On March 11 Rishi Sunak will make his debut against one of the most politically charged Budget backdrops for years. Predecessor Sajid Javid quit last month, leaving novice Sunak to balance the “levelling-up” political agenda with a wobbly economy now being battered by coronavirus. His scope for action is limited, to say the least, but here we look at the key measures that could be in that famous red box.
Pension tax relief
Cutting pensions tax relief to 20% from 40% for high earners is a controversial measure at Sunak’s disposal. Under current rules, workers get the same relief on pension contributions as their income tax rate (a higher rate taxpayer paying 40% will get a 40% relief on pension contributions). Slashing the relief to 20% could give the Treasury an extra £11 billion but the idea is politically fraught.
It has already had a cooler reception from Sunak than Javid gave it and today the Institute for Fiscal Studies said it would increase the income tax bill of people earning more than £50,000, the cohort the Government had pledged to defend from tax hikes. EY head of tax policy Chris Sanger says: “Reform of pensions tax relief is notoriously difficult. Any tax changes on existing pension pots is controversial and brings calls of unfairness.”
A business rates review
Traditionally the Government’s cash cow, business rates raise around £30 billion for the Treasury each year. Some recent tinkering has seen relief for some retailers, music venues and pubs but the nation’s chain retailers, the most vociferous opponents of the duty, are pinning their hopes on Johnson’s manifesto pledge to review rates.
Recent legislation has set up a revaluation of property values next year, and then every three years after that. But while that’s seen as a step in the right direction, a complete overhaul is on retail’s wish list.
A cut to Entrepreneurs’ Relief
There was significant opprobrium when it emerged the Government was looking at revamping this tax break for entrepreneurs last month. It allows firms’ owners to pay reduced capital gains when selling up. The measure has been criticised for being too generous to the wealthy.
PwC tax partner Adam Waller says: “While it’s unlikely to be done away with altogether, restrictions on the size of the relief and ease with which it can be accessed are certainly on the cards.” Narrowing it to priority industries like tech and science is also a possibility.
Digital services tax
Pushing through a digital tax on giant tech companies would be a brave decision for the young Chancellor, especially as the US has promised to retaliate when it comes to thrashing out a trade deal. At the last Budget, the then Chancellor Philip Hammond said that a 2% turnover tax for digital businesses with global revenues of over £500 million would be introduced this April. The Office for Budget Responsibility estimates the tax would raise more than £400 million a year.
Those close to Sunak believe he will see Hammond’s plans through, but there may be pressure from the PM to hold off until a co-ordinated tax is worked out on an international level.
A fuel duty rise
Rumours abound that fuel duty could be on the rise for the first time since the Tories took office in 2010 with industry predicting an inflation-linked 2p a litre increase. Despite Johnson’s comment on the campaign trail that he had “no intention” of raising the duty, the mood music has been become anti-drivers in the run-up to November’s Cop26 climate summit. Suggestions of a rise have riled backbench Tories, who believe it would upset voters outside big cities who drive to work.
Expanding inheritance tax
This would be a rabbit-out-of-the-hat policy. Inheritance tax rules force estates to pay 40% tax on assets worth more than £325,000, but there are certain things that are exempt. These include businesses handed down to children and assets such as farmland. Tory voters view these tax reliefs as a birthright, but Sunak is reportedly considering including these assets in the inheritance tax remit.
Cummings is a fan of the idea and while it will cause outrage in true blue seats across the country it could also raise billions.
Named after an Inland Revenue press release (the policy was in the 35th release from IR), IR35 forces companies to treat contractors working through a personal services company as employees. That has prompted many contractors to stop freelancing and caused confusion in businesses, which have to try to assess whether they have to pay taxes on behalf of the contractors. The rules will come in in April 2020.
Sunak could be tempted to fiddle with the policy, going further than his current promise to give people trying to comply a “soft landing” on enforcement. “Despite calls for a rethink or delay, it’s extremely unlikely we’ll see an 11th-hour U-turn from the Government,” says PwC employment tax lead Julian Sansum.
Stamp duty reform
Housebuilders and estate agents will be looking closely for any stamp duty reforms that could give sales a boost. Among pleas on many industry wish lists include a reduction, or exemption in some cases, such as for over-65s looking to downsize.
Some would-be buyers will wait to see if any of these wishes become reality, but for now the most probable change is a new higher rate of stamp duty for those buying property who are not UK tax residents.
Some are circumspect on how bold Sunak will be, with the OBR set to downgrade economic forecasts. EY’s Sanger adds: “As there is another Budget later this year, the Chancellor may be tempted to have a quieter one now. He could deliver the manifesto promises, but also raise some ambitious ideas at a high level for consultation in the autumn.”