EY comments – Autumn Budget preview

Addressing the Fiscal Black Hole

Chris Sanger, UK tax policy leader at EY, said: “Against a challenging economic backdrop, the Chancellor will be contemplating how to raise the significant revenue required to reduce the likely fiscal shortfall, while also promoting greater investment in the UK. The three biggest taxes – Income Tax, National Insurance and VAT – combined contribute more than two-thirds of the total UK tax take, so adjustments made here could offer opportunities to raise substantial revenue. If these taxes are under consideration, the Chancellor may be weighing up whether to make minor tweaks that affect a relatively small group of people, or pursue broader changes that impact everybody.

“The UK’s current Corporation Tax rate of 25% is around the middle of the pack among G20 countries, and further increases there seem unlikely given the Chancellor’s growth agenda. In contrast, a one percentage-point cut in the main rate, to 24%, perhaps delayed to 2028, would cost around £4bn in the first year, but may help to boost future entrepreneurial activity, investment and receipts longer term.

“Beyond tax rate adjustments, the Chancellor has several other revenue-generating options and, while these measures are unlikely to produce sufficient revenue on their own, they could provide funds that may be re-deployed to stimulate growth. One option is to explore revenue-raising measures to close the tax gap, the difference between the amount HMRC should collect and what it currently receives. For example, it is often asked whether the UK’s high VAT registration threshold incentivises those earning just below the limit to restrict their income or potentially underreport their income. To address this, we could see a reduction in the VAT threshold.”

Options with Income Tax

Sarah Farrow, UK Private Client Services Partner at EY, said: “The Chancellor is facing difficult choices around taxation and, with Income Tax currently accounting for 30% of the total UK tax take, even a minor adjustment has the potential to raise significant revenues. Based on the Treasury’s own numbers, a two-percentage-point increase to the basic rate of Income Tax basic would potentially raise £13.8bn in the first year alone.

“The Government could also consider proposals to reduce employee National Insurance by 2p, offset with a 2p rise in Income Tax. This could be viewed as levelling the playing field between different types of income and would offer substantial revenue gains, raising up to an estimated £6bn for the Exchequer.

“If the basic rate of Income Tax is left unchanged for now, an alternative revenue raiser could involve modifying the personal allowance to become a credit, being a fixed amount of tax that you don’t have to pay, rather than being an amount of income that you don’t pay tax on. This would mean the allowance would be worth the same amount of money whether you were a 20%, 40% or 45% rate taxpayer and, combined with threshold changes, could raise more revenue from higher earners. This would also remove the 60% so-called “tax trap” band that affects those earning annual incomes of between £100,000 and £125,140.”

Capital Gains Tax

Sarah Farrow, UK Private Client Services Partner at EY, said: “The recent removal of carried interest from Capital Gains Tax (CGT) may signal that further CGT changes could be announced at the Budget, such as aligning rates with the marginal rate of Income Tax, as they were back in 1998. However, it is difficult to predict how much revenue this would raise, particularly as a rate increase of this magnitude would likely be accompanied by greater support for business disposals and relief for inflation.

“Announcing an increase to take effect from next April could lead to a flurry of asset sales ahead of any changes. The risk though is that a material increase in CGT may encourage some to simply hold onto assets in the hope that rates will fall in future. Aligning CGT rates with Income Tax could help mitigate some of this impact as it would send a clear message that rates are not likely to be reversed for the foreseeable future.”

Banking Taxes

Richard Milnes, EY UK Banking Tax Partner, said: “The UK banking sector continues to face speculation over potential tax rises in the Budget, including the possibility of further changes to levels of banking surcharge and bank levy rates.

“While changes to the bank levy seem less likely – given it’s a balance sheet tax that no other major financial centre has to pay – changes to the banking surcharge on profits, which currently stand at 3%, could be on a long list of potential measures.

“A rise of even 1 or 2% could add between £0.5bn to £1bn respectively onto banks’ tax bills and could also create greater uncertainty about the future direction of the operating environment for UK banks. For an industry already paying a higher tax contribution compared to other sectors and indeed other nations, this could have significant implications for the sector’s UK competitiveness in a global market.”