In Ancient Rome, there were people specially “trained” to practice a form of prophecy called haruspicy. This involved inspecting animal innards to make predictions. And it wasn’t just the Romans that thought this was a good idea, there are accounts of this practice continuing across Europe well into the Middle Ages.
I am hoping that no one thinks this is a good idea when it comes to predicting what is likely to happen to our tax system in the next 12 months.
Filling in a bit of recent activity on the Budget front. The current Chancellor’s predecessor, Sajid David, was due hold a budget in November 2019 but was forced to delay due to the general election and Parliament’s failure to reach consensus on Brexit. Given the timing of his subsequent resignation, our current Chancellor, Rishi Sunak, had a mere 3 weeks to pull together a budget that would support the Government’s manifesto promises. He managed to squeeze it in just under the wire on 11 March, before the end of the financial year on 5 April.
A spring budget is not generally any Chancellor’s preferred option as this leaves very little time to implement major changes to spending policies and tax law, as the budget also requires Royal Assent (around 4 months later) before it has legal force. It is however a legal requirement to have at least one budget a year.
Fast forward to November 2020 and the financial aftermath of COVID-19 has forced yet another postponement to a planned budget. The objective being to allow the Treasury to focus on nursing the economy through the winter and a second wave of the pandemic.
So what happens next? There will have to be a budget in early 2021 but most informed commentators are not expecting there to be many changes to tax until the economy has recovered sufficiently. This moves us to a year from now, which is the earliest date that most ‘experts’ believe that a budget can take place containing significant measures.
When it finally happens, the most likely changes are considered to be National Insurance for the self-employed and an increase in corporation tax.
Rishi Sunak made reference to increasing Class 4 National Insurance when he first announced the Government’s package of support measures (the Self Employment Income Support Scheme). He did so in the context of the gap between the 12% paid by employees and the 9% levied on income from self-employment.
An increase in Class 4 NIC could however drive more people towards running their business as a limited company, commonly known as a ‘tax-driven incorporation’. Recent changes to how dividends are taxed and the roll-out of changes to the implementation of IR35 do not point to any political desire to see that happen. One way of stopping this, and raising much-needed funds, would be to increase the rate of corporation tax at the same time. This would have the effect of pushing businesses to choose how they trade for reasons other than how much tax they’ll pay – very much in line with Mr Sunak’s personal philosophy. The rate bandied around is 24% as this would create financial balance between sole traders and limited companies, in line with a simultaneous increase in Class 4 NIC to the current employed rate of 12%.
Around the periphery, there are current trends that tax advisers expect to see in future budgets. Focus on the environment is a clear frontrunner and, as a result of incentives for green alternatives, the resurgence of the company car. This dovetails neatly with the grants and tax relief available for electrical charging points, and schemes encouraging people to cycle to work.
There has also been increased attention to tax avoidance and evasion. General anti-avoidance measures have been introduced in a concerted effort to catch those people who try to avoid prosecution using technical loopholes. In this way, the focus has been shifted to the overarching intentions demonstrated by an individual or organisation’s actions.
Specifically in the Finance Act 2020, there are powers for HMRC to pierce the corporate veil. What this means is that in specific circumstances the directors of companies (or members of LLPs) may be held personally liable for tax and penalties. In extreme cases, even participators of close companies (companies with 5 or fewer shareholders) and those involved in the day-to-day running of a business could be served with a Personal Liability Notice. If this sounds scary, it is meant to. But, to receive one of these notices, you do have to have committed and/or facilitated tax evasion, or have gone bust on multiple occasions owing more than £10,000 to HMRC.
Given the extremely hard line that the Treasury is planning to take with employers who have fraudulently claimed the Coronavirus Job Retention Scheme, and with self-employed workers who claimed Self Employment Income Support that they were not entitled to, we believe that there is a good chance that tax evasion in all forms will feature strongly in future budgets.
So, the headlines appear to be: higher Class 4 National Insurance, increased corporation tax, continued incentives to go green and efforts to hold tax evaders to account.
Between now and the next Budget, however, we have a major hurdle to cross….at midnight on 31 December, the transition period that has been in place since we left the European Union in January 2020 will come to an end. Worryingly, we have relatively little detail as yet. Rest assured however that we will be monitoring this very closely with our clients’ specific needs in mind.