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The Chancellor earlier this month told Tory MPs that there won’t be a tax horror show in the upcoming Autumn Budget.  But do we believe him?

Well, we all know that the Government’s response to COVID-19 has left a hole of epic proportions in the Treasury coffers, £300 billion at the last estimate, and the number keeps rising.  So the question is what will the Chancellor do about it?  Much noise has been made around possible tax increases and some consider them an unavoidable evil.  However, as always, the economy is a complex system and short term fundraising has to take into account the delicate nature of the country’s longer term economic recovery.

So, what do we actually know?

Aside from the rumours and/or leaks from the Treasury, several tax reviews have already been launched in recent months.  In particular, The Treasury Committee launched a new inquiry called ‘Tax after coronavirus’.  The purpose of the enquiry is (among other topics) to ‘seek evidence on what overall level of taxation the economy can bear, the role of tax reliefs in rebuilding the economy, and whether there is a role for windfall taxes in the post-coronavirus world’.  The Committee will be gathering evidence until December so we should know more next year.  Similarly, The Institute for Fiscal Studies (‘IFS’) has launched an enquiry ‘into the possible introduction of a wealth tax’.  Again, the final report is not expected until December so whatever its conclusions, we are unlikely to see any wealth tax until late 2021.

Hang on, did you say ‘wealth tax’?

According to the IFS, taxing wealth essentially means taxing transfers of wealth, returns on wealth or the ownership of wealth.  Currently, it is only the latter which escapes taxation in the UK.  Should this change?  It will be interesting to see how the IFS answers this difficult question.  For the moment, it is worth reminding ourselves of a few truths about a wealth tax.  Labour’s plan for a wealth tax in 1974 was abandoned in the face of objections, including a potential capital flight, a risk which seems enhanced today in a world of high mobility (even post-coronavirus).  France replaced its ‘impôt sur la fortune’ rules with a property focused tax, and several other OECD countries have repealed wealth taxes over the past few years.  Admittedly, in the US, some democratic presidential candidates have suggested a wealth tax, but it would only affect the very (very) wealthy with a proposed $50 million threshold.  Whilst desperate times call for desperate measures and it has been said that the Chancellor is keen on ‘levelling up’ the playing field by taxing wealth more aggressively, it still seems unlikely that a Tory Government determined to attract investment to a post-Brexit UK, would be the party to bring this in.

More tinkering with Capital Gains Tax?

This seems more likely and in keeping with the trend in CGT over the last decade.

Recent trends in CGT

A look back over the recent evolution of CGT shows that successive governments have sought to increase its scope and narrow the reliefs.  This can most clearly be seen when considering real estate as a class of capital assets:

• Before 2013, broadly speaking, non-residents were not subject to CGT at all – on the sale of residential or commercial UK property.
• From 2013, the scope of CGT extended to catch UK residential property sold by companies within the ATED (Annual Tax on Enveloped Dwellings).
• From April 2015, CGT on residential UK property was further extended to non-resident individuals and closely held companies.
• From April 2019, non-residents are now also subject to CGT on the sale of commercial property.
• From April 2020, Principal Private Residence Relief for sales of UK resident property has been reduced where the property has not been a main residence for full ownership period.
• Also from April 2020, Lettings Relief has been abolished in all but a minority of cases.

Current CGT Position : The Basics

Currently, CGT is charged at 20% on chargeable gains realised by individuals who pay income tax at the higher rate of 40% (or at the additional rate of 45%).  For taxpayers who pay basic rate income tax, the rate is 10% (or 20% in certain cases).  Increased rates apply to the sale of residential property (apart from a principal private residence), with 18% payable by basic rate taxpayers and 28% by higher rate taxpayers.

The sale of assets that qualify for Entrepreneur’s Relief (i.e. qualifying business assets or shares in trading companies) are taxed at only 10%, up to a lifetime limit of £1 million (trimmed back from £10 million in the last Budget).

Possible CGT Changes

A further reform of Entrepreneur’s Relief could be on the cards again, since it is seen (by some) as benefitting the wealthy.  This could also be part of wider discussions around the abolishing of the various reliefs applied to CGT, to replace them with indexation allowances, so that only gains in excess of inflation would be taxed.

It has also been suggested that CGT rates generally could be aligned with income tax rates, which for higher and additional rate taxpayers would mean 40% and 45% respectively.  For basic rate taxpayers, this would result in the levy on profits from asset sales rising from 10% to 20% for, and from 18% to 28% for gains on the sale of residential property (except principal private residences).  For higher rate and additional rate taxpayers, that would mean CGT increasing to over 40%.  Such a shift would be very unpopular with certain classes of voters and effectively represent a return to the Eighties, when capital gains were taxed at the taxpayers’ marginal income tax rate.

Interestingly, this proposed move is not only about finding a quick fix to replenish the Treasury coffers, it is also part of a wider political debate about the fairest way to levy taxes.  At its core is the question whether the burden of taxation should be shifted away from ‘earned income’ towards ‘unearned asset wealth’.  Whatever the current Government decides now, the debate could therefore continue for years to come.

What about Corporation Tax?

The Government cut the headline rate from 28% in 2010 to 19% by 2017, with promises to lower it further.  However, in his election campaign, the Prime Minister postponed a planned cut to 17%, on the basis that the Government needed the money for the NHS, and that British companies already enjoyed ‘the lowest (rate) of any major economy’.

Raising corporation tax to 24% could raise an additional £12 billion in 2020/21, according to the Times.  Still, the rumour of a potential increase has sparked fierce criticism from a number of business leaders.  They warned in particular that such a hike would further reduce the UK’s investment appeal after Brexit and harm already struggling businesses.

An assault on pension reliefs?

Under current rules, basic rate taxpayers benefit from a 20% relief on their pension contributions whilst the relief is 40% for higher rate taxpayers and 45% for those taxed at the additional rate.  It has therefore been suggested that the relief should be cut to a flat rate of 20% to raise between £10 billion and £20 billion annually.  There is also talk of increasing the tax paid on pension withdrawals on the basis that pensioners have been protected from recent tax rises.

Tempting as it may be to raid the country’s pension pots for short term tax receipts, with the living age steadily rising and Government keen for people to fund the cost of their own retirement, there is an obvious tension/contradiction with such a pension tax policy.

What else could the Chancellor do?

Increasing VAT may be an attractive option.  The increase of the VAT rate from 17.5% to 20% in 2011 generated a huge extra take for the Treasury (estimated at £13 billion at the time).  And VAT currently brings in £161 billion a year, representing over 18% of tax receipts (according to figures released by the Treasury at the March 2020 Budget) so, even a slight rate increase could translate into a substantial increase in takings.

NO TAX HORROR SHOW

Whilst the Chancellor told Tory MPs that there wouldn’t be a horror show this Budget, but he didn’t rule out frightening times further ahead.

Paul Johnson, director of the IFS, comments: “We’ll need tax rises eventually but this budget seems unlikely to be the moment when they’ll be announced, at least for 2021, because of the uncertainty over the state of the economy”.

As with all things in the current crisis, nothing is certain and there’s even a chance the Autumn Budget may be pushed into next year.

So, tax advisers (like everyone else) will have to wait and see.