Finance

Covid has ravaged the UK’s finances — can Chancellor Rishi Sunak fix this?

Balancing the UK’s fiscal policies over the next year will be an unforgettable challenge for Chancellor Rishi Sunak.

The keeper of the country’s public purse will need to find ways to plug the gaping hole in its finances, after the pandemic smashed through shrewd Treasury policies and left the government with no alternative but to spend its cash to shore up the economy. 

The UK saw a 9.9% contraction for the final three months of 2020, its worst slump since 1709, the Office for National Statistics said earlier this month.

Data from the Office for Budget Responsibility suggest that the UK would need to borrow £372bn to cover the costs between April 2020 and April 2021, according to PwC’s chief economist Jonathan Gillham.

“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,” said EY’s head of tax Chris Sanger.

“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?”

But, as Sanger pointed out, the answer is unlikely to be either one extreme or the other. Instead, Sunak is expected to try to “boost the economy, but at the same time to raise taxes in areas of the economy that he thinks can bear it”. 

Here’s what tax experts have predicted ahead of Sunak’s next Budget on 3 March.

Economy: Vaccines bring bright spots for growth, roadmap to taper down government aid

Jonathan Gillham, PwC

Unemployment has crept up to 5.1% as the pandemic stifled the economy but there’s cause for optimism, according to PwC’s chief economist.

The UK has shown it can quickly switch in and out of lockdown. This makes for bright spots ahead, together with cheaper borrowing and outpacing other countries on the vaccine rollout.

“Given the current conditions, acting early to ensure a sustainable recovery is likely to be the most effective option — even if that means borrowing more over the next couple of years. But for this to work, government spending needs to be well targeted towards the households and businesses that need it most,” he said.

Gillham expects the chancellor to build on his Spending Review announcements. This would mean setting more detail on support in key areas, “such as upskilling our workforce in the technologies of the future, and rapidly accelerating our investment in R&D”.

Ian Stewart, Deloitte

Deloitte’s chief economist Ian Stewart said the budget is likely to outline a roadmap for the winding down of pandemic support schemes along with more limited and selective support for sectors at risk. 

“The chancellor will want to turbocharge investment, above all on green projects, as the cycle turns up,” he said.

Yet, there’s uncertainty too, as it may be too soon for Sunak to give up fiscal easing entirely, Stewart added. 

“But it’s not too early to lay out an ambition for putting the public finances on a sustainable footing. The current sell-off in US bond markets reflects a growing confidence about America’s recovery and shows that ultra-low interest rates cannot be taken for granted. The UK government will want to have a plan for righting the public finances well before Britain’s recovery kicks in.”

Corporation tax: Levies on firms that profited over the pandemic

Zubin Patel, international tax partner, Deloitte

Corporation tax made up 6% of total tax receipts in 2019/20. An increase of one percentage point would bring in an estimated extra £2bn in the first year alone, said international tax partner Zubin Patel. Rumours of a tax hike for corporations have done the rounds for some time but timing is of the essence, he noted.

“The chancellor needs to decide if now is the right time to make such a move. With limited room for manoeuvre elsewhere given the government’s manifesto pledge around the triple tax lock, there are few other options to raise material amounts of revenue,” he said.

An increase could result in an inevitable backlash he said, since some may consider it too early to target businesses with extra tax. There may also be concerns that any material increase might compromise a fragile economic recovery in 2021. 

“As an alternative, the government could take a more targeted approach and focus on raising tax only for those businesses that have remained or become more profitable over the course of the pandemic.”

Amanda Tickel, head of tax policy, Deloitte

Amanda Tickel also expects a levy as a realistic consideration for firms that did well out of the pandemic.

“The chancellor could draw from history to introduce new specific levies on successful sectors,” she said, noting the example of the Excess Profits Duty used to ease the strain of the exceptional economic circumstances following World War One.

The levy meant wartime excess profits were measured against the company’s pre-war average and any excess profits were taxed at 50%. “This meant that if a company made £10,000 average pre-war profits but £15,000 during wartime, the extra £5,000 would be subject to £2,500 of tax,” Tickel said.

Attracting foreign business will also be high on the government’s agenda, she said. “This could mean new investment reliefs and incentives are introduced around innovation, life sciences and green energy. Consultations in areas like regional economic zones, packaging taxes, and business rates are also likely, with a raft of subsequent tax policies announced at a fuller than usual Autumn Statement.”

Stamp duty: Holiday extension on the cards?

Jonathan Evans, real estate director, Deloitte

The property market has heated up substantially as the UK draws to the end of the Stamp Duty Land Tax holiday, due to end on 31 March. But the chancellor could extend this to further support sales.

An online parliamentary debate noted this would help purchasers, in particular, Jonathan Evans said, since many are running out of time to complete their house purchases by the current deadline which could move costs up by an additional £15,000 in extra tax.

