Emergency Budget 2015 – What will we see?
In this preview of the ‘summer budget’ on July 8, we asked tax partner Tony Medcalf to share his thoughts on what we might see.
Is there going to be anything significant in this budget?
This will be the first full Tory budget in almost 20 years and, as such, I expect the announcement to be lively. It won’t be the low-key affair that many are expecting.
The early days of a new government is traditionally when a chancellor gets to take the most drastic and controversial economic decisions (raising taxes and cutting spending) safe in the knowledge that the opposition are still in disarray and there’s no election for another five years.
Of course, they can’t bring in everything they want to straight away, but this will be the first big economic set piece of the new parliament and it will be used to set the scene for the next five years.
And if the Conservatives are going to eliminate the deficit over this parliament, as they have promised, then there’s a serious amount of work to do, so I would expect some pretty fundamental announcements.
Where are the cuts going to come from?
Free from the shackles of the coalition, Mr Cameron and Mr Osborne have already widely hinted at where they are going to find the £12bn of cuts to the welfare bill they want to achieve by 2017-18.
With pledges not to cut pensioner benefits or child benefit, working tax credits and housing benefit look to be in the firing line, especially given last month’s admission by Mr Cameron that he wanted to end the “tax credits merry-go-round”.
His argument is that it makes no sense for “people working on the minimum wage to have that money taxed by the government and then the government giving them that money back—and more—in welfare”.
Therefore, I think it’s fair to say we will see some firm announcements on plans to end or limit working tax credits, especially as there’s only so much the Tories can raise from lowering the benefit cap and removing housing benefit for the under 25s.
The Institute for Fiscal Studies estimates £30bn will have to be cut from government departments, which means more pain for all apart from the ring-fenced areas of the NHS, education and foreign aid.
What will happen to income tax, NICs and VAT?
We know from the Conservative’s manifesto that they intend to raise the income tax personal allowance.
However, in terms of raising tax revenues the government would appear to have backed itself into a hole with its pledge to introduce legislation not raise income tax, national insurance contributions, or VAT rates.
At the time it seemed like a desperate pledge from a party that thought it wouldn’t get into government. Now that it is, it’s reduced its room for manoeuvre. However, there are still things the chancellor can look at to boost tax revenues, such as tweaking the thresholds of certain taxes.
For example, it’s possible that they might seek to align Class 4 NICs for those who are self-employed, currently payable at 9%, with those of employed people, which are currently at 12%.
What other tax changes might we see?
This is just me speculating, but Capital Gains Tax is an area where we could see some changes. Currently, you pay 28% tax if you sell an asset. They may decide to align this with income tax in a bid to increase revenues. However, this would only encourage people to hold onto assets, which goes against producing greater tax receipts.
We may also see the rate at which those selling a business asset can claim Entrepreneurs’ Relief. At the moment the sale proceeds of qualifying assets are taxed at 10%, rather than the 18% or 28% of CGT, up to a lifetime limit of £10m. The chancellor may look to make further changes by reducing the lifetime allowance.
I think it’s almost certain we’ll see a significant reduction in the annual investment allowance (AIA) which can be claimed on plant and machinery acquisitions. I think it’s likely this will come down to below £150,000 from the current £500,000, thus reducing the upfront tax benefit of sizeable investments in these areas.
We are expecting a boost for homeowners by an increase in the threshold at which inheritance tax is paid when property is passed on to family members. This has been widely speculated to increase to £1m per couple.
Will tax avoidance be a feature of this budget?
The message that government is tough on tax avoidance was a consistent one over the last parliament and I don’t expect that to change.
The government says it wants to recover £5bn through its clampdown on tax avoidance, though it’s unclear whether it thinks the bulk of this will come people abandoning aggressive tax avoidance schemes, or through penalty charges for previous offences.
Either way, I expect there will be some mention of tax avoidance in this budget.
Will the chancellor dare to reduce the top rate of tax?
I think he would like to, but, politically, I just don’t think he can. Two former Tory chancellors, Lord Lamont and Lord Lawson, have urged him to, and history has shown that a less punitive tax rate for the highest earners actually creates more tax receipts. The top rate of tax was also at 40 per cent under Tony Blair’s government for many years.
However, I think it’s still too early for this to happen, especially as it would come at the time when the Conservatives look set to affect some of the lowest earners in society with cuts to tax credits.
The Conservatives have stated their desire to move from a “low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare society.”