The first Budget of any new Parliament is normally the one where the Chancellor has the political capital to make some major reforms – particularly if the new government has a strong majority. And with austerity now said to be in the past and Brexit underway, the need to “supercharge” the economy may also signal widespread changes. So the 2020 Budget could be the most adventurous for many years.
Boosting economic growth
Although the Prime Minister has already announced that the long proposed cut in corporation tax will not now take place (the rate for 2020/21 will stay at 19%), there are other changes in train. The Government has confirmed that it will devolve rate setting power for corporation tax in Northern Ireland to the NI Assembly (allowing for rates to go down to 12% if they wish). It has also announced a plan to create 10 free ports across the UK to help manufacturers importing, processing and exporting goods. Whether there will be additional tax incentives (beyond duty reliefs) for businesses in these new areas remains to be seen.
Encouraging business investment will be high on the Chancellor’s agenda and it has already been announced that the rate of Research and development expenditure credit (RDEC) will increase from 12% to 13%. Equally, the Structures and Buildings allowance will be increased from 2% to 3% to encourage businesses to start building new business facilities. We also expect that funding for a number of infrastructure projects will be announced, from ‘shovel ready’ small scale schemes to major projects tied to an updated National Infrastructure Plan. For the longer term, few would now argue against more support the development of battery technology and boosting the use of low carbon vehicles in the UK – will the Chancellor finally make large scale investments in green technology?
Traditionally, the housing sector has been a major driver of economic growth in the UK so it is quite possible that the Chancellor will cut the rates of stamp duty land tax (SDLT) to help boost the housing market – perhaps at the lower end to help first time buyers. We would also expect to see some technical measures to release land for house building and to help local authorities and housing associations fund more building schemes.
As always, Chancellor will also seek to help struggling businesses. Short term cuts to business rates have already been promised for smaller businesses (including specific help for pubs) pending a more radical long term review of the levy and this should help the struggling high street. Similarly, the promised review of air passenger duty could help all UK domestic airlines (not just Flybe). There may even be some cuts to fuel duty to help road hauliers facing Brexit disruption from 2021.
Raise starting threshold of NIC from £8,632 to £9,500 as promised (or maybe even higher) and the substantial increase in the minimum wage will boost consumer spending and there may be further measures to help consumers.
Tax raising measures
Of course, no Budget would be complete without tax raising measures although, as usual, most are likely to be portrayed as action to prevent tax avoidance and refocus incentives.
The off-payroll labour/IR35 rules will be extended to private sector organisations from April 2020 (the current review of the way the rules are implemented is not though likely to trigger changes to the key rules). For large international companies, the introduction of the UK’s own digital services tax will be a major development. We already know that the plastic packing tax will go ahead and more headline grabbing green levies may also be announced.
The Conservative manifesto acknowledged that not all tax incentives are working as intended and it is expected that CGT Entrepreneur’s relief (ER) will come under the spotlight. It would be very bold to simply abolish ER, but it may well be reformed to refocus it on longer term business investment- for example, by extending and/or phasing the holding period qualification rules and possibly the percentage holding requirements.
There are also some major new spending commitments to be paid for – for example, it is unlikely that the Chancellor will wish to borrow to fund the cost of long term social care. He may well choose to raise money for these by cutting back on existing tax reliefs for individuals although this may also be tied to tax simplification. For example, the Office of Tax simplification has said that inheritance tax (IHT) is far too complex and outdated. The Chancellor might choose to increase the basic relief (the nil rate band) but collect more tax in the long term by removing/restricting complex reliefs (the main residence nil rate band, exemption for gifts out of income, business property relief qualifying rules etc.)
Similarly, the £50bn a year cost of pensions tax relief might be cut back to release funds for social care. Restricting tax relief to a flat rate (rather than the individual’s marginal rate of tax) would save considerable sums and may look much fairer to the conservative party’s newer voters. As part of wider reforms that removed the controversial annual allowance charge, such changes may prove less controversial than previously assumed.