This year, for the first time, the government has chosen to separate its tax announcements from the main Budget. Instead, tax proposals were published three weeks later on so-called ‘tax day’.
While the government has stated this is to improve transparency around tax changes, there is inevitably some truth in saying that the separation of the two events would allow the Budget to be a “good news day” for the government, minimising the risk that coverage of spending commitments would be drowned out by spending cuts or tax rises elsewhere.
The 2021 spring Budget took place on 3 March and contained no immediate tax proposals beyond a statement of intent to increase Corporation Tax to 25% in 2023. Instead, on 23 March the government published a number of tax-related consultations and calls for evidence.
Announcements made on ‘tax day’ included measures intended to improve the tax system for both HM Revenue & Customs and for taxpayers, focusing on removing bureaucratic hurdles and improving tax avoidance measures with the overall aim of reducing the UK’s current ‘tax gap’, or the difference between the amount of tax that should be paid to HMRC, and what is actually paid. The current tax gap stands at a record low of 4.7%. The government also published an interim report in its ongoing review of business rates, though this provided very little detail on what final measures the government will take to reform the system, indicating that there is significant work still being undertaken as part of the review. The government launched the review in March 2020 following years of debate over the effectiveness of the current model. Though expected to report in spring 2021, the pandemic has delayed progress with the final report now expected in autumn 2021.
The biggest ‘tax day’ announcements relate to calls for evidence on how the government can best innovate the tax system. The launch of a call for evidence relating to how HMRC collects revenue, alongside other structural proposals like changes to how and when tax is payable, are clear indications that the government’s focus is on the underlying structure of the system, aiming to improve the existing legislation, rather than overhaul or change tax rates at this time.
The government is also rethinking how the tax system can help shape the green agenda, launching a consultation on how Air Passenger Duty (APD) could support national and regional connectivity while maintaining the commitment to reach net-zero emissions by 2050. It has also announced that a proposed Carbon Emissions Tax will not be taken forward while the government develops its own Emissions Trading System.
The key policy changes for businesses are:
Timely Payment – The government is publishing a call for evidence to begin to explore the possibility of more frequent payment of income tax within Income Tax Self Assessment, and of corporation tax for small companies, based on in-year information;
Residential property developer tax – The government will publish a consultation on a new tax on the largest residential property developers. The tax will be introduced in 2022 to help pay for the costs of cladding remediation.
Tax treatment of pension Superfunds – The government will be reviewing the appropriate taxation framework for Superfunds, which are consolidation vehicles for defined benefit pension schemes. This work will proceed alongside the work under way on the development of the appropriate regulatory regime.
New rules to prevent value shifting for VAT – The government will be publishing a summary of responses this summer to the consultation on ‘VAT and value shifting’. Subject to the responses, the government intends to prepare the new rules for introduction and will be providing an update on next steps later this year.
The announcements of 23 March largely represent updates on the outcome of existing policy consultations, or are designed to address strategic and administrative priorities like tax avoidance and how the overall system should be structured. This approach has left unanswered medium-term questions over taxation levels, including the future of Capital Gains Tax, and whether the government will keep its manifesto commitments to freeze VAT, National Insurance and Income Tax throughout this Parliament. While Chancellor Rishi Sunak recommitted to the freeze ahead of the March 2021 budget, there is uncertainty over whether this position can be maintained for subsequent budgets.
Independent analysts, including the Institute for Fiscal Studies and the Resolution Foundation, remain publicly convinced that “substantial” tax rises will be required in order to address public finances. Chancellor Rishi Sunak has acknowledged that changes will need to be made, warning that “difficult times” lie ahead, but refusing to be drawn on the future action the Treasury will take while its focus remains on its immediate response to the Covid-19 pandemic and ensuring a swift and stable recovery. While tax rises remain highly likely, the Treasury is conscious of the need to balance increasing the tax take with encouraging the economic growth. Deciding how to achieve this is likely to be one of the key strategic decisions the Treasury and No.10 will need to address in the near future.
With so many questions left unanswered, attention within the Treasury and among business leaders will turn to the expected autumn Budget and multi-year Spending Review. With the Covid-19 vaccination programme continuing to progress at speed, these fiscal events are expected to present greater opportunities for the Treasury to make meaningful changes to address public finances.
The Treasury will begin to make preparations for the autumn fiscal events over the summer months as the scale of what needs to be done to reduce the economic impact of Covid-19 becomes apparent. Decisions will have to be carefully balanced, given the roll-back of pandemic support measures over the summer and latter part of this year. With tax changes still highly likely, businesses can prepare for future changes by ensuring that they are aware of the ongoing tax workstreams within the Treasury and wider government. The Treasury has yet to respond to more recent reviews and consultations, including those relating to Capital Gains Tax, meaning more announcements and policy reviews are likely to be undertaken over the summer in advance of the autumn Budget. Responding to consultations, either as an individual or as part of a collective, to ensure that their views are represented and heard by the government is another key step businesses can take in advance of the next Budget. To ensure that they are prepared for any opportunities or risks that arise as a consequence, developing relationships with advisors with links to Treasury officials and ministers to keep on top of the direction of travel is essential.