As the new U.K. government will be formed by a Conservative party with a significant majority, its policies will set the U.K. tax agenda for the five years.
Tax Changes the Conservatives have Already Promised
In Finance Act 2016, the rate for corporation tax for 2020–21 was set at 17%. However, during the election campaign, the Conservative party pledged to set the rate for 2020–21 and the rest of the new parliament at 19%. Therefore, businesses will need to revisit their deferred tax calculations.
The Chancellor is expected to stick to the existing plans to introduce restrictions to payable research and development (R&D) tax credits from April 2020. However, the Conservatives have pledged to increase the value of the Research and Development Expenditure Credit (RDEC) for larger companies from 12% to 13% and to review the project qualifying criteria to establish if it can be widened to include R&D on cloud computing and data. They have also made a commitment to increase relief available under the new structures and buildings allowance to 3% a year.
A “fundamental review” of the business rates system has been promised but no desired outcome was stated, other than to reduce the burden on businesses, and no timescale was given for the review.
The Conservatives promised not to raise the rate of value-added tax (VAT), income tax and national insurance contributions (NIC) during the next parliament—the tax triple lock.
The Conservative party manifesto also confirmed its commitment to introduce a digital services tax (DST) from April 2020. Whether or not there will be enough time to finalize the necessary legislation to implement this new tax for the 2020–21 tax year remains to be seen. It is also possible that the tax may yet be substantially modified or even abandoned as it is likely to be a significant point of contention in any post-Brexit trade deal with the U.S.
As part of a wider review of small business taxation, the Chancellor promised to look at the impact that the IR35/off-payroll labor changes for private sector businesses will have on contractors and gig economy workers from April 2020. Given that these changes were longstanding Conservative party policy, it is perhaps unlikely that they will be abandoned completely. However, delaying the changes until 2021 or committing to a “post-implementation review” of their impact may feature in the Budget.
Similarly, the outcome of the (disguised remuneration) Loan Charge Review by Sir Amyas Morse is expected to be published either before or at the 2020 Budget. Again, for the government to abandon this tax enforcement action seems unlikely, but the Chancellor may announce much more flexible payment terms for individuals facing the charge.
Most tax changes arising from Brexit will not take effect until the end of the transition period. If the withdrawal agreement is implemented from January 31, 2021 as planned, the transition period is scheduled to run until January 1, 2021. That allows relatively little time for the new government to negotiate a post-Brexit trade deal but the Prime Minister promised not to extend the transition period beyond January 1, 2021 so, theoretically, there may be a “no-deal” Brexit at that point. Alternatively, with a substantial parliamentary majority, an extension to the transition period may be possible if a post-Brexit deal takes longer to agree.
The Conservatives intend to raise the annual NIC starting threshold for employees from 8,863 pounds ($11,823) to12,500 pounds over the next parliament, with an immediate increase to 9,500 pounds from April 2020: this will give a cash saving to employees of 104 pounds (or around 85 pounds taking inflation into account). The rates of NIC are to be frozen for the duration of the new Parliament but they plan to increase the NIC Employment Allowance for employers from 3,000 to 4,000 pounds—probably from April 2020.
Employers should be preparing for a significant increase in the National Minimum Wage (NMW) from April 2020. The Conservative party has pledged to increase it in stages to 10.50 pounds over five years—this equates to a 5% increase from April 2020 and each subsequent year of the parliament.
During the election campaign, all the main parties proposed changes to capital gains tax. The Conservative party proposals were the least radical, but they did make a pledge to “review and reform ‘entrepreneurs’” relief (ER) from capital gains tax: the manifesto stated “…some measures haven’t fully delivered on their objectives.” While it is perhaps unlikely that the valuable ER rules will be repealed, there may be some rules changes announced in the Budget.
Future Tax Reforms?
The Conservative manifesto took very much a “safety first” approach to taxes, but with a substantial majority and potentially five years before the next election, the promised Budget in late February could see some radical tax proposals: it is the Chancellor’s best opportunity to make structural reforms and the pain of any changes many have dissipated by the time of the next election.
The Chancellor may choose to begin reframing business tax incentives for a post-Brexit economy—perhaps focusing tax reliefs on businesses that export and on sectors such as fintech and green-tech.
Past political controversy over pension tax relief perhaps influenced politicians not to make specific commitments on the topic during the election campaign. However, because of the impact the Annual Allowance charge is having on senior national health service clinicians, the government announced “quick fix” measures to ensure that where they take on additional hours, such individuals would not lose out overall.
Tax relief for pension costs is a considerable cost to the exchequer and the rules are complex and ripe for reform. The Budget may be the Chancellor’s best chance to grasp this nettle—perhaps linking any revenue raising measures to increased funding for social care of the elderly.
Similarly, inheritance tax is seen as overdue for reform by many. Structural reforms and removing some tax reliefs could both simplify the tax and again raise additional revenue to support social care reforms.
A truly radical Budget might address the long-proposed alignment of income tax and NIC to remove much of the complexity of the current rules for small businesses and attempt the level the tax playing field between employment, self-employment and operating through a personal service company.
The new government’s first Budget in February 2020 will set the tone for taxes until 2025—how bold will the new government be?
Paul Falvey is a Corporate Tax Partner at BDO LLP. He may be contacted at firstname.lastname@example.org.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.