The question on my mind pre-budget was “how was the Chancellor going to balance the books having borrowed so much during lockdown whilst supporting business to recover to pre-covid levels?” Although I accept that this is virtually an impossible balancing act I was hoping for a plan which plotted a way out of the situation we find ourselves in. In the run up to the budget he promised to set out his vision for the UK’s “future economy” and promised to “be honest” about what it will take to repair the public finances.
Balancing the books
The Chancellor stated that the damage already done by the virus was £355bn, the highest since WW2. The cost will be another £234bn next year. He stressed the need for corrective action to bring it down but gave no dates or timescale. He did say it was not the Conservative way to leave problems for the next government and said he would put in place measures to prevent low debt to keep rising. But he emphasised that it would take decades to put things right. He would ask more of those that can contribute which will be profitable businesses and working people.
Corporation Tax – from 2023 this will increase substantially to 25% - although the Chancellor was at pains to stress that it was still low compared to other countries it is a big increase and a surprise to many. The increase is tempered for small business with a reduced and tapering rate (from 19%) dependant on profit. There was also a radical incentive aimed at driving investment which he called a “superdeduction” of 130%.
Income tax/ thresholds – Income tax rates are not changing. Thresholds will be increased this year as previously promised then frozen until April 2026 which will raise tax from working individuals in the future. He was at pains to point out that no-one’s take home pay will reduce this year.
VAT – there was no change to the headline rate which would have been an obvious way to raise more tax but the Government was constrained by previous promises on VAT.
Missing pieces
Windfall Tax - Some companies have thrived during lockdown. For example Amazon’s UK sales surged to £19.4 billion in 2020 - up 51% on the year before. It is surprising that the Chancellor did not take the opportunity to introduce a Windfall tax of some kind although the rise in Corporation Tax will deal with in future years for those paying tax in the UK but leaves this year’s superprofits alone. It will not affect those that pay very little in the UK due to their corporate structures which will leave a sour taste for those that do pay tax in the UK.
Collection of tax - We had heard that the Government would be thoroughly auditing claims made under the various support schemes to ensure that only those eligible for the schemes benefitted. Since the schemes were understandably rushed in there was little if any due diligence carried out on those claiming. Though the Chancellor did not mention this specifically he did refer to the red book in terms of further detail on enforcement and said that thousands of investigators would be employed in the future.
Off-payroll – the Chancellor did not mention a delay to the off-payroll legislation which was consistent with messages from the Treasury and HMRC. There have however been many PSC directors and end clients that were convinced that a delay would happen. Unfortunately not.
Supporting Business
As well as the continuation of the furlough scheme the Chancellor announced, amongst other things further support for the self-employed; more money for apprenticeships; cash restart grants of up to £6000 or £18000 for the leisure industry; art grants; a new recovery loan scheme; business rates holiday extension; VAT reductions for the hospitality industry; a new green bank. All will be welcome though business will no doubt focus on the Corporation Tax rise and will point out that successful businesses creates jobs.
Supporting people
The Chancellor also reaffirmed his commitment to support people by way of furlough, grants and tax credits. And of course freezing any increases in fuel and alcohol duty. There was no change announced in relation to taxation of pensions which was a surprise. There will of course be those who fall through cracks of any support measures and the Government may need to address the needs of those people in the future.
So did he deliver a clear and honest plan?
Having listened to the budget the Chancellor has provided some clarity whilst leaving himself room to manoeuvre in the future. He did not commit to many timescales (and I can understand why). A lot was made of support for business, both historical and over the next years and the Chancellor regularly stated the costs of his measures.
There is no doubt that there is a huge commitment to support the economy which is welcome. There was less detail around balancing the books although in terms of collection of tax and HMRC enforcement the Chancellor did say there would be further detail published.
The size of the increase in Corporation Tax was the big news. It will be a while before we see the real impact on business of this measure but it will undoubtedly raise tax in the short term. The counter argument (and a Conservative mantra) is that successful businesses create jobs and pay more tax as they get bigger so we should keep tax rates low. The superdeduction incentive gives the Chancellor a response to criticism along these lines.
Realistically the Chancellor had left himself few alternatives to balance the books because of previous promises to leave VAT income tax and NI rates alone. Politicians do not like to be seen to backtrack on their promises!
All in all it was a reasonable budget bearing in mind the constraints and pressures the Chancellor was under.
For a summary of the key changes which could affect contractors visit our Budget 2021 headlines article here.
