Ahead of new Chancellor Rishi Sunak’s first Budget, coming only weeks after his instalment at No 11, Mike Hodges, a partner at Saffery Champness reflects on what might be in store on 11 March.
Mike Hodges comments:
“With a five-year term lying ahead of it, if the government is going to do anything particularly controversial, it’s likely to be now – or at least the first steps will be taken in advance of the promised Autumn Budget later in the year. With a strong majority and time to consolidate before any future election, Boris Johnson may feel that bridges seemingly burned at this early stage of his tenure can be rebuilt in the future.
“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.
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. Major infrastructure projects like HS2, whether or not they unlock the potential of swathes of the UK economy as promised, will require vast amounts of funding.
“Pensions relief is one of those seemingly in the crosshairs. Reform has been trailed in advance of what seems like every Budget of the last decade, without ever making an appearance on the day. But with a new demographic of voters to appease, the chances for sweeping reform have arguably been heightened. Pensions relief costs HMRC an estimated £40 billion a year and, despite rumours of mounting pressure from the Conservative back benches, it may look like an easy target to a new Chancellor seeking to deliver cash to a Prime Minister we know has a taste for his so-called ‘Grands Projets’.
Pensions relief vs inheritance tax?
“There is a point of view that if ever a Conservative government was likely to be radical it’s this one, and it could be that Downing Street decides to pull a big surprise. 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 it scrapped entirely as a carrot to match the stick of reform to pensions relief? The £5 billion of receipts from inheritance tax pales into insignificance compared to 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 meaning it is steady as she goes in the immediate term.
“Looking ahead, 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% rather than dropping to 17%. While there may not be immediate policy reform, 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 are currently precluded from benefiting 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.
“All in all, the question really will be just how radical does Boris Johnson and his Downing Street team want to be? And it remains to be seen the extent to which the government will prioritise investment and retaining its new voters who catapulted Boris into power, versus those policies, voters and MPs which have been the core of Conservative politics for so long.”