Chancellor faces tough decisions if optimism is to spring from March Budget

Max Chassels

Max Chassels

Tax Director

On March 3, the Chancellor will map out the next phase of the UK Government’s COVID-19 recovery strategy in his Spring Budget - the question is: which areas will be used to plug the huge spending gap the pandemic created or will he choose to invest further to stimulate growth and put tax rises on hold? And how will it affect the local economy in the North East? 

The Treasury has an extremely fine line to balance between encouraging economic recovery, while paying the £394bn borrowed in the current financial year. Rather than targeting consumers directly, it’s likely Mr Sunak will look to businesses to support the economic recovery he believes can be achieved.

Over several years, the government has continually targeted individuals with second properties or residential property portfolios to increase taxes and this could be a continued theme.  This could be achieved by increasing the additional dwelling supplement or increasing the residential rate of capital gains tax (CGT) which is currently 28%.  A move like this could also inhibit property price growth and encourage more first-time buyers to support local property markets.

Bringing the regular rate of CGT in line with income tax is a further option which could see tax on gains on asset sales more than double – from 20% to as high as 45%. Aligning the regular rate of CGT with income tax is unlikely but an increase to 25% or 30% is possible. If the Chancellor were to delay an increase in CGT to 2022, this may create a one-off windfall as it would give individuals more time and certainty to plan disposals.

Business Asset Disposal Relief (BADR) currently allows entrepreneurs to pay CGT at 10% when the individual sells business assets or shares (subject to stringent conditions being met). While there has been speculation, I don’t foresee this being abolished in the Chancellor‘s statement next week.

With such a high number of young, entrepreneurial companies utilising Enterprise Management Incentive (EMI) Options to attract talent, removing BADR could have harmful effects on start-ups. At the moment a lifetime limit of £1 million on the amount of BADR that can be claimed exists, which could be reduced to £500,000 without having a significant impact on EMI option holder.

It’s unquestionable that small businesses have been adversely affected in the last 12 months and recent statistics released by the Office for National Statistics (ONS) also revealed a sharp drop in the number of people self-employed in the UK. Offering tax relief for sole trading and small businesses would certainly be welcomed by all, to encourage entrepreneurship and increase the chances of longer-term success for the self-employed.

Remaining on the topic of self-employment, the looming IR35 reform will see firms responsible for operating PAYE on payments to contractors from 6 April 2021. The controversial reform was deferred last year, and I don’t think we’ll see a further delay in next week’s statement, so it’s imperative that businesses continue to prepare for this. In the North East this will be particularly relevant to energy services firms, many of which rely on contractors.

As the energy transition continues to dominate the news agenda, we shouldn’t be surprised to see green incentives feature in the Chancellor’s budget. These could extend beyond traditional oil and gas, to encourage sustainable corporate behaviour across all sectors, further supporting the UK’s journey towards net zero and, crucially, creating growth opportunities for energy businesses across the region. Such incentives could take the form or more favourable reliefs available to both companies and investors.

Given the sheer scale of change the economy has undergone this financial year, it’s difficult to predict the finer details of Mr Sunak’s budget – while it is clear there are difficult decisions to be made, I think we can be cautiously optimistic that we are on the road to recovery.

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