Spring Budget 2024: Paving the way for the general election

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 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. 

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.

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.

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.

Having announced freeports and investment zones over the last few years, progress on both seems to be quite slow.  Both offer tax savings and enhanced reliefs, but neither are significant in terms of the public finances, and are unlikely to be huge drivers for growth.  They are unlikely to be a focus for the Chancellor as he prepares for the general election.

Prediction:  No significant changes to investment zones or freeports will be announced.

Business rates is an area frequently flagged as needing urgent reform to remove the disparity between the treatment of ‘bricks’ and ‘clicks’ businesses (those with a physical presence as opposed to those without a physical presence). In our experience, it is also the most likely tax policy to get kicked down the road. 

Significant consultation and time would be required to get reform right.  It would also be revenue neutral, creating winners and losers.  It may feature in a Conservative manifesto, but it is unlikely to be in the Spring Budget.

Prediction: No announcement of significant reform to business rates. 

The VAT registration threshold has been £85,000 since 2017.  Research has shown there is a cluster of businesses, particularly sole traders just below the threshold.  Unless a business owner is confident of being able to grow revenue significantly beyond £85,000, they will tend to turn down work rather than going over the threshold and having to add 20% to their prices.  The Office of Tax Simplification recommended a review of the cliff-edge effect of the VAT threshold in 2017. 

An option would be to unfreeze the threshold for now and then kick more fundamental reform further down the road, perhaps making it a manifesto matter.

Prediction:  It’s a tough problem to fix, but reform would send an encouraging growth message to small owner managed businesses without costing the exchequer much in the short term. A nominal increase could well be on the cards, but fundamental reform will be saved for later.  

In 2020, when he was Chancellor, Rishi Sunak abolished tax-free shopping for tourists.  The UK is now the only European country not to offer this.

Ever since its abolition, there has been a steady stream of reports about the negative impact this has had for the hospitality industry and retailers, with Heathrow airport recently adding its voice to the debate.  The Chancellor is reported as asking the OBR to look into it.

Prediction:  The VAT Retail Export Scheme will be reinstated.

The UK’s capital markets are looking quite poorly at the moment, and this has resulted in a lot of calls for the UK’s 0.5 per cent stamp duty charge on share transfers to be abolished.  This is an area where the UK is seen as an outlier.  Some major economies have no transfer taxes on share dealings, whilst others offer exemptions or relief for smaller companies. 

Stamp duty does not raise large amounts and so abolishing it would not be too costly, but the Treasury is reported to be bullish in defending the tax. 

Prediction:  Stamp duty exemption for smaller businesses will be announced. 

Many of the measures introduced by the Conservative government since COVID have been focussed on getting people back to work.  In 2023, the government consulted on providing a form of ‘super-deduction’ for firms that provide certain types of healthcare, in particular regular health screenings and medical check-ups.   The consultation was triggered by concerns about the increase in the number of people off long-term sick since COVID.

The consultation closed prior to the Autumn Statement, but there was no announcement at that time.  We think the government will want to take this forward.

Prediction:  A super deduction for employers who provide certain healthcare and relief from any associated benefit-in-kind charge will be announced.

Rumours continue to abound that the Chancellor will cut personal taxes further in the Spring Budget. But polls after the last Autumn Statement showed that decisions to increase the national minimum wage and the state pension were better received. 

Personal tax thresholds are currently frozen until 2027/2028.  In March 2023 the OBR estimated that the freeze takes its real value in 2027/28 back to its 2013/2014 level.  It is possible that the Conservatives will deliver a ‘stealth’ tax cut by unfreezing the thresholds.  One benefit of increasing the personal allowance, in particular, would be that it could remove pensioners from having to pay tax on their state pension income. 

Cutting either national insurance or income tax is expensive, with income tax being more expensive than national insurance.  Out of the two, cutting national insurance probably makes more sense. It will incentivise work more and go some way to reduce the distortions between the tax treatment of earned and unearned income.  Cutting income tax, however, spreads the joy across the wider population, which may look more appealing in an election year.

Prediction:  The Chancellor will not be able to resist cutting the main rate of either income tax or national insurance.  We would put our money on national insurance as it chimes with previous messaging on incentivising work and may be better received by the OBR.  This may be the “rabbit” of the Spring Budget but, following the Autumn Statement, it feels a bit scrawny.  It is not clear if there is sufficient headroom for a 2p cut in either.

Rumours that inheritance tax will be abolished have died down with the prime minister put off by the perception of it being a tax-break for the wealthy.  A more sustainable reform to inheritance tax would be to reduce the rate and refocus some of the reliefs available.  But this would take some time to implement and would run the same political risks as abolishing it completely.  It could be a manifesto item.

Prediction:  No announcement to abolish or significantly reform Inheritance Tax.

There has been increasing focus on some of the distortions caused by certain pinch points in the tax system.  These arise where entitlement to certain benefits is withdrawn.  The two obvious pinch points are income thresholds of £50,000 and £100,000.  At £50,000 an individual starts to pay higher rate tax at 40% but is also subject to a High Income Child Benefit Charge (effectively a claw back of child benefit).  At £100,000 entitlement to free child-care is lost but the personal allowance is also clawed back.  Both thresholds can result in punitive marginal tax rates.

The government announced an extension to free childcare in the Spring Budget in 2023.  However, the £50,000 threshold for child benefit has been static since 2013 and is arguably long-overdue a reset.  An increase to the threshold for the High Income Child Benefit Charge would chime with the government’s ongoing initiative of getting people back to work. 

