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What might we see in the next budget?

Author: ICAEW Insights

Published: 09 Jul 2024

When will the new government deliver its first budget, and what will it include? ICAEW’s Tax Faculty looks for clues in the Labour Party’s manifesto and other publications.

Now that the votes have been counted, we have a new government, and a new Chancellor of the Exchequer in Rachel Reeves. With that in place, attention is turning to what this means for tax.  

Timing of the first fiscal event 

In February 2024, the Labour Party indicated that, once elected, it would hold a single budget each year in the final two weeks of November. However, it was noted that, should the timing of the general election make an autumn budget impractical, it would deliver a fiscal event outside of this routine.  

This suggests that the first fiscal event will be delivered earlier. In its manifesto, the Labour Party promised that its significant fiscal events would be subject to an independent Office of Budget Responsibility (OBR) forecast. Allowing time for this and considering Parliament’s summer recess, mid-September would appear to be the earliest date for the new government to deliver its first fiscal event. 

ICAEW calls for simplification 

Frank Haskew, Head of Taxation Strategy for ICAEW said that ICAEW is urging the government to use its first budget to commit to radical simplification across all areas of the tax system.  

“This is crucial for reducing complexity and improving efficiency,” he said. “The tax system has developed ‘fault lines’ which create suboptimal decisions, hinder tax compliance, and contribute to unnecessary complexity. Notable examples include the longstanding issue of taxation differences between employed and self-employed individuals, as well as cliff edges in the tax and national insurance contributions (NIC) system that distort behaviour and disincentivise productivity.” 

ICAEW recognises that tax policymaking is by its nature intensely political. Frank said: “The government is faced with difficult trade-offs and choices.  Nevertheless, this is an opportune time to develop a new approach to examine these matters to identify a way forward that could provide vital improvements in tax compliance and productivity.” 

Main manifesto commitments 

It is likely that the new government will look to deliver on its key manifesto commitments in its first fiscal event. These are:    

  • Charging VAT on private school fees. ICAEW has published an article explaining how this could be achieved and looking at the implications of the policy. In interviews before the election, members of the then shadow cabinet indicated that anti-forestalling legislation would be introduced to prevent parents from avoiding VAT by paying fees up-front.   
  • Taxing carried interest as income. Currently, carried interest is subject to capital gains tax at a maximum rate of 28%. 
  • Increasing the rate of stamp duty land tax (SDLT) on purchases of residential property in England and Northern Ireland by non-UK residents by one percentage point.
  • Closing ‘loopholes’ in the windfall tax on oil and gas companies.
  • Publishing a roadmap for business taxation within the first six months of taking office to ‘allow businesses to plan investments with confidence’. Based on a commitment made in February 2024, this would include trialling greater use of advance rulings and clearances for major investment projects. 

Richard Jones, Senior Technical Manager, Tax Policy welcomed the publication of a roadmap for business taxation. “However, robust consultation and engagement are crucial for the roadmap to be effective. The government should avoid additional business tax changes outside of the roadmap.”  

The new government ruled out making changes in a number of areas over the life of the next parliament. These include: 

  • not increasing rates of NIC, income tax or VAT;
  • capping the rate of corporation tax at 25%; and 
  • retaining key capital allowances, including full expensing and the annual investment allowance.  

R&D tax relief 

In the February 2024 document Labour’s business partnership for growth, the party committed to maintaining the current structure of R&D tax credits and the patent box. It pledged to crack down on fraudulent and incorrect claims for R&D tax relief, and to evaluate the impact of the regime on a sector-by-sector basis, starting with the life sciences industry. 

“Stability in the R&D regime will be essential to improving investment confidence, therefore the government's commitment to retain the existing rules is welcome,” Angela Clegg, Technical Manager, Tax said. “However, HMRC’s approach to compliance must also be reviewed. While we fully support activity to mitigate fraud and error, significant evidence from members indicates that HMRC’s compliance strategy is disrupting compliant claims, hindering genuine R&D investment and disproportionately affecting small companies. This should be re-evaluated as a matter of urgency.” 

Plans for HMRC and tax regulation 

The new government’s manifesto costings include plans to invest an additional £855m per year to increase tax receipts by approximately £6bn. Much of the detail is set out in Labour’s plan to close the tax gap, published in April 2024. The new government’s plans include: 

  • recruiting more HMRC staff to work on compliance and focusing that additional resource on specific areas of tax risk;
  • ring-fencing some of the additional funding to use on strategically important criminal cases to act as a deterrent; 
  • improving the services HMRC provides to taxpayers, agents and families in receipt of the benefits and credits that HMRC administers. This includes investing in digitisation; 
  • taking forward the consultation on regulating the tax advice market; and
  • making changes to the legislation to tackle non-compliance. One option under consideration is to require a wider range of tax schemes to be reported to HMRC under the disclosure of tax avoidance schemes rules. 

Caroline Miskin, Senior Technical Manager, Digital Taxation said: “It is to be hoped that the proposed additional funding for HMRC strikes the right balance between funding for HMRC compliance activity, customer service and improving digital services. All need investment, alongside simplification, if the tax system is to improve.” 

What else can we expect? 

There is some unfinished business from the previous government’s Budget earlier this year. For example, legislation has not yet been brought forward to deliver on the then government’s plans to replace the ‘non-dom’ rules with a foreign income and gains regime.  

Labour’s manifesto promised to “abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period”. It also said that it would end the use of offshore trusts to avoid inheritance tax. The Labour Party’s fiscal plan indicated that it intends to bring forward the reforms to the non-dom regime from 6 April 2025.   

Lindsey Wicks, Senior Technical Manager, Tax Policy at ICAEW said: “The complexity of abolishing the non-dom rules should not be underestimated. Not only does the concept of domicile feature throughout the UK’s domestic tax legislation, it also features in many international treaties. The general election halted HMRC’s planned consultation program that included consultation on draft legislation over the summer. With changes to the original policy anticipated, implementation of such a significant and complex change by April 2025 is looking ambitious.” 

Another key announcement from the Budget in March 2024 was the abolition of special tax rules for furnished holiday lets from April 2025. Although draft legislation has not yet been published, HMRC has ruled out a ‘bright-line’ test in correspondence with ICAEW.  

In its manifesto, Labour also pledged to reform the business rates system to “level the playing field between the high street and online giants, better incentivise investment, tackle empty properties and support entrepreneurship.” ICAEW’s views on this, and on local audit and audit reform, are set out in a separate article.  

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