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An awesome performance, but few tax measures

Author: ICAEW Insights

Published: 27 Oct 2021

ICAEW’s Head of Tax, Frank Haskew, provides his take on the Chancellor’s third full Budget, which despite announcements on business rates, R&D tax relief and a promise of future tax cuts, provided more political spectacle than detailed tax policy.

Like his Budget in March 2021, this was another awesome performance from Rishi Sunak, brim full of initiatives and ideas to rebuild the economy, make it more productive and pro-growth. As well as encouraging businesses to come and invest in the UK.

It was full of promises and pledges but, surprisingly, appeared to have little in it about how we might pay for them. Indeed, this Budget was really about the Spending Review and it showed, as there were few announcements of major substance on tax measures.

However, as mentioned in ICAEW's Budget preview podcast, Sunak had already fired the first tax-raising torpedo in September with the announcement of the health and social care levy (HSCL). Two months on, the HSCL is already on the statute book following a whirlwind passage through parliament. Quite what was the rush we will never know, unless it was to clear the decks of bad news ahead of this Budget. If so, it was probably a very canny strategy which highlighted, once again, that the art of politics is not for ordinary mortals.

Turning to the Red Book, it did not include the usual pie charts of total government and expenditure and receipts – you had to turn to chapter five of the Red Book to find out the estimated costings of the various tax and policy measures. As always the devil is in the detail and there were quite a few announcements and developments which the Tax Faculty covers in our detailed Budget commentary.

Business taxes

A number of measures were announced, which built on the changes announced in the March 2021 Budget. The research and development (R&D) tax credit regime will be refocused to investment that takes place in the UK – currently it could take place anywhere in the world.

Further measures will also be announced to clamp down on those who submit inflated R&D claims – a concern which many ICAEW member firms have expressed and which undermines trust in the R&D tax credit system.

Making the UK a more attractive place to do business

It is now 21 months since the UK left the EU and 10 months since the ned of the transition period we are beginning to see the stirrings of a more independent trade policy and a greater desire to make the UK a more attractive place to do business.

Measures announced by the Chancellor included:

  • changes to tonnage tax to make the regime more attractive,
  • an extension of the temporary increase in the upper limit for 100% relief on plant and machinery (the annual investment allowance) from the end of 31 December 2021 to March 2023, and
  • an extension of the definition of R&D to include cloud computing and data costs.

However, although the government now has much freedom to change the VAT rules, as yet the government has made no changes of substance to them other than to reintroduce the reverse charge process for imports of goods.

Business rates

The government has published a final review of business rates and has made a number of announcements to help alleviate some of the burdens placed on businesses, especially for businesses in the hospitality sector.

Before the Budget, there was much speculation that the government might introduce an online sales tax to help fund a reduction in the business rates charge. In the event, the government will be publishing a consultation document shortly on an online sales tax while introducing a number of more limited measures to ameliorate some of the more controversial aspects of the business rates rules, including:

  • three-yearly revaluations,
  • freezing the multiplier in April 2022,
  • allowing businesses to improve properties without a corresponding rates rise,
  • encouraging investment in green technology, and
  • a new 50% relief for retail, hospitality and leisure sectors in 2022/23 capped at £110,000.

Personal tax – life after the big freeze

In his March 2021 Budget, the Chancellor announced the big freeze, with the income tax personal allowances, capital gains tax (CGT) annual allowances and the IHT nil rate band all frozen to 2025/26.

Then, on 23 September 2021, he announced the new HSCL of 1.25% (or 2.5% if you include employers' NIC) with effect from April 2023, but which would be preceded by a temporary 1.25% increase in NICs to take effect for one year from April 2022. Given that unexpected and controversial announcement, it was hardly surprising that no further tax raising measures were announced in the speech.

However, and more controversially, what the Chancellor didn't announce, but was included in the Red Book figures, is that the government will proceed with the proposed reform of the basis periods rules with effect from April 2024.

During the consultation in the summer, ICAEW recommended that the government should not proceed with the measure as it would impose more burdens and costs on businesses than it would solve, which seems counter intuitive for a measure described at the time as tax simplification rather than tax raising.

However, the Red Book makes it clear that the tax receipts from the reform, estimated to raise over £1.7bn over the next five-year review period, were just too juicy to miss.

Tax cuts – the next election battleground?

With the UK still emerging from the biggest crisis we have faced since wartime, and with the Chancellor already having pre-emptively fired his secret weapon (the HSCL) two months previously, in tax terms this was always likely to be a 'steady as she goes' Budget.

The Chancellor was at pains to stress he would like to return to a tax cutting agenda before the next parliament, and the improvement in the finances since the forecast reported March 2021 suggest that some tax cutting measures may be announced before the end of this parliament, just in time for the next general election. However, any possible tax cuts need to be set against the fact that the total UK deficit has now breached £2tn (yes, trillion) and is forecast to reach nearly £2.4tn at the end of 2022/23. This is about £36,000 for every UK citizen and £542bn higher than was forecast in March 2020 before the pandemic began.

Budget webinar

The Tax Faculty reflected on the Chancellor's announcements in this essential webinar. Freely available, watch the recording to find out what the Autumn Budget 2021 could mean for you and your clients.

Analysis from ICAEW's experts on the Autumn Budget 2021 and the comprehensive spending review published on 27 October 2021.
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