For this reason, many will consider this the most important Budget in living memory, but the reality could be very different. The backdrop to the Budget is likely to be the ongoing pandemic, with national lockdowns and restrictions still in place and large parts of our economy still struggling. We all hope that the vaccines being rolled out will help us all move back to some sense of normality, but this will take time.
The options available to the Chancellor will be limited at this time. Any increases in taxes could harm the recovery we need to see. Our expectation is that any significant tax changes will be deferred until the pandemic is fully under control and there is clear evidence that taxpayers and the business sector are able to support higher tax bills.
Our predictions and hopes for the Budget are based on the needs of the small business sector.
Unfinished business by The Chancellor
The Government needs to ensure that its COVID-19 support remains in place for as long as it is needed. Key schemes such as the Coronavirus Job Retention Scheme (also known as the furlough scheme) and Self-Employment Income Support Scheme (SEISS) have already been extended on more than one occasion, but the impact of the pandemic continues to be felt by many sectors.
We predict that there will be further extension plans put in place as businesses will not be able to cope with a ‘cliff edge’ approach of funding if these schemes are simply removed. Support will need to be scaled back over time, allowing businesses to transition back to a position where they can fully fund their activities. Without this, hundreds of thousands of businesses and jobs could be at risk.
We expect the Job Support Scheme and Job Retention Bonus Scheme will return, which are examples of how funding could be transitioned, or to see similar schemes announced in March.
We understand the Treasury is reviewing proposals to support those who have been forgotten through current funding schemes. Millions of directors, self-employed and freelancers have missed out on funding through no fault of their own. We recognise it is impossible to fund every individual and save every business, but we feel the current system is unfair. There are too many gaps and too many individuals who have missed out. We all hope that we live in a fair and equitable society – the Government needs to recognise these gaps and protect and support the businesses, lives and families affected.
Incentives to stimulate the economy
Our recovery will be business led and we expect to see incentives put in place to encourage investment, employment and consumer spend.
The Eat Out To Help Out scheme last summer was an example of an innovative plan to stimulate much-needed consumer demand in the hospitality sector. Some may argue about the true value of the scheme to the taxpayer, but it galvanised the nation and supported many thousands of businesses. We don’t expect to see a reintroduction of the scheme, but we may see the Government introduce similar measures to support consumer demand in those sectors hardest hit by the pandemic, such as hospitality and the arts.
We also hope to see further incentives to support employment. We have already seen the introduction of new apprenticeship schemes and these are likely to be extended and enhanced. Other options could include enhanced funding for training, possible reductions in payroll taxes (such as employers’ national insurance) or more direct contributions towards payroll costs for eligible businesses.
Small businesses have relied heavily on Government-backed funding schemes such as Bounce Back Loans and Coronavirus Business Interruption Loans through the pandemic. The sector will now have to manage this unprecedented level of debt. We have to move away from this level of dependency, drive entrepreneurial behaviour and support individuals who invest in existing and new businesses. We hope to see further tax incentives to encourage this type of investment, particularly in the small business sector. This could be done alongside the Government, perhaps with some form of underlying central support or protection.
We also expect to see further measures to encourage capital investment by businesses through enhanced capital allowances, particularly for energy efficient projects.
Possible tax rises in the Budget
While we don’t believe now is the time for significant changes to the tax system, there is no doubt that tax revenues will have to rise in the medium and long term.
This will have to be balanced with the need to support growth, the likely levels of spending needed post COVID-19 and the tax lock in place, with the Government committing to no increases to income tax, VAT and national insurance in this Parliament.
There are some potential opportunities should the Chancellor look to raise taxes in the coming Budget without causing significant political and economic fallout. There has been speculation for some time now around the possibility of removing higher rate tax relief on pension contributions and introducing a new flat rate relief. For many, this would be a fairer system and the impact on tax revenues is projected to be sizeable. It may also support plans to encourage these individuals to invest in businesses directly, rather than saving via pension funds.
Increases in fuel duty, the introduction of a plastic tax and VAT on more environmentally damaging activities could also be considered, which would sit well alongside possible enhanced tax relief for green investments.
More significant changes to taxes have been mentioned by many, but it seems unlikely these will be introduced in this Budget. Changes to the capital gains tax and inheritance tax systems have been debated for years and they do appear to need an overhaul, but that seems likely to be a project for the Chancellor in subsequent Budgets. We would also be concerned that any change in capital gains tax relief as investors in small businesses would be discouraged from funding and investment at a time they most need it.
Finally, there has been speculation that the Government could introduce a wealth tax, including some suggestions that it would apply as a flat rate to assets over £1m. Despite the possible tax revenues this could generate, it seems very unlikely we will see this introduced in the near future. The calculation and collection of this type of tax would be hugely complex and it seems unlikely that the Government would have the appetite for this type of wealth redistribution policy.
By Daren Moore FCCA, Group Commercial Director at TaxAssist Accountants
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Last updated: 3rd February 2021This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.