Summer Budget 2015: triple lock on tax and strong action on evasion

Chancellor George Osborne delivers his Summer Budget next week, which is expected to include legislation for the ‘triple lock’ preventing increases in the rates of income tax, VAT and national insurance contributions (NICs) over the life of the parliament, plus tough action on tax avoidance and evasion

Ahead of the Chancellor's speech on 8 July, Chris Morgan, head of tax policy at KPMG in the UK, said: ‘He is keen to make good on manifesto pledges such as raising the personal allowance and higher rate income tax threshold and may well take the opportunity to do so now, so setting out the direction of travel to a lower tax economy. In addition there has been some speculation that the Chancellor could reduce the additional rate of tax from 45%, perhaps back to 40%.  However, given the current economic climate the former seems more of a priority than the latter.’

Morgan is expecting changes to pensions tax relief, including reducing the annual amount that can be contributed to a pension tax-free for those earning over £150,000, with those earning around £210,000 only able to contribute £10,000 and possible changes around the tax free lump sum or the way people can use ‘salary sacrifice’ to make pension contributions. 

David Brookes, tax partner, BDO,  said the Chancellor was likely to create some ‘wriggle room’ around the triple lock, perhaps by reducing, removing or capping some tax reliefs or by broadening the base of these taxes by removing some exemptions.

This could include increasing current capital gains tax (CGT) rates to 20% and 40% in line with the current income tax bands, or limiting Entrepreneurs’ Relief. Options there could include restricting claims to employees of a business only; making the 5% shareholding test apply to 5% of the total value of the business; or extending the required ownership period from 12 months to three years.

‘Historically new governments have raised taxes in their first year in office and when we polled our clients ahead of this Budget, 72% of them were expecting an increase in taxes. The promised triple lock will clearly limit where taxes can be raised but we expect further action on tax avoidance, and possibly the “sin taxes”’ to be high on the list,’ Brookes said. 

Measures to tackle tax evasion may well include continuing to make professional service firms more accountable, and the Chancellor may also consider removing a person’s ability to inherit non-domicile status from their father or grandfather, Brookes said, along with strengthening HMRC powers in relation to direct recovery of tax debts and deterring serial tax avoiders.

David Kilshaw, private client services partner at EY, predicts that Inheritance Tax (IHT) reliefs are also likely to be in the spotlight.

‘Agricultural Property Relief (APR) and Business Property Relief (BPR) provide exemptions from IHT and the Chancellor may consider there is not room for both. IHT raised £3.1bn in 2012/13 but the value ascribed to the reliefs was seven times higher. Given the focus of the National Audit Office on reviewing the coherence and continued viability of all tax reliefs, this could give the Chancellor a platform for change.  APR may therefore be restricted, abolished or refocused,’ he said.

Kilshaw is also expecting the Chancellor to fulfil the Conservative Party’s manifesto promise to introduce a £175,000 transferable main residence allowance which would increase the effective nil rate band to £500,000 and allow spouses and civil partners to pool their reliefs. On this basis, a family home of up to £1m would escape IHT.

George Bull, senior tax partner at Baker Tilley, is expecting to hear from the Chancellor about two aspects of business tax. The first is Patent Box, with the UK regime likely to come under scrutiny following the recent European Commission action to fundamentally reform corporate taxation in the EU.

‘Second, the annual investment allowance. The AIA is a generous form of capital allowance which enables businesses to deduct the full value of a qualifying item from profits before tax. The AIA, currently £500,000, has changed four times since 2008. Without specific action by the Chancellor, it will revert to £25,000 on 1st January 2016,’ Bull pointed out.

Anna Anthony, EMEIA head of financial services tax at EY, points out that the bank levy is also likely to cause a headache for the Chancellor, and suggests that the announcement of a consultation on the issue would be welcomed.

‘The choices are either to keep the status quo and continue to disproportionately penalise UK banks with a global footprint, to drop the tax take, or to put the rates up on UK balance sheets.

‘There has been talk about lowering the threshold and extending the tax to smaller banks, but this is a real red herring - it won’t raise much more tax and contradicts the government’s policy on competition and encouraging challenger banks,’ Anthony said.

Meanwhile,  Chas Roy-Chowdhury, ACCA head of taxation, cautions that the Chancellor should be careful when unveiling his calculations for cutting the UK deficit based on expected income during his Budget speech, suggesting that the experiences of the last Parliament have shown that these may be over-optimistic.

Roy-Chowdhury said: ‘Tackling avoidance and evasion has been a key plank of the government’s strategy for balancing the books.

‘If we look at the Office for Budget Responsibility’s own figures we see that the expected income in this area often falls short in reality, and even then there are a number of one-off payments that make up the figures.

‘For example, the government expected to receive £5.3bn from the deal with Swiss banks, however they actually received £1.9bn. These payments do help but there are only a finite number of these schemes which the Chancellor can plan for. The introduction of APNs (Advanced Payment Notices) means that in the future there will be far fewer of these single payments to rely on.’

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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