The current state of affairs
Nobody can doubt the importance of the Spring Budget taking place on 6 March. It is widely expected to be the last fiscal event before the general election, which we expect to take place in the autumn. As such, it is the final opportunity for Jeremy Hunt, Chancellor to the Exchequer, to set tax policies that will steer the Conservatives towards the general election.
The Autumn Statement last year consisted of two high profile tax give-aways: making full-expensing permanent and reducing national insurance for workers. They were financed by a combination of unexpected higher fiscal headroom (ironically driven by increased tax revenues from freezing thresholds), and largely unidentified public spending cuts.
The Conservatives still want to be the party of low tax. Speaking at the World Economic Forum in Davos, the Chancellor hinted he was hoping to reduce taxes again at the Spring Budget 2024, saying that countries with lower taxes generally had more ‘dynamic’ and ‘faster growing’ economies. But the IMF has warned against further tax cuts, and the IFS has said tax cuts may need to be reversed later on.
Opinion polls after the Autumn Statement showed that the NI cut failed to move the dial. A YouGov poll last month showed that 62% of voters wanted the government to prioritise public spending over cutting taxes.
Meanwhile, Labour have started setting out their key business tax policies in their ‘Business Partnership for Growth’ plan unveiled at the start of February. They have largely committed to keeping Conservative business tax policies: capping the Corporation Tax headline rate at 25%, retaining full expensing, the R&D and patent box regimes and the annual investment allowance, as well as confirming capital allowances will remain ‘at least as generous’ as they are currently.
The Chancellor’s Dilemma
The Chancellor is in an unenviable position, warned off big tax cuts by influential organisations just as the country falls into a technical recession.
How will this play out? Well, history tells us that Chancellor’s typically cut taxes in the run up to a general election and then increase them at the start of the next parliament.
If tax cuts are not moving the public opinion polls, and opinion polls consistently show a sustained Labour lead, does this liberate the Chancellor to do the ‘right thing’ rather than traditional vote-pleasing tax cuts? To a certain extent he did this in November when he made full expensing permanent. It will take some time for that measure to be felt in increased investment, growth and consequential tax revenues.
We think the Chancellor will try to walk the line between the two. Good news will be focussed on smaller measures that won’t set the world on fire but, importantly, will have a fairly immediate impact, particularly for business owners (ie voters). Expect a Budget focussed on growth for SME’s.
Oh, but of course, this close to an election there will need to be a rabbit. The difficult question is what will that rabbit be? Our policy team have put our heads together and keep consulting Hogwarts’s Sorting Hat, but all we find is a couple of relatively scrawny bunnies.
Business tax predictions
Corporation tax rate
The narrative around the headline rate has bounced around a lot over the last few years, sometimes backed up by actual legislative change. A reduction would be expensive, could add to the uncertainty of the UK’s tax environment following fast on the heels of so much change, especially as it might need to be accompanied by a narrowing of full expensing. It would not change investment activity overnight but would put the spotlight on Labour as to whether they would keep the reduction.
However, keep an eye on Northern Ireland where the Executive has committed to setting the rate of corporation tax at 12.5% for some trading income. Legislation has been passed but is subject to agreement between the UK government and the Northern Ireland Executive. Now Stormont is functioning again, we may see movement in this space although it probably wouldn’t form part of the Spring Budget announcement. The Northern Ireland rate end up being set at 15% not least because of the global minimum tax. However, it puts an interesting lens on devolution and may mean there is political pressure on the government to reduce the rate for the rest of the UK. And, of course, any cut wouldn’t necessarily have to be right back to 20%, it could just be a few percentage points.
Prediction: A cut to the headline rate of tax would send a strong message about the UK’s competitiveness, but it would be expensive. Unlikely.
Incentives
The main incentives in the UK are the R&D and patent box regimes and, more recently full expensing.
Whilst full expensing is welcomed by business it is not without flaws. Where full expensing operates to create a loss, the loss can be difficult to utilise. A specific, more flexible, regime for the use of full-expensing losses, or some form of refundable tax credit for losses would make the relief more valuable for low profit margin businesses and loss-makers.
There are also still some scope limitations which restrict the number of companies that can benefit:
- The government has already announced a consultation to extend the regime to leased assets. We expect this to go ahead and may see the formal consultation issued shortly after the Budget.
- Unincorporated businesses do not fall within the full-expensing regime. This seems to be a policy hang-over from the super-deduction, which was introduced to encourage investment in plant and machinery before the corporation tax rate increased to 25%. The case for differential treatment has arguably disappeared.
Meanwhile, after several years of change most taxpayers will be hoping that the R&D regime stays stable for a while, and this is likely to be the case. Similarly, the patent box regime is unlikely to change.
Prediction: Full expensing is the Chancellor’s flagship tax incentive. If we see a “rabbit” out of a hat, it might be some form of doubling down on full expensing. But the big headlines on full expensing have already happened, and it is hard to see any further changes being in “rabbit” territory rather than “bunny” territory. R&D and patent box regimes expected to remain largely unchanged.
Windfall Taxes
With Labour’s plans to extend the windfall tax coming under criticism from the oil and gas industry, we think that the Conservatives will hold fire on any further windfall taxes or changes to the North Sea regime.
Prediction: No changes to the existing windfall taxes.