Pre-budget forecasts; the tax partner

‘A lot of the focus in next week’s Budget is likely to be non- tax related’, by Charlotte Sallabank

There may be incentives offered for over 50s to stay in/return to work and those incentives might include some tax incentives – such as lifting the pension lifetime allowance for senior key workers. There may be improved tax reliefs for childcare to get parents back into the workforce – there is currently no tax deduction for nannies’ salaries, which is possibly the most blatant example of double taxation and makes childcare financially unattainable for parents whose working hours are too long or too uncertain to allow them to commit to nursery hours, so leading to a fall out from the workforce.

Overall, it’s unlikely that many, if any, tax cuts will be announced as the Government is keen to ensure that it maintains the focus on ‘fiscal responsibility’. The Chancellor has said that the government intends to take steps to help reduce inflation and improve the UK’s financial credibility. It is also unlikely that tax cuts will be announced given that the government had previously said that there would be a freeze on the personal allowance and income tax thresholds until 2028. However, given the current cost of living crisis, it may be that the Chancellor might announce some limited tax cuts, but they would probably not take immediate effect. If there were any cuts to income tax, these are likely to be highly targeted.
 
Other possible measures that could be announced in the Spring Budget include:
 

• Amendment to the research and development tax relief regime. In January, the government launched a consultation seeking views on how the two research and development regimes could be merged into one. The two regimes are the research and development expenditure credit and the small and medium enterprise deduction. The new regime is likely to be modelled on the existing research and development expenditure credit regime.
• Last year, the government launched a consultation which sought views on how to target the types of income covered by the sovereign immunity exemption. The government considers that sovereign immunity should be targeted to income that 1) arises from what might constitute investment rather than trading activity; 2) arises in respect of investments that are of a more passive nature and that are more commonly held as part of an exercise of sovereign functions; and 3) arises in respect of investments for which exempting it from direct taxation creates the appropriate balance between supporting investment in the UK and delivering fairness between different participants in the UK market.
• There was a consultation on corporate re-domiciliation which closed at the beginning of 2022. There has not been any further updates in relation to this topic, but allowing corporation re-domiciliation could help the government with its plan to encourage investment into the UK
• In spring 2022, fuel duty was reduced to 5p per litre which is due to last until end of March 2023. It is possible the government may seek to extend this reduction, although this would be directly opposed to the government’s net zero commitments
• There have been calls for the government to take more focussed and meaningful steps in relation to environmental measures in the last few budgets/statements.  Hopefully the government will announce some green measures in this budget
• The consultation on the taxation of decentralised finance involving the lending and staking of cryptoassets closed on 31 August 2022 but HMRC’s response is still awaited
• The consultation on the VAT treatment of fund management services closed on 3 February 2023  – hopefully HMRC’s response will outline a path to greater certainty of the VAT treatment of fund management services. Hopefully the VAT position for Qualifying Asset Holding Companies will also be addressed.

 
In recent weeks there has been discussion about increasing the windfall tax rate. This is in light of companies such as EDF and Shell announcing unprecedentedly large profits. As such, there has been speculation as to whether the current windfall tax rate will be further increased – it was previously increased from 25% to 35% in January 2023. This topic could now come with additional political baggage as EDF has announced billions of losses in France, any reluctance to further increase the windfall tax in the UK could be seen as indirectly giving a helping hand to EDF in France.

Given that the next election is likely to be in 2024, it is probable more substantial tax cuts will come in the Autumn budget as a last minute move to garner political support.”

Charlotte Sallabank is a tax partner at international law firm Katten UK