Much has been said about how the cost of the coronavirus to government should best be met, but unfortunately, there has been very little specific detail. This also comes at a time when many areas of the tax system are being reviewed at a high level by various government bodies.
So what changes might be on (or over) the horizon?
The Conservative manifesto said that there would be no increases in income tax, VAT, or NI rates. That still leaves capital gains, inheritance tax, stamp duty, and corporation tax – which has already been hit. It also allows for changes to definitions, thresholds, and other factors affecting the tax base.
The Chancellor has already put the self-employed in his sights. If he can’t raise tax rates, then either self-employed NICs could be aligned with those for employees (a higher rate by the back door), or the self-employed could have to pay some employer’s contributions. Either could make it more attractive to operate through a company – if it weren’t for the increased corporation tax. Being damned either way could easily dampen enthusiasm for new business start-ups.
The OTS has held the EIS scheme up as a good incentive for investors, as it gives up-front tax relief while Business Asset Disposal Relief (formerly Entrepreneur’s Relief) gives more benefit on retirement than at start-up. My guess is that any changes here will be to focus more on the investor, perhaps with increased limits for EIS and SEIS and a better-targeted replacement for BAD Relief.
Looking at CGT generally, the OTS suggests taxing gains at income tax rates, after deducting indexation allowance. Higher rates must be attractive to the Chancellor, but indexation allowance is a relief and so reduces the tax take. When CGT reform comes (probably in a few years’ time) I suspect it will be either a modest increase in rates, or full income tax rates with some form of indexation.
Note that the higher 28% CGT rate for residential property bears no real relation to any other part of the tax system. It would therefore be easy to increase it without much of a knock-on effect.
Whatever the changes, there will almost certainly be anti-forestalling rules to catch transactions that try to bank gains under the old rules. Any CGT planning to use current rates and allowances should therefore be done well in advance – in the previous tax year, if possible.
A minor point on CGT is that no one in government seems to know whether the annual exemption is meant to be a deliberate relief, a fudged indexation allowance, or excusing small gains. It could easily be reduced: those who are careful to use their full allowance each year may lose out.
Property tax investors can be split into commercial landlords (unpopular with government) and residential landlords (actively disliked).
Stamp duty is currently a stick to beat residential and offshore landlords, and I would expect that this will continue – especially as stamp duty brings in almost as much cash as CGT and IHT combined. The extra 3% on housing purchases could very well increase, and post-tax returns on residential property could be squeezed further. On the other hand, the new free ports could open new opportunities for investment in commercial property.
Pensions are under constant scrutiny. Although there were some relaxations recently (aimed largely at public-sector schemes) there is a risk of further tightening; early contributions may pre-empt any changes.
Inheritance tax raises very little but is politically sensitive. Fundamental reform seems unlikely, but some reliefs may be trimmed back: careful planning will (as always) be important.
A wealth tax would be very hard to administer fairly, but practicality has never been enough to dissuade Government when it comes to grand gestures. Frankly, anything could happen.
Finally, HMRC is under significant pressure to collect all tax due. I would expect significant campaigns targeted at particular sectors, together with increased reliance on third-party data. HMRC are obtaining more data from banks, fund managers, and other third parties, and all indications are that they will be taking the figures they receive as gospel truth.
This means the information flowing to HMRC will be increasingly out of your control. If your bank reports the wrong interest figure to HMRC, HMRC will assume the bank is right and you are wrong. That error by the bank will look like your carelessness, and may result in a wider enquiry into your return.
An enquiry always has a cost in time, effort, and/or fees, even if you don’t end up paying any extra tax, and so it will be far better if you are alert to potential errors in third-party data and can correct them before your return goes in. Corrections will take time, so you will need to check early and check often. This is the age of information – managing your data is just as important as managing your money.
Andrew Jackson is head of Tax UK200Group and head of corporate tax at Fiander Tovell