“A further blanket extension of the holiday, which increases the purchase price exempt from tax from £125,000 to £500,000, seems unlikely, but some additional time to complete for purchasers who have already exchanged, or received a mortgage offer, may be forthcoming given the prolonged time it is taking to complete house purchases in lockdown,” Evans said.

Income tax: A reverse to the increase in personal allowance?

Rachel McEleney, associate tax director, Deloitte

Rachel McEleney said the scope for big revenue-raising measures could be narrow if the government sticks to its pledge of a “triple tax lock” on rates for income tax, national insurance contribution and VAT.

“The chancellor confirmed his intention to raise the personal allowance and basic rate band in line with inflation in the 2020 Spending Review, which would result in an income tax reduction of up to £68 per taxpayer, and legislation has already been made to give effect to this. The Chancellor could potentially reverse this in order to collect more income tax without breaching the ‘triple tax lock’.”

Iain McCluskey, tax partner, PwC

Noting the government has already increased the tax-free personal allowance to £12,500 and the higher rate threshold to £50,000 — both had been due to continue to rise in line with inflation — Iain McCluskey said the chancellor could now freeze these, to bring in more revenue without raising tax rates. 

“Another option would be to freeze the upper rate tax threshold at £50,001 and raise the Class 1 NIC upper earnings limit upwards from £50,000. This move would mean more employee earnings would be subject to employee NIC at 12% rather than 2%, and would impact earners over £50,000 a year,” he said.

Furlough: Cliff-edge fears

John Harding, employment tax lead, PwC

John Harding said there’s growing concern about the “cliff-edge ending of the furlough scheme” which is scheduled for termination at the end of April could mean an extension once more.

The tweak, however, could mean a tapered style of funding over several months or a revival of the Job Support Scheme, which was postponed in November 2020 when the furlough scheme was extended. 

“This could be targeted at specific sectors, focusing on those industries hardest hit by the latest lockdown. The chancellor may also decide to revive the Job Retention Bonus in order to encourage business to make a longer-term commitment to employees,” Harding said.

He cautioned, however, that the original plans for the JRB were considered a “dead weight” cost, because businesses that intended to retain employees anyway could benefit.

Ian Williams, economics and strategy research analyst at Peel Hunt

Ian Williams said that “there are causes for optimism” if the furlough scheme is extended.

“Vacancies are recovering in line with some survey evidence of revived recruitment plans, and redundancies appear to have peaked,” Williams added in a 23 February labour market update.

“If the proposed reopening timetable encourages businesses to retain furloughed workers, the outlook for employment may be less bleak than many feared.”

 

Increases to capital gains tax, inheritance tax? 

Rachel McEleney, associate tax director, Deloitte

McEleney added that increases to capital gains tax may be on the cards, either through raising rates or by restricting the annual exemption or other reliefs.

“However, in terms of raising cash fast to help economic recovery, the amount this would raise is likely to be relatively low as very few individuals need to pay CGT — about 250,000 per year,” she said.

“HMRC estimated that raising all CGT rates by 1% would raise an additional £175m per year but this could be considered alongside other measures to provide a boost to the Exchequer. The average additional charge per affected taxpayer would be about £700 a year.”

Tom Evennett, head of private client services, EY

“While raising inheritance tax and capital gains tax rates may make little difference to the significant fiscal deficit as a result COVID-19, they would be perceived by some as addressing the imbalance of wealth in the UK,” said Tom Evennett.

“It would send a message to the electorate that the government is serious about the redistribution of wealth.” 

 

Business rates: Tax on e-commerce

Gerry Biddle, director of business rates, Deloitte

The government committed to holding the rates for 2021/22, so bills should remain at the same level as 2020/2021. 

However, a fundamental review of the system is expected, as announced in the Spring 2020 Budget.

Among the main proposals was a measure to reduce the rates by supplementing them with a tax on sales online, which saw an unprecedented boost during the pandemic as shops took sales via e-commerce portals due to Covid restrictions forcing the temporary closure of retailers.

“It is likely that the chancellor will give a high-level analysis of the review and announce further work to be carried out, in particular in regards to an online sales tax. This has been described by supporters as a way to reduce the burden of business rates on high street shops and ‘level the playing field’ with online retailers,” Gerry Biddle said.

Hospitality, retail and leisure properties were given a 12-month reprieve on the rates from 1 April 2020 to reflect the impact of the pandemic on their businesses. 

“While this is due to expire on 31 March 2021, it is expected that the chancellor will extend it for a further three months,” he added.

 

VAT: Short extension for hospitality industries

Kendra Hann, tax partner, Deloitte

Kendra Hann said she expects the government to provide a short extension to the VAT reduction that was introduced in summer 2020 for the hospitality sector. 

“These businesses are still being impacted more than most by lockdown restrictions and this could help to ease the burden once they begin reopening,” she said.

So far, the reduction has cost the government £4.1bn so far, according to HMRC.

“Extending this further would certainly counteract tax rises elsewhere to some extent, but the government will need to balance the impact of this cost with the impact on the sector as a whole,” Hann said.

