Chancellor of the Exchequer Rishi Sunak will unveil his Budget and Spending Review on October 27, setting out the government’s spending plans and taxation changes as it continues to rebuild the public finances in the aftermath of the pandemic.

With increases in the rates of Corporation Tax and National Insurance Contributions previously announced this year, there’s little expectation of further major tax rises. Instead, the focus will likely be on incentivisation to use tax policy to drive the government’s objectives on ‘levelling up’ and ‘net zero’.

In this article, Alvarez & Marsal (A&M)’s Managing Directors Jonathan Hornby and Kersten Muller discuss their views and predictions for the forthcoming Autumn Budget.

A&M Taxand is hosting a live webinar on 28 October 2021 at 8:30 BST where a number of our experts break down the Treasury’s announcement and what it means for your business. Register here to join. 

Tax increases?

Hornby: We’re not expecting anything spectacular in terms of additional taxes to be announced next week, because we have already had notice of an increase in the main rate of corporation tax and the new Health and Social Care levy.

That said, one significant announcement will  be a reduction in the bank surcharge which we are expecting to go down to 3%. The current surcharge on banks’ profit of 8% would render the total taxation burden on banks uncompetitive when compared with other financial centres once the main rate of corporation tax goes up to 25% in 2023.  Financial services remain one of the UK’s strongest exports and in a post-Brexit environment it is no surprise that tax policy will be to ensure that the UK remains competitive when benchmarked against its would be rivals.

Muller: I expect that a couple of capital gains tax changes could be on the cards. Clearly there have been areas of the market where there’s perceived avoidance and aligning capital gains tax rates more closely with income tax would be in line with the Levelling Up agenda that the government has.

Hornby: Capital gains tax is definitely a heavily rumoured area and something to watch out for. But, as a counterpoint, I don’t think it would raise a lot of tax and it’s a quite political issue as it’s seen by many as anti-entrepreneurial, so I don’t think we’ll see a major overhaul this time around.

Muller: I wouldn’t be surprised to see some specific measures for the hospitality and leisure sectors which were heavily affected by the pandemic crisis. The VAT reduction that they currently enjoy is due to stop at the end of the year, and there’s been talk about keeping the rate lower as a way of incentivising hotel stays in the country.

Green Incentives

Muller: With a little over one week to go until the start of COP26 in Glasgow and the government’s Net-Zero Strategy just announced, we’ll probably see more announcements on the climate theme coming through the Budget. I would expect these to be in the form of tax allowances or incentives for people and businesses to invest in green initiatives, rather than additional taxation.

The narrative around investment into infrastructure will also be there – ranging from electric cars charging points in towns and cities to new cycling infrastructure and of course making buildings greener and smarter. Further to the government’s heat pump subsidy announced this week, there could be renewed incentives to insulate homes, for example. Any such incentives will undoubtedly be framed in the context of reducing energy costs, in particular in the light of the current spike of gas prices.

Levelling Up

Hornby: In many respects any changes to capital gains tax or the ongoing freeze on inheritance tax bandings have more impact on those in London and the South-East.  That however is quite a subtle point and when it comes to levelling up we would expect some specific regionally targeted incentives. In particular I would welcome an update on the government’s freeport initiative which will allow generous tax breaks to those businesses investing in those eight areas that were initially successful in their bids to be included.

Jobs and Skills

Muller: Many sectors including transport, healthcare and hospitality have been heavily affected by the skills and staff shortage so there could be announcements around incentives for training and upskilling people. One of the ways to do this could be to allow more flexible use of the apprenticeship levy that was introduced in 2017.

Business Rates/Online Sales Tax

Muller: While I don’t think there will be any fundamental change to business rates, despite the ongoing reviews, there could be some changes around the edges. These are likely to be a move towards more frequent valuations so that business rates take into account market movements quicker. Fundamentally however at this point in time we are unlikely to see a ‘levelling up’ between the traditional bricks and mortar retailers and those that generate the majority of their sales on line. 

Hornby: Perhaps related to that is the discussion around taxation to the digital economy, which is in a holding pattern while an international consensus is developed. The UK has effectively committed through the OECD not to introduce any new digital sales taxes, so the government will have to tiptoe around that while trying to address the business rate problem. That is to say any new taxes on the digital economy will have to be compliant with the undertakings HM Treasury have given to other major economies.

Muller: One way of dealing with this could be the introduction of an online sales tax and I could see this as either a separate levy or additional VAT on online sales. The latter could be done through the existing system, so would be more straight-forward. That said, introducing an online sales tax in whatever form to “level the playing field” between bricks & mortar and online retailers seems counterintuitive whilst business rates have not been reformed.
 
R&D Incentives

Hornby: Earlier this year there was a comprehensive consultation about how the research and development tax credit regime operates and what it should look like going forward. Post-Brexit we would expect the government to have more flexibility as the UK should be less constrained around EU state aid rules.  Any announcements in this area are likely to be good news for innovative UK businesses as the government has previously committed to raising total investment in R&D to 2.4% of GDP by 2027. We would definitely expect an update on this process next week and being cautiously optimistic potentially draft legislation with a view to inclusion in the 2022 Finance Bill.

If you have questions about any of the potential tax measures discussed in this piece, and how they could impact your business, please get in touch with a member of the A&M Taxand team.