It is only three months since we provided analysis on the Chancellor’s March 2020 Budget. At that time none of us could have predicted how our lives would be affected by the COVID-19 pandemic, or the effect on government finances.
The COVID-19 pandemic has resulted in an incalculable human cost, and the Treasury is facing a budget deficit in excess of £300 billion this year. The difficult question is how the Chancellor will reduce the deficit and clawback the billions of extra spending?
In normal times a Chancellor would have the choice of cutting expenditure, raising taxes, or a combination of the two. However, these are not normal times and cutting expenditure, particularly on the NHS and social care which will need extra funding as a result of the pandemic, will be very difficult, if not impossible. This leaves increases in taxation almost certain to take place, but of course we don’t know the size or timing of them. The Chancellor will not want to increase taxes too quickly for fear of stifling the economic recovery.
In their election manifesto last year, the Conservatives pledged not to increase the rates of income tax, national insurance contributions (NIC’s) or VAT. Whether they can stick to this pledge is open to question given the scale of the deficit?
We were expecting an announcement regarding Inheritance Tax (IHT) in the March Budget, but there was no mention in the Chancellor’s speech. We do not think that this means there will be no changes and we expect an announcement in the autumn.
It is worth remembering however, that IHT only raised £5 billion in 2018/19 and government expenditure is expected to exceed £1,000 billion in 2020/21 for the first time. Any measures on IHT can realistically only fill a small part of the deficit but could still result in businesses facing larger bills in future.
There was no manifesto pledge on Capital gains Tax (CGT) so we cannot rule out an increase in the rates payable on a property disposal. We have a system at present where the rates payable on residential property (18% or 28%) are higher than on land and other assets (10% or 20%).
As with IHT, CGT doesn’t raise huge sums of money – less than 1% of tax revenues – so again could only fill a small part of the deficit. However, tax on property transactions is easier for HMRC to collect than other taxes. The recent requirement to report gains and pay tax on residential property sales within 30 days could perhaps be extended to accelerate the payment of CGT.
When the Chancellor announced his package of measures to support the self-employed at the end of March, he made an interesting comment:
“It is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.”
It is of course impossible to know what precisely the Chancellor meant by this, but here are a few possibilities:
However the Chancellor chooses to meet this growing deficit only time will tell, but one thing is for certain, tough challenges lie ahead.