Climate: COP26, carbon tax

Mike Barber, sustainability and climate change partner, Deloitte

Fiscal stimulus and economic recovery in the wake of the pandemic are front of mind, Barber said, noting it’s important the government ensures the climate crisis and plans for Net Zero remain a priority for businesses and individuals.

“Three-quarters of respondents to a recent Deloitte survey said they believe the climate crisis is of similar or greater magnitude than the COVID-19 pandemic, and business leaders ranked it as the top societal issue for businesses to tackle in the next decade,” said Mike Barber.

With COP26 on the horizon, measures to incentivise green action will be a priority, meaning others may need to pay for their carbon footprint. 

“A carbon tax is reportedly being considered as one way for the chancellor to begin this process. Developing effective carbon markets will need to be a key part of enabling the UK’s future transition to Net Zero, and accelerating activity in this area is likely to be a priority,” Barber said.

Jayne Harrold, environmental tax leader, PwC

The COP26 will be an opportunity the Boris Johnson government will want to take, if it wishes to appear to be leading in the fight against climate change.

“This could finally mean a rise in fuel duty after more than 10 years of freezes. A 5p increase would set the average motorist back £100 a year but with environmental issues at the top of the agenda and a need to begin mending the public finances, now may be seen as the time to increase what is the Treasury’s eighth biggest revenue raiser,” Jayne Harrold said.

There may also be moves to extend current measures that permit electric car drivers to pay no benefit in kind tax until April 2021.

“Further investment into the green infrastructure that will be a crucial complement to future carbon price rises will continue to lay the groundwork for the net zero economy. Moving forward, there are multiple levers within the tax system that can be pulled to encourage businesses to become greener,” Harrold said.

These might include enhanced capital allowances for environmentally-friendly equipment, she added, as well as plans to help oil firms offset tax with losses from decommissioning projects for renewable energy infrastructure and enhanced R&D incentives to encourage innovation.

So what’s on the City’s Budget wishlist?

London, like many other cities, has been particularly hard hit by the pandemic, with the centre of the English capital deserted during three lockdowns.

The hospitality and retail sectors suffered as offices emptied with most City employees working from home.

Data published by the British Retail Consortium on 8 January found that footfall in London between 29 November 2020 and 2 January 2021 was down 58% compared with the same period the previous year.

For the City, the extension of furlough is at the top fo the wishlist for support that’s needed from the UK’s upcoming budget, which would be key to helping the government’s efforts to reopen the economy.

Reskilling and making the UK competitive are also key, as well as tax simplification and higher public sector investment to propel the recovery moving forward.

Emma Reynolds, managing director for public affairs, policy and research at TheCityUK

TheCityUK, the lobby group for the financial sector, has called on the chancellor to boost skills and UK competitiveness in his next budget.

One of the group’s key messages is that the government should “strongly consider” tax simplification as well as invest in skills and training needs to align with those of businesses, most notably on technology and digital.

“Ministers must have a laser-like focus on ensuring people across the UK have the skills and digital infrastructure they need to innovate and create value,” said Emma Reynolds in a 25 February statement.

“The UK’s future lies in being a highly-skilled, competitive, innovative and green economy. In this sustainable vision, people will be our greatest asset, and digital infrastructure our most important tool.”

Sanjay Raja and Panos Giannopoulos, economic research analysts for Deutsche Bank

For Sanjay Raja and Panos Giannopoulos, Sunak’s second Spring Budget will be “his most important”.

“While the chancellor’s actions thus far have been extraordinary, his hardest task now awaits him in building a successful recovery plan to kick start the economy,” wrote Raja and Giannopoulos on 24 February.

They added that a “successful” budget would need three pillars: extending employment support in line with restrictions; extending household and business support through to the initial stages of the recovery; higher public sector investment to propel the recovery.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown

“So, the tricky tightrope walk begins, balancing the desire to recoup some of the emergency spending, and ensuring recovery isn’t hampered by a squeeze on companies’ bottom lines,” said Susannah Streeter.

She added that the roadmap out of lockdown has provided some “hope” for sectors that have been heavily impacted by the crisis, like the travel and hospitality sectors.

“Any potential increase in corporation or capital gains taxes, should be part of a clearly thought out review, rather than a spate of salami slicing,” Streeter added.

Michael Hewson, chief market analyst at CMC Markets

Michael Hewson said that the furlough scheme, business rates and tax are key areas the chancellor needs to consider “given that a full economic re-opening is still some way off”.

“It is entirely right to be concerned at the level of the current deficit, however with borrowing costs still at fairly low levels the government can afford to be creative when it comes to time frames in narrowing the gap between taxation and spending,” Hewson wrote on 24 February.

To contact the authors of this story with feedback or news, email Penny Sukhraj and Bérengère Sim

Most Related Links :
todayuknews Governmental News Finance News

Source link

Back to top button