the rate might discourage disposals, thus limiting the amount of any additional tax yield.

There is also scope for increasing the rate of minor taxes such as air passenger duty, insurance premium tax, climate change levy, landfill tax, aggregates levy, and betting and gaming duties. The problem is that together these account for less than 2.5% of total revenue so that even significant increases in the rates would not produce a large ‘tax take’.

More beneficial from the Chancellor’s point of view would be increases in stamp taxes, excise duty rates on fuel, alcohol and tobacco, and vehicle excise duty, which together account for more than 6.5% of tax revenue.

Stamp duty land tax is a tempting target because it is cheap and easy to collect. However, it is a tax on mobility rather than on wealth or income and thus inhibits economic efficiency and may be perceived as unfair.

Excise duties that affect the cost of motoring are always unpopular, and feed through into the cost of living. However, petrol prices are currently low and (partly as a result) so is inflation. Now might therefore be the time to raise fuel duties.

To introduce completely new taxes

The present Chancellor likes to spring a surprise in his Budget speech. A new tax, or taxes, would certainly be a surprise but probably not the sort of surprise the Chancellor is looking for, given that (as Edmund Burke said) "to tax and to please, no more than to love and to be wise, is not given to men".

One new tax with some high-profile supporters is a charge on sugar, intended to reduce current levels of obesity. This is superficially attractive, like any tax that raises revenue and at the same time discourages an activity that is either anti-social or has detrimental effects on health. However, the behavioural effects are uncertain; there would be an impact on the cost of living; and (like any tax on food) its impact would be regressive. In addition, despite the vociferous support for such a tax from a small number of celebrities, it is likely to prove politically unpopular precisely because it cannot be effective from a behavioural point of view unless it is resented.

Another possibility is to impose new taxes, or corporation tax surcharges, on specific industrial sectors as is currently the case for banks and North Sea oil producers. This can be done either as an expression of society’s disapproval (as in the case of banks), or simply to take advantage of ‘super profits’ (which, rightly or wrongly, were originally perceived as arising in the North Sea). The problem with all such charges is that the tax burden eventually filters down to the consumer because, while corporations can pay taxes, only individuals can ultimately bear them.


The Government is committed in theory to the simplification of the tax system, but recent years have seen Finance Acts of record-breaking length adding more and more complexity. The ‘tax lock’ is likely to complicate matters further, because (as indicated above) the additional revenue that might have been raised by a simple change in rates will now have to come from a range of different measures, each of limited effect.

We shall see

All the comment above assumes that the Chancellor will need to raise additional funds by taxation. However, if he is fortunate the economic figures at the time of the Budget may indicate that tax rises are not needed, and that the Chancellor can continue with his planned progress, as outlined in the Autumn Statement, to the ‘higher-wage, lower-welfare, lower-tax society the country wants to see’.

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