Date
18 Mar 2022Category
Tax, AdvisoryRishi Sunak has a difficult task ahead of his Spring Statement on 23 March 2022. The Chancellor must balance the UK’s books having dealt out hundreds of billions of pounds in Covid support measures, whilst under pressure to address the soaring cost of living.
With inflation at a 30-year high and energy costs set to increase further, there is a serious strain being put on millions of UK households. It has also been confirmed by the Bank of England that interests rates have increased for the third time in four months to 0.75% from 0.5%, now at the highest level since March 2020.
The Ukraine conflict has compounded matters, with an indefinite impact on food prices and energy costs. This is in addition to the planned increases in National Insurance contributions (NICs), which come into effect on 6 April 2022.
So, will we see a U-turn on taxes to ease the burden of rising costs when Mr Sunak addresses the Commons?
What we know
In the Mais Lecture 2022, the Chancellor spoke about “a different vision for our economy, the future economy we must build. An economy where businesses are investing more, where people of all ages are supported to learn and most importantly, where ideas and innovation constantly transform our lives.”
The Chancellor also recognised “we need to be bold and focused” and adopt a new culture of enterprise. As part of this agenda, he highlighted three priorities:
The Chancellor recently announced a direct support package for households facing increased fuel bills, seemingly indicating no significant tax announcements on 23 March 2022.
However, the landscape is already much changed, and there is an argument that tax cuts are essential.
What we can expect
We believe there is an opportunity for the Chancellor to be bold and make a clear statement in support of British people and businesses. There are areas he could focus on:
Research & Development (R&D)
We must create an innovative economy and now is the time to improve R&D tax relief as part of the Government’s ongoing review. Some reforms have already been announced, however, extending the relief could attract more investment from overseas, allowing for greater focus on the new technologies in the UK. Any proposals should make the relief even more attractive for all forms of R&D to be carried out in the UK.
Capital expenditure tax relief
Whilst it was a bold move and one that has benefitted many businesses, the Super Deduction for Plant & Machinery, which runs until 31 March 2023, has been criticised as not encouraging businesses to plan for long term capital investment. The Government could make this accelerated tax relief permanent or extend it for a much longer period. It could also consider keeping the ‘super’ element – being the additional 30% tax relief – for green and sustainable technologies only to support the transition to net zero and pivoting existing reliefs such as the structures and buildings allowance (currently at 3%) with a higher relief for sustainable buildings.
Supporting green choices
Tax policy has supported the move to electric and low emission vehicles in recent years, with the zero or low Benefit in Kind charges and accelerated tax relief for businesses for vehicles and associated infrastructure. Again, one criticism has been the lack of a long-term plan to support businesses and individuals in making this switch and supporting the phase out of new petrol and diesel vehicles by 2030. Now is the time for a long-term and wide ranging review of how the tax system can support this transition.
Indirect Tax / VAT
As we are no longer in the EU, the UK Government can make changes to indirect taxes to meet short, medium, and long term needs and goals. The Government has already reduced the rate of VAT for certain supplies in the leisure and hospitality sectors. These measures will end in April, and we believe it should extend them for an additional period of at least 12 months.
The VAT and duty rate of fuel and power could be reduced for both domestic, commercial supplies of electricity and gas – the same action could be extended to petrol and diesel. This would help to reduce costs incurred by businesses and could help to slow down the rising cost of living in the UK and help to cushion the cost of rising fuel and power costs for individuals. The Government could also introduce VAT savings that promote the use and generation of alternative sources of power.
If the Government wanted to reduce the cost of VAT incurred by every charity, business, and household in the UK, it could reduce the standard and reduced rates of VAT. It could also increase the VAT registration limit which would remove smaller businesses from the burden of VAT accounting and administration.
Finally, the Government could increase VAT recovery deminimis limits or extend existing VAT recovery procedures to allow those operating in the research, care, education, property, and financial sectors to reduce or remove the cost of irrecoverable VAT. These measures would ensure that limited public funding is used more efficiently and effectively.
Inheritance Tax (IHT)
Once again there is some speculation ahead of the Spring Statement that there may be changes to IHT, which were expected to be announced last year. Even with no new changes, we are seeing more estates dragged into the net as there has been no increase to the nil rate band, which has been frozen at £325,000 since April 2009, or the residential nil rate band, which was capped at £175,000 in April 2020, until at least April 2026. Rising property prices will push more estates into the tax net and figures from the Treasury indicate that an extra £1bn will be raised through inheritance tax.
Employment Tax
Whilst not widely publicised, HMRC announced a review of Overseas Workday Relief in October last year. The aim of the relief is to incentivise non-domiciled individuals to come and work in the UK. If structured correctly, this means remuneration relating to non-UK duties is not taxable to the extent it is not remitted to the UK in the year of arrival and the following two UK tax years. The rules for structuring bank accounts to claim the Overseas Workday Relief are complex and individuals can struggle with the practical challenges that these present.
There is also increased complexity for NICs, with now 12 different categories, including new categories for freeports and veterans, and a greater opportunity for employers to get it wrong.
The homeworking allowance – which was relaxed for the past two years – will revert to pre-Covid rules from April 2022, meaning any reimbursement of employee purchased equipment is likely to be taxable. There has also been speculation that the Government is reviewing the £6 working from home allowance, which is likely to be stopped and only allowed under formal working from home arrangements. However, with flexible working being adopted permanently by many there a chance Mr Sunak could restrict this further.
Prior to the Ukraine conflict, the cost of living was already a cause for concern. With the onset of war, these pressures accentuated further. If the Chancellor insists on introducing the Health and Social Care Levy in April 2022 as planned, it is essential businesses look into ways of mitigating these costs and rewarding employees in wider ways than simply increasing headline salary and pay.
With fuel prices rising rapidly and some analysts predicting £2 a gallon in the coming months, an increase to the Approved Mileage Allowance Payments (AMAP) rates would be welcome, as it’s increasingly difficult to justify the 45ppm covering fuel and wear & tear.
We may also hear an announcement in respect of the loss of tax revenue as a result of people moving over to electric cars and therefore no longer buying fossil fuels. The fuel duty is significant and, with fuel prices increasing, a move to electric is an attractive option which will impact on duty as well as road tax.
With these complexities in mind, and with the economy struggling to bounce back from the pandemic, it might appear more sensible to continue to provide a tax relief to attract overseas talent to the UK and allow these individuals to bring all their funds to the UK so they can spend and invest in the UK economy.
Cost of living support
For SMEs the rising cost of living presents another significant challenge. We work with business that have just survived a global pandemic, the significant increase in logistic costs post Brexit, and are now dealing with the ongoing increases in energy costs, which for some will be the final straw unless there is some Government support.
The Chancellor made it clear in the Mais Lecture 2022 what the role of Government should be. However, we believe some short-term support measures are essential.
Mr Sunak needs to be bold to protect households and businesses in the difficult and unpredictable months ahead.
