18 February 2020
Ahead of the March Budget, Deloitte has summarised its predictions for the economic outlook and potential tax changes.
Ian Stewart, chief economist, said:
“The message from the government is that austerity is over. The fiscal taps are being turned on, and for the first time since the financial crisis, the public sector is hiring at a faster pace than the private sector. Government consumption spending is growing at more than twice the rate of the economy.
“Yet the scale of fiscal easing is largely dependent on whether the new Chancellor dispenses with his predecessor’s fiscal rules, which, while leaving room for investment in public infrastructure, kept a tight grip on day-to-day costs. The chances of greater spending on health, education and social security seem to have risen after the cabinet reshuffle. But without an easing of the government’s fiscal rules, constraints on core services will remain as real as ever.”
Daniel Lyons, head of tax policy, said:
“The new Chancellor has a few plates to spin at the upcoming Budget. The expectation is a slackening of fiscal rules to allow for more spending, but that needs to be balanced with the tax commitments made in the Conservative manifesto.
“Whatever measures he chooses to implement, there is work to be done to engage and educate people on tax. Deloitte’s Tax Education Gap research found that improving understanding of tax increases perceptions of fairness and ensures a more successful system overall.”
Pauline Biddle, managing partner regional markets, said:
“The government has made its intentions around ‘levelling up’ the UK very clear, and further devolution of funding and decision-making will enable regions to bolster regional identity and productivity, and invest in the public services that underpin economic growth.
“We have an exciting opportunity, but it will require long-term and consistent policy change. The right interventions and focus, both nationally and locally, could go a long way to drive growth and opportunity in all parts of the UK.”
Business Rates will increase by 1.7% from 1st April 2020, in line with the previous September’s CPI. This would mean the total Business Rates take in England would be approximately £425 million higher than the previous year.
Gerry Biddle, director of business rates, commented:
“Continuing the government’s commitment to helping the high street, it has been indicated that the Chancellor will announce a fundamental review of the business rates system, in an attempt to reduce the overall burden to businesses. A reduction in rates could be supplemented by the introduction of an online sales tax in future, but the outcome of the review is not yet clear.
“More immediate measures may include the transitional relief scheme, which phases in increases or reductions in liabilities following revaluations, over a significant period. If downward phasing - the gradual decrease of liabilities - was scrapped or significantly accelerated, it would give immediate relief to many struggling high streets.
“The Government plans to install super-fast broadband across the UK, so the announcement of a significant extension to the current Business Rates exemption for newly installed fibre broadband (set to end 31st March 2022) would certainly encourage investment in this new infrastructure.”
Patricia Mock, tax director, commented:
“The Chancellor needs to decide whether now is the moment to raise revenue through tax increases for individuals, bearing in mind he has limited scope with the manifesto pledge of a ‘triple tax lock’ on the rates of income tax, NIC and VAT. It was noted at Budget 2018 that the personal allowance and higher rate threshold - £12,500 and £50,000 respectively for 2019/20 - would not increase for 2020/21, so changes to the personal allowance and tax bands seem unlikely, though not impossible.”
The Manifesto also confirmed the government will address the ‘taper problem’ in doctors’ pensions and the outcome of the current review will be announced at the Budget. It is not yet clear whether the review will be confined to doctors or apply across the whole taper regime.
Patricia Mock added: “Removal of the £110,000 threshold for income net of pension contributions would assist in simplifying the system and alleviating the effect of the taper. An alternative solution for the government would be to abolish the taper altogether and rely on the annual and lifetime allowances to limit the cost to the Exchequer of pension tax relief - currently estimated at over £37bn in 2017/18.
“The Chancellor may be tempted to make more wide-ranging changes to the regime in view of its cost, but following many changes in recent years, a period of stability would be a relief to many, in a system intended to encourage long term saving.”
Capital gains tax and entrepreneurs’ relief
Patricia Mock commented: “Changes to Entrepreneurs’ Relief (ER) are the most likely across CGT. A review was promised in the manifesto but it’s also possible more immediate changes could be introduced from Budget Day. The options are an increase in the entrepreneur’s rate of CGT from 10%, reducing the lifetime limit - currently £10m pp - or changes to eligibility. The latter could mean increasing the holding period to qualify from two years, increasing the shareholding threshold for qualification from 5% to perhaps 25%, or tightening the employment requirements.
“Changes will depend on where the government wants to focus relief, against the current high cost of over £2bn per year. A focussed relief which encourages entrepreneurship has an important place in the UK tax system, and a detailed review and consultation would be the best course of action prior to changes being made.”
There have been a number of recommendations for the future of inheritance tax. Last year’s Office of Tax Simplification (OTS) report contained a number of proposals, including removing the charge from gifts made more than five years before death (at present this is seven years), and abolishing the tapering of tax due for gifts between three and seven years before death. The All Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness recently suggested reducing the rate from 40% to 10%, but applying it to lifetime transfers as well as to estates on death.
Patricia Mock said: “Inheritance tax is widely disliked despite the fact that only 5% of estates in the UK pay it. The Chancellor may consider simplifying the regime, and possibly make other changes to closely target reliefs. Rational changes to simplify this complex tax would be welcome, but the Chancellor will also need to consider the cost of simplification.”
Rebecca George, UK Government and Public Sector Lead, said:
“Public expectation is high for this Budget. Our State of the State report shows that people want to see greater investment in public services and strong action on climate change, and it’s likely these will be two areas the Chancellor may address. I’ll also be looking out for some more detail on the forthcoming Spending Review which is needed to give departments and public services greater certainty over funding for the years ahead.”
Nick Prior, global head of infrastructure, said:
“The creation of a National Infrastructure Bank would send a strong signal to the strength of the intentions of the new government whilst giving access to debt finance that will allow an efficient and cost effective option for the infrastructure industry – the step-change to long-term economic growth the UK needs. This would be especially welcome give that the European Investment Bank will not now be an option.”
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Experts from Deloitte are available now and on the day of the Budget for comment. On Wednesday 11 March, please call the Deloitte Media hotline on 020 7007 3333, where you will be directly connected to one of our spokespeople.
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