Where could Budget 2018 tax rises come from?

Partner Jonathan Main, MHA Moore and Smalley’s specialist in VAT and indirect tax, offers his Budget 2018 verdict.

In announcing “austerity is over” in her party conference speech, Theresa May signalled an increase in spending on public services, including the previously announced £20bn boost for the NHS. She also limited the chancellor’s room for manoeuvre in his Budget announcements next week.

It’s now down to chancellor Philip Hammond to make this work. In addition to the PM’s announcement about the end of austerity, the Democratic Unionists have threatened to derail the progress of the Finance Bill through Parliament if the Irish border issue isn’t resolved and Tory backbenchers will have no appetite for headline grabbing tax rises given the difficulties of navigating a safe passage for our departure from the EU and worries about a snap general election.

How will chancellor balance the books?

In recent years, there have been plenty of announcements regarding the likely content of the chancellor’s speech. Perhaps not surprisingly, this year there has been far less publicity concerning the possibility of either spending cuts, or tax rises to fund increases in NHS spending.

That said, I do think we are in for some modest tax increases in this budget, with Philip Hammond indicating back in June this may be the case. The Office for Budget Responsibility also said this was the only realistic way to increase spending on the NHS.

But if we look at the taxes that affect the employed and self-employed; income tax and national insurance, there’s not much scope for increasing either of these if the Conservatives want to be seen as supporting hard-working people.

This is particularly the case as we’re just two years on from a Conservative election pledge not to raise mainstream taxes, albeit we’ve had another election since.

The chancellor has also said he will look to “minimise” the effect of any tax rises on the economy or people.

On corporation tax, the Conservatives have reduced this significantly in the last eight years and the chancellor has stated that the UK will be the most tax competitive European destination post Brexit. My colleague Tony Medcalf talks more about what may happen to corporation tax in his look at the Budget.

Is there scope to increase indirect taxes?

If we’re not expecting to see significant changes to any of the headline direct taxes, how about the indirect taxes?

VAT: I don’t foresee any increase in the headline rate of VAT of 20 per cent, but there’s a chance of a change to the VAT registration threshold for businesses. If this is lowered from the current £85,000 it could mean a lot more start-up businesses paying VAT. According to the Treasury, there are 3.5 million small businesses below the current VAT registration threshold costing the Exchequer around £2bn in unpaid VAT.

Fuel duty: The government has already pledged to freeze this again.

Excise Duty: As always, there will be increases in excise duties on cigarettes and tobacco. Could there be a reduction in the rate of VAT on e-cigarettes to align these with other smoking cessation products? The chancellor may choose to hold down alcohol duties, as a way of buying some goodwill as we head towards the exit door next spring.

Air Passenger Duty: Considering this only went up again in the spring, and the UK already has one of the highest APD rates in the EU, I think it’s unlikely we’ll see any big changes here.

Environmental taxes: There are a number of environmental taxes, such as the Climate Change Levy, Landfill Tax and Aggregates Levy, but again these are not going to raise huge amounts of tax for the chancellor.

Insurance premium tax: This is one of the areas where I would see some scope for a revenue generating tax increase. In the UK, the rate of insurance premium tax is lower than the rate of VAT, but many other countries have the same headline rate for both VAT and insurance premium tax. This would be unpopular because it would hit the consumer with increased costs. However, for the chancellor, it’s probably the indirect tax with what I would call the best ‘revenue to controversy’ ratio.

Will it be cautious or optimistic budget?

In conclusion, I think we’re likely to see some tax rises, though I believe the chancellor will look to do this in a way that avoids any major changes to income tax, national insurance and VAT. I think he may also look to increase tax revenues through other means, perhaps with a curb on pensions tax relief, the cost of which he has previously labelled as “eye-watering”.

The chancellor talked recently about a possible Brexit “deal dividend”, once the terms of Britain’s exit from the EU are agreed, but that is clearly dependent on the way in which we leave next spring.

With so much uncertainty, it’s hard to commit to any firm tax rises or spending pledges, which is why I think we may see a cautious budget. Whether Britain leaves the EU with or without a deal, I think we’ll then see an emergency budget in April or May next year once the picture becomes clearer.