Prediction:  The child benefit threshold of £50,000 will be increased, probably to £60,000.

Labour have begun to message about their vision for replacing the existing non-dom regime with one for those living in the UK for short periods.  One option on the table is understood to be a 4-year “temporary residents” regime.  There is still a window for the conservatives to steal a march on any Labour plans by announcing a review or reform of the regime. 

Prediction:  We could see some form of announcement on the non-dom regime, but it will be a review or consultation at this stage.

Hunt is under pressure to boost the competitiveness of UK equity markets, and one option could be to simplify ISA products and remove barriers to investing in the stock market.  This could be done by increasing the ISA allowance where the surplus amount is invested into UK equities or enabling cash and shares to be held within a single ISA wrapper. 

Prediction:  Expect some relaxation to ISA rules to encourage investment in UK equities

Lifetime ISAs were introduced to help people buy their first home with savers receiving a 25% per cent boost from government. 

With the ongoing challenge for young people buying houses, a change on this would help and would help boost the housing market.  It is a measure supported by Martin Lewis of MoneySavingExpert, which can only help the momentum for change.

Another barrier to house-buying is Stamp Duty Land Tax (SDLT).  On 23 September 2022, the then Chancellor Kwasi Kwarteng announced permanent reforms to SDLT as part of the Truss Government’s “Growth Plan”.  These included increasing the nil rate band to £250,000, increasing the nil rate band for first-time buyers to £425,000.  In November 2022, Chancellor Jeremy Hunt announced a sunset clause ending the relief in March 2025. 

Whilst some commentators are calling for fundamental reform to SDLT, for a quick win with young people still struggling to get on the housing ladder, an extension to the current reliefs might be an option.

Prediction:  Expect some relaxation to LISA rules, perhaps indexing up the price of houses that can be acquired beyond £450,000 or reducing the penalty if money is withdrawn.  And expect this to be coupled with an extension to some of the current SDLT reliefs.

As we write, fuel duty is legislated to rise on 23 March.  For over a decade fuel duty has been frozen, but it needs a formal announcement to make this happen.  There can surely be no appetite to unfreeze fuel duty this close to a general election.

Prediction:  Fuel duty will be frozen once again, making a not insignificant dent in the Chancellor's fiscal headroom.

HMRC is concerned about the way some offshore employee ownership trusts are used to shelter gains for shareholders when ownership is passed to employees. HMRC has been consulting on this and so measures that ensure that the trust retains its tax residency in the UK seem likely. 

Prediction:  The government will act to curb the use of ESOTs to ensure they are used as intended.

Business minds will be focussed primarily on the corporation tax regime.  Most investors start by looking at the headline rate of a country, then they move on to look at the system of incentives available. 

A key ask from business would therefore be to see the headline corporation tax rate reduce.  But a corporation tax rate cut is unlikely to shift the investment profile of the UK in the short term, and investors will want to know whether Labour would keep any reduced rate should they win the election. 

Businesses would also like to see more incentives focussed on net-zero.  Green incentives for non-plant and machinery, particularly buildings, are perceived as a gap in the current tax system preventing ‘greening’ of buildings.  Second-hand assets are not currently in the scope of full expensing meaning that there is little to encourage sustainability or recycling.

At the moment, the patent box regime is a below the line incentive, and businesses will be hoping that it moves above the line to protect from the potential impact of the global minimum tax.  This is unlikely to happen in the short term.  The government may want to see if businesses will be encouraged to bring more “fully-taxed” (i.e., 25%) income into the UK to bring the overall effective tax rate up to 15% instead.

For the most part, businesses will want the R&D regime to stay stable as it is one relief that has been subject to a lot of consultation and change over the last few years.  One thing that Businesses would like to see, however, is for capital expenditure on R&D to be brought within the scope of the RDEC.

Businesses would like to see a tax roadmap, similar to the one issued in 2010, setting out the government’s strategy with regard to tax policy for the medium to long term to help with forward planning.  But with a general election on the cards for later in the year the window to do this has probably passed.

Business rates and the apprenticeship levy are frequently quoted as areas that need a fundamental shake-up.  Labour have already said that they will reform both of these if they get into power.  Again, it would seem unlikely for the government to launch a program of reform with an election so close.

The UK tax system is full of distortions and cliff-edges that can produce unfairness, or disincentivise growth or work.

Some of these have been mentioned above, such as the high marginal tax rates that can be experienced by individuals at certain pinch points and the VAT registration threshold that prevents small businesses growing past a certain point. 

The different tax and NI treatment of the self-employed compared to the employed is another area where distortion means there are clear incentives for workers to structure their labour according to a self-employed model. 

The problem is that fixing these issues would be both complex and potentially expensive (especially with regard to personal income tax).  It would take some time to see the rewards come through in terms of increased tax take.  

We all recognise the challenge facing the Chancellor as he seeks to do the groundwork in advance of the general election.

In an election year, tax cuts are often a near-certainty.  We expect one headline-grabbing tax cut, probably to either income tax or national insurance, but whether this will move the opinion polls remains to be seen.  The interesting tax announcements may be the less headline-grabbing ones.

Keep an eye on our dedicated Spring Budget page on 6 March as we cover key announcements and remember to register for the events:

We will be sharing our first impressions in a LinkedIn Live event at 4pm on 6 March 2024. Please register to attend via LinkedIn.

And our Spring Budget virtual event will take place at 12pm on 8 March. Please register now to join our panel of experts for a deep dive into the measures.