Chancellor Rishi Sunak is to deliver a ‘summer economic update’ tomorrow, 8 July, outlining the government’s plans to support the economy through the first phase of recovery from the coronavirus crisis, with likely options including temporary tax cuts, funding for green projects, and job creation schemes
In a briefing note on the Chancellor’s update, the Treasury stated: ‘The magnitude of the recession caused by the coronavirus outbreak is unprecedented in modern times. GDP was around 25% lower during the depth of the crisis in April than in February.
‘While a recovery is underway, there is uncertainty over how fast economic activity will regain lost ground.’
This year’s budget deficit is set to be larger than at any time since World War II, while the government’s Covid-19 support schemes for support businesses and individuals are adding around £130bn to the deficit this year. Lower economic output is depressing tax revenues, potentially by more than £100bn.
Against this background, Sunak is expected to reveal a range of business support measures, to stimulate activity and generate employment. These may include extensions to coronavirus business loan schemes, changes to the tax and National Insurance contributions (NICs) schemes, and potentially also a series of temporary tax cuts, including removing stamp duty on house purchases below £500,000, and reducing VAT in sectors which have been hardest hit, such as hospitality.
Zena Hanks, a partner in Saffrey Champness’ private wealth group, said: ‘In such a politically sensitive environment it seems unlikely that the government would impose anything too onerous on the working public, which would alienate those it has supported through reliefs such as the job retention scheme.
‘However, speculation continues to mount regarding a wealth tax, perhaps rebranded as an NHS tax, which could be a tax on overall assets, including land, rather than income.
‘This kind of policy will always need careful scrutiny given the potential risks it poses to, say, retirees who may have benefited by rising house prices but who have no additional income to support day-to-day living.
‘Likewise, some tweaks for pensions and pensioners could unlock a significant boon for the Treasury. NIC relief on pension contributions was projected to cost almost £20bn in 2019-20, which would make a significant dent in the cost of the furlough scheme – expected to be around £60bn – and would likely be seen by government as a fairly uncontroversial target for reform.’
Chris Sanger, EY’s head of tax policy, said: ‘The Chancellor has demonstrated since the start of lockdown that he has been willing to use the levers at his disposal to support businesses through these unprecedented times.
‘A cut in VAT would demonstrate that he is turning the dial from support to stimulus measures as the country begins its journey back to normality and the economy to recovery.
‘There is speculation as to whether he will adopt the choice of Chancellors past and cut VAT will across the board, to include all products and services, or use what options are available to him whilst still constrained by the Withdrawal Agreement to target specific sectors, such as hospitality and leisure.
‘Whichever option the Chancellor chooses, the tax policy that follows his announcement needs to support business and stimulate consumer spending, without burdening business with a more complicated tax system at a time when many are already struggling to keep their heads above water.’
However, in its analysis PwC pointed out that a 12-month 3% cut in the VAT has been estimated to cost £21bn, around one third of the cost of the coronavirus job retention scheme. While a shorter term could be considered, with many people still tentative about shopping on the high street and visiting pubs and restaurants for health reasons, it is debatable if that would turn out to be an efficient way of stimulating the economy.
PwC also highlighted that while employer (NIC) holidays and/or an increase to the employment allowance to encourage recruitment and protect jobs have been mooted, these would be complicated to implement while the Coronavirus Job Retention scheme is still running.
Nonetheless, rising concern about levels of youth unemployment have led to speculation that the Chancellor will announce grants for training or employing younger workers, or potentially a wage subsidy for companies who retain apprentices.
Amongst the measures to be announced is also likely to be a £3bn package of energy efficiency measures including £2bn towards a new green homes grant and another £1bn for insulating public buildings that has to be spent within a year so that it acts as an effective stimulus.
At the time he launched the self employed income support scheme to help those individuals affected by coronavirus, the Chancellor made clear that a likely consequence would be changes to the tax regime to bring taxation of the self employed in line with those paying tax via PAYE.
Nimesh Shah, a partner at Blick Rothenberg said: ‘The Chancellor could announce changes to the self-employed by abolishing the Class 4 NICs and effectively harmonising the NIC regime for the self-employed and employed worker.
‘For a self-employed worker making profits of £60,000, such a change could leave them £1,215 worse-off per annum.
‘A further proposal would be to abolish the lower dividend tax rates (currently 7.5%/32.5%/38.1%) and align to normal income tax rates (20%/40%/25%). This change would have a heavy impact on a self-employed worker using a company and paying themselves through dividends.
‘For someone generating profits of £100,000 and paying themselves in dividends, they would see a reduction in take home pay of over £6,000 per annum.
‘Harmonising the dividend tax rates with income tax rates would have wider implications for those with savings in share portfolios, such as pensioners, as they would see a higher rate of tax applied to their income as a result.’
The Chancellor’s summer economic update is on Wednesday 8 July, immediately following Prime Minister’s questions at 12.30.