Billed as a Summer Economic Update, Chancellor Rishi Sunak will hold what may be actually an Emergency Budget in all but name on 8 July 2020, as he faces pressure to unlock new support measures to help the economy move out of the coronavirus lockdown and to get the country working again.
According to the Chancellor more than two million jobs could be lost and the country could be facing the worst recession since the Great Frost of 1709. There could also be a second wave of the coronavirus in the Autumn, and the Treasury may want to anticipate how that might impact the economy, should there be the need for another lockdown.
Against that stark economic backdrop, Mr Sunak is keen to bring forth government spending commitments reported to be in the region of £100bn to provide the country with the financial boost it needs in the post-covid environment, culminating in what could be a 1930’s style macro-economic infrastructure package. Any tax raising measures would be deferred until the full Autumn Budget.
Alongside the spending and infrastructure commitments other possible Budget measures could include:
- A reduction in the VAT rate from 20% to 5% particularly in the hospitality sector, the aim being to put additional cash in people’s pockets and encourage consumers to accelerate their spending.
- A temporary cut in Stamp Duty to stimulate the housing market.
- Changes to the Apprenticeship levy to support learning of new skills.
- A skills fund to retain furloughed workers who have lost their jobs as the furlough scheme ends.
- Another look at how the proposed off-payroll rules will affect the agility of the private sector
- An attempt at equalising NIC’s between the employed and self-employed.
- Increases in the R&D tax credit and capital allowances.
With three former Chancellors of the Exchequer all recommending fiscal stimulus rather than tax increases as a means of re-invigorating the economy it will be interesting to see whether Mr Sunak will again take centre stage with his commitment to UK workers and businesses that “they will not face this alone.”
Our tax partners have put together their thoughts on what might be announced in tomorrow’s update below.
VAT – Andy Horsfield, VAT Director
Tomorrow has the potential to see some key VAT announcements:
Temporary cut in the Standard Rate of VAT – currently 20%
There have been lots of rumours about a potential cut to the main VAT rate as this would follow the precedent set in the last financial crisis when Alastair Darling cut the rate to 15%
Previous Chancellor, Sajid Javid, has suggested a cut to 17%, which would cost Treasury around £21 billion
There is concern about whether a rate cut is the answer, but it would certainly be a confidence statement to boost spending and provide cash flow savings to businesses
Sector Support
Given that certain sectors are suffering more than others, there could be more targeted VAT cuts, as opposed to, or in addition to, a headline rate change.
For example, an expansion of the current zero-rating legislation could create further VAT reliefs for businesses who cannot recover all VAT incurred such as NHS, not for profit & charities
Reliefs could be introduced for construction & property businesses to alleviate VAT further on construction initiatives and a targeted 5% rate for the hospitality sector could help those business although how this would work in practice remains to be seen?
BHP Comment
A VAT rate cut would certainly be a welcome support to boost confidence, but needs implementing carefully although targeted sector support may act as more of a stimulus
Whatever changes are announced, we would like to see a clear set of guidance notes to support any changes, as the anti-forestalling legislation at the time of the last rate cuts was complicated for businesses
“Temporary” needs to be defined and be for a significant period, to avoid businesses making onerous systems & compliance changes to effect a VAT rate change and have to change back in a few months. Changing the VAT rate is a costly process that should be offset against the potential savings.
Property – Zoe Roberts, Tax Partner
Boris may have said “Build, build, build” but will Rishi Sunak’s economic statement tomorrow also support the construction and real estate sector?
The rumours of a Stamp Duty Land Tax holiday will certainly be welcome but, if they are not confirmed on Wednesday or are confirmed as coming into effect later in the year, this will likely freeze the market in the meantime.
The eagerly awaited planning reforms to brownfield sites, alongside the impact of Covid on the nation’s working patterns and reduced need for office space, may mean more opportunities will exist to convert commercial property to residential and it will be interesting to see whether the Chancellor announces any reliefs to further incentivise this type of development. Enhanced tax relief for converting commercial properties or for retrofitting them to become sustainable, green buildings would certainly focus attention on these types of developments.
Similarly, it would be great to see Rishi Sunak put some tax reliefs and incentives behind the eco elements of the Prime Minister’s Project Speed which aimed to get the UK building better, faster and greener.
Whilst home builders may be in favour, landlords have long felt they were the Chancellor’s whipping boy as their tax rates were increased and reliefs withdrawn, and they have continued to suffer in light of Covid due to the restricted recourse for non payment of rent and little Government support for their sector. Some help to the career landlord would be on my wishlist as providing quality sustainable rental properties will always be a core element of the UK’s housing supply – perhaps in the form of incentives to upgrade the housing stock or to make it more eco-friendly. However, I suspect that its unlikely that there will be much announced to change this position.
Technology/ R&D – Dean Pearson, Tax Partner
Reports suggest the Chancellor will be making spending commitments on infrastructure and within that there is likely to be a focus on green technology to achieve this.
The commitment to reduce emissions of greenhouse gases and tackle climate change may lead to further tax incentives for businesses using zero-carbon technology, whilst the tax system should continue to reward innovation for developing such technology.
Given the need to stimulate investment and employment coming out of COVID, the Chancellor’s statement may therefore focus on:
- Technology and Innovation – There could be further support for UK Business through the R&D Tax Relief scheme to encourage further spending in innovation, especially with COVID coming on the back of Brexit and the exit from the EU State Aid rules from 2021.
- Employee Training – With impending redundancies in sectors affected by COVID, subsidies may be available for the retraining of the workforce to provide the necessary skills that employers require. There may also be some update on the apprenticeship levy to encourage this.
- Infrastructure Spend – To stimulate the economy and fulfil the green commitments, pressing ahead with large capital projects is widely reported, which could include upgrades to the broadband network, greener living accommodation and incentives for greener travel.
Charity sector – Rachelle Rowbottom, Tax Partner
Gift Aid Emergency Relief
Sector bodies are calling on the Government to temporarily increase the level of Gift Aid that can be claimed on donations from 20% to 25% to help to narrow the funding gap for the charity sector at a time when demand has never been so great #NeverMoreNeeded. There is also a proposal to make the Gift Aid Small Donations Scheme more accessible by increasing the current maximum level of donations that can be claimed on under the scheme from the current level of £8,000, to £10,000, as well as removing the matching rule. The aim being that more charities are able to utilise the scheme.
Corporate Gift Aid
Many trading subsidiaries of charities are expecting to incur a loss in the current financial year as a result of the pandemic. For many, this will mean that they are unable to make the Gift Aid payment (in respect of the previous year end when profits were generated) to the charity within 9 months of the previous year end. Although the loss in the current financial year can be carried back, the tax on the previous years profit would need to be paid before the loss is calculated. Representations have been made for an extension to the 9 month rule.
Will these measures be announced in the Chancellor’s Mini-Budget? Updates to follow tomorrow.
Private Client – Suzy Harris-Milnes, Tax Partner
The mini Budget is expected to be centred around getting the economy going and to extend financial support in certain areas. It’s therefore highly unlikely to include significant personal tax rises.
This being said, it’s been noted previously that the inheritance tax regime could be in line for change and this must still be on the agenda considering the revenue it brings in. Whether this could involve sweeping changes or a tinkering around the edges remains to be seen. May be one for the Autumn statement but watch this space. As we know at some point taxes are likely to rise to pay for all of the current support, it would seem an easy target.
