Client Affairs

Will Downing Street Pull A Big Surprise? Pre-Budget Industry Comment

Jackie Bennion, Deputy Editor, 10 March 2020

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The question will be just how radical does Boris Johnson and Downing Street want to be? "It remains to be seen the extent to which the government will prioritise investment and retaining the new voters who catapulted Johnson into power, versus those policies, voters and MPs which have been the core of Conservative politics for so long,” Saffery, among other specialists, warn.

In the run up to any budget, wealth managers like to bend the Treasury's ear, in theory anyway, on what the sector would like to see and areas that it fears are most in the crosshairs. Wednesday's budget will be an interesting one, not least as it is Rishi Sunak's first as chancellor and backed by a big Conservative majority promising some “radical” levelling up in a society set for a new big spending era. The stage at least is set for that, begging the question of who is going to pay for it. Also weighing is No.10's heavy hand in Sajid Javid's departure last month, and analysts suggesting that the prime minister can afford to burn a few more bridges this early on in his tenure with a strong, if tricky, mandate.

Mike Hodges, partner at accountancy firm Saffery Champness begins with what might be in store for tax and spend, pensions and IHT, corporation tax, and possible repercussions to UK business in the face of more Brexit upheaval.

“At this stage we shouldn’t necessarily be expecting swathes of tax giveaways. The money for the investments the government says it wants to make will need to come from somewhere, and that means either more tax or more borrowing. At the same time, the government will be conscious of the need keep new Conservative voters from the former so-called red wall onside and may, therefore, be thinking more seriously about tax policies which would not perhaps have sat quite so easily with previous Conservative administrations," Hodges said.

Tax to spend
“If the new Chancellor decides to use the tax system to level-up parts of the UK, as has been suggested, this could come to the detriment of perceived wealthier parts of the country - which already shoulder the bulk of the UK’s tax burden," Hodges said. He cautioned that big infrastructure projects like HS2, whether or not they can unlock vast economic opportunity, will require vast amounts of funding.

Pensions relief is one issue in the crosshairs but Hodges noted that reforms have been trailed before many previous budgets, without ever making an appearance on the day. But he argues that with a "new demographic of voters to appease", chances for more sweeping reforms have been heightened. "Pensions relief costs HMRC an estimated £40 billion ($52.1 billion) a year and, despite rumours of mounting pressure from the Conservative back benches, it may look like an easy target for a new chancellor seeking to deliver cash to a prime minister we know has a taste for his so-called Grands Projets," he said.

Pensions relief vs inheritance tax?
If ever a Conservative government was likely to be radical, it is in this area, Hodges said. "For example, with so much recent debate over inheritance tax – despised by a large proportion of the population even though most will never have to pay it, and criticised for its complexity by the OTS and others – might we see IHT scrapped entirely as a carrot to match the stick of reform to pensions relief? The £5 billion of receipts from IHT pale into insignificance compared with the £40 billion cost of pension tax relief and with a little numerical sleight of hand to keep the coffers full. The chancellor could pull off what he and the prime minister might see as a PR master stroke."

Business, Brexit and entrepreneurs
Brexit will loom large for the chancellor, despite the transition period providing a buffer. Hodges suggests the government will likely be keen to demonstrate the country’s competitiveness on the world stage and the "attractiveness of UK plc to investors – particularly with corporation tax set to remain at 19 per cent rather than dropping to 17 per cent." Hodges contends that while policy reform may not be imminent, "we could see a movement towards expanding the likes of the Enterprise Investment Schemes to encourage investment into sectors the government sees as important", but which don't benefit currently due to European state aid rules.

"It remains to be seen how a desire to be business-friendly can be squared with what seems to be the lukewarm, to put it mildly, views on Entrepreneurs Relief expressed by the prime minister. The debate has focused on whether the relief really influences entrepreneurs in setting up in business, but given the likely reaction to an outright abolition, it is more likely we will see a shift back to a lower lifetime limit, perhaps closer to £1 million," Hodges said.

Another area concerning wealth and tax advisors is whether the chancellor will close a tax loophole enabling wealthy families to invest in farmland as a way to cut their children’s inheritance tax bill.

Tax and land
Current agricultural relief can protect between 50 per cent and 100 per cent of money invested in farmland from IHT. Reportedly, the new chancellor is also considering ending business property relief, which is another way of reducing IHT when the deceased has an interest in a firm or shares in an unlisted company.

Tax experts believe that scrapping the two reliefs could raise around £800 million a year. Head of international tax at Andersen Tax UK, Miles Dean, has raised both issues as a concern for wealth holders.

"I expect that, like business property relief (BPR), those that need agricultural relief most will be affected if the chancellor closes this so called IHT 'loophole'. Farmers who would otherwise benefit, and therefore are able to keep land in their ownership, will have to consider selling to fund the IHT now due.

“The same goes for BPR which is a sensible and much needed relief if we insist upon taxing wealth on death, which some might argue is wholly egregious in and of itself. It seems that this is an attempt to fill the coffers rather than introduce sensible tax policy."

Tax on techs
Dean has also flagged the UK’s decision to roll with plans for a new digital services tax, despite threats of a US retaliation, squared at Javid, when he was still in charge, and ahead of warnings from UK tech firms that the move could see them taxed twice. The levy is due in April, following its likely inclusion in this week's budget, and aimed at clamping down on technology companies' practice of diverting profits to low-tax territories such as Ireland to pay lower tax. Some would argue that this is tax in name only.

The proposal is expected to raise around £500 million a year, which Dean argues is “an extraordinary tax to introduce” if that's “the anticipated return”.

"It is a great shame that the government seems to be capitulating to the braying few who demand more tax for the sake of it. Stating that tech companies must pay their fair share simply isn’t good enough."

Dean called it “very risky" given the high stakes and potential for US reprisals, and that costs will invariably be passed on to consumers.

"The problem for the government is that the DST won’t affect the behaviours of the tech companies it is aimed at per se, but they might start to think about the extent to which they invest in the UK. Of course, for many this tax won’t go far enough (and they have a point given the expected tax revenues). As such, one might argue that this is simply a token gesture with the OECD beginning to look at alternatives to the arm’s length principle, which the tech companies appear to reluctantly accept is inevitable.”

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