Chris Sanger: EY Budget predictions - stimulate economic growth, address the deficit or both?

Chris Sanger

With exactly four weeks to the day until the Chancellor delivers his Budget speech, Chris Sanger, EY’s head of tax policy, has set out his predictions.

While it’s been nearly a year since last Budget, the Chancellor has arguably spent more time delivering the series of mini ‘Covid-19 crisis Budgets’, than he may have done giving a normal Budget speech.

While the first few Budgets of a new parliament are usually used for the government to deliver on campaign promises and raise money to spend over the rest of the term, the Chancellor has found himself in a completely different environment, one that has overturned the norm and required a wholly new rulebook.

The Budget provides the opportunity for the Chancellor to set out what a Budget looks like in the midst of an ongoing pandemic and its response. Will this Budget seek to deliver on the tried and tested approach early-term Budgets of the past, namely to raise funds to spend later, or will it take a different approach, based on the precise situation that UK is in today?

Some may argue whether a Budget is needed at all, given the country is still in the midst of a global pandemic, but apart from the legislative requirement to fulfil the fiscal cycle, the Budget provides the Chancellor and government the opportunity to lay out a clear road map that provides UK citizens and business with clear direction of travel over it plans for future taxation. Having a clear perspective of where the UK wants to be will provide the best environment for investment and future growth.

How is the Chancellor likely to act?

In all of the discussions on the future, the “elephant in the room” is the response to the increasing level of government debt as a percentage of GDP. This is adversely affected by both the increase in debt and the drop in GDP, with many headlines and high watermarks being hit. Given this, the Chancellor faces the decision of whether to raise taxes to reduce the debt level or to provide greater stimulus to increase GDP.

The Chancellor could embrace the current low interest rates and put off balancing the books for now to invest in the future. This would be in line with the suggestion of Janet Yellen, US Treasury Secretary, that the US needs to “go big” to help the economy back on its feet. Will the Chancellor synchronise his approach with Ms Yellen and develop the UK/US special relationship?

In practice, the answer is unlikely to be either one extreme or the other, with the Chancellor looking to boost the economy but at the same time to raise taxes in areas of the economy that he thinks can bear it. 

Tax rises under speculation

Corporation tax rate

A perennial rumour is a rise in the headline rate of corporation tax. The Government seems to have already decided that there is little competitive mileage in cutting rates below 19%, with the reversal of the cut to 17% which was due in April 2020. Any significant rise in tax rates is less likely to hit smaller companies, either due to the reintroduction of a specific regime or, at least in the short term, due to the losses incurred as a result of the pandemic.

In contrast, larger companies can currently only use a portion of their losses brought forward, with the additional cash flow burden that this imposes acting as a drag on the competitiveness of UK firms. Even beyond this, the current rules allowing losses only to be carried back one year denies previously profitable companies a valuable source of cash and any increase in tax rate may well be paired with an extension of the period for carrying back losses to three years, a firm favourite of Chancellors Past when faced with recessions.

A one percentage point increase in the rate of corporation tax would still leave the UK’s rate at the lowest (equal) rate in the G20. Such a powerful position has been one that the UK government has fought hard for and this may therefore be a natural cap on the Chancellor’s willingness to raise tax rates on corporates, at least at this stage.

Building the environment for growth

In any event, the Chancellor will want to announce measures that make it more attractive for overseas businesses to invest in the UK. These may not necessarily be tax measures, and the availability of grants or streamlining regulations may play a significant part. But from a tax perspective, we may see a return to enterprise zones, targeted outside the South East to help address the levelling up agenda – a key tenet of the Conservative manifesto. These are likely to be accompanied by strict anti-avoidance measures to stop any ‘secondary market’ in the allowances and ensure the relief works as intended.

To help stimulate investment and drive future growth, he could choose to build on the government’s ten-point plan for a green industrial revolution, with further announcements around specific measures and investments to drive this forward.

While his party’s manifesto pledges have taken a back seat since the pandemic, he may conclude that now is the time to push ahead with the levelling up agenda. Creating enterprise zones, employee growth zones and expanding free ports across the North of the UK could be levers he chooses to use. He may also look to R&D incentives, capital allowances and entrepreneurship grants to boost the economy and to incentivise businesses investment. However, it is clear from the Government consultation on the R&D credit for SMEs that it will want to protect tax relief/grants against fraud and this may limit the expansive nature of any incentives.

We did see the creation of the Future Fund during the pandemic and the Chancellor may look to replicate this type of equity investment by the Government in key start-up industries. He may also consider the opportunity to take on some of the Corona Virus debt which the banks have issued (and which the Government is currently guaranteeing) which becomes part payable shortly and either hold with extended terms or even consider converting part into equity stakes. The aim would be to freeze the debt burden on companies recovering from the pandemic at little additional liability for the Government.

Additionally, the Chancellor may be attracted to the idea of further specific reliefs for sectors which are feeling the impact of Brexit teething troubles, perhaps through additional grants or VAT holidays/deferments.

Wider changes to taxation

Beyond tapping the economy to increase the coffers or promoting growth in the UK, the Chancellor is likely to want to address a number of other elements in the world of tax and tax administration. The first will be to set out Britain’s future outside the EU. In a post-Brexit environment, the indications so far is that the UK appears is likely to shift its approach to aligning with wider global standards than following the direction of the European Union. This may be seen in the near term with a slow divergence as slightly different decisions are made in London and Brussels, rather than as sudden change of direction.

The UK has the presidency of the G7, something that it last held under David Cameron (then as the G8). Last time, the focus areas included government transparency and automatically sharing information between tax authorities. This year, we may see the Chancellor wanting to use this pulpit as a means to encourage further international cooperation. Whilst the European Parliament has maintained its calls for public Country by Country reporting, the Chancellor may instead move more towards the more targeted tax reporting that has been the discussion in the World Economic Forum.

A Budget of longer-term ambition?

With so many mini-Budgets having already taken place to support businesses and employees through pandemic, any give-aways and the proverbial ‘rabbit out of the hat’ surprise will give rise to a greater deficit. And with the economy in a delicate position, such that significant tax increases may risk the recover, the Chancellor may use this year’s Budget to set out the government’s broader ambitions rather than announce too many specific taxes.

He may also be keen to move the dial from being perceived as the ‘crisis Chancellor’ to one that sets out the road to future growth and prosperity.

UK open for business post Brexit

With the UK now out of the EU, the government may be keen to make a statement of intent and demonstrate to people and business that getting ‘Brexit done’ will benefit the whole of the Union. The Chancellor may focus on the benefits of ‘Freeports’ and take the time to consider changes to the UK VAT rules.

In practical terms, the Chancellor may also wish to address some of the frustrations around post-Brexit trade, particularly around procedural requirements – most recently highlighted in respect of Scottish fisheries, the creative industries and the transport of products into Northern Ireland. With regards to the latter, his options are however limited by the Northern Ireland Protocol. What we may see is support for businesses which export through additional grants and the possibility of new export credit facilities.

Consultation on Uncertain Tax Treatments

Last March, the Government launched a consultation regarding its proposal to introduce a requirement for large businesses to notify it of uncertain tax treatments (UTT). The proposed measures would draw on accounting principles but instead of requiring an assessment of whether it is probable that a tax authority (including a court) would accept an uncertain tax treatment, it would require taxpayers to identify positions that HMRC is likely to challenge.

HMRC is working on making these rules more objective and easier to apply so as not to create a disproportionate administrative burden, and swamp HMRC with information it already has. Accordingly, the rules will be delayed until April 2022 but we may see an update on progress at the Budget.

COVID-19 Business Interruption Loans

Loans under the COVID-19 Business Interruption Loan Scheme (CBILS) were first granted in March 2020, with no interest due for 12 months. A big question remains over what decision the Chancellor will make on paying back these loans. Might we see the government take an equity share in those viable businesses which are unable to pay back the loans?

Business Rates/Online sales tax

There will be pressure on the Chancellor to match and perhaps exceed the three month extension of the business rates holiday into 2021 promised by the Scottish Government in its recent Budget. Such a move may even come in advance of Budget day. Recent moves by online retailers taking over well-known fashion brands but not their stores or employees have led to more calls for some ‘re-balancing’. Given this, and in response to the consultation on Business Rates, the Chancellor may take the chance to look at an online tax on retailers, potentially allowing these proceeds to reduce the business rates, something of value to more traditional retailers.

Tags: EY

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