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Is A Wealth Tax A Viable Option for The Chancellor?

Written by admin on . Posted in Budget, Capital Gains Tax, COVID-19, Property, Tax. No Comments on Is A Wealth Tax A Viable Option for The Chancellor?

The Wealth Tax Commission, an independent body of tax experts, has set out the framework for a one-off wealth tax.  Will the Chancellor be tempted to adopt this?

In his November [2020] statement, in which Chancellor Rishi Sunak highlighted that the government was spending £280 billion this financial year on coping with the Covid-19 pandemic, he is also said:

“[W]e have a responsibility, once the economy recovers, to return to a sustainable fiscal position.”

A wealth tax is one way that has been suggested to repay at least part of the massive debt that has accumulated. The idea was given a boost in December when a 125-page report detailing how a wealth tax could operate was published by the Wealth Tax Commission, which is independent of government. Its main proposals were:

  • The tax should be a one-off, levied at the rate of 5% on individual wealth above £500,000.
  • The definition of wealth would include all So, for example, there would be none of the special reliefs for pensions, farmland or business assets that currently apply under inheritance tax.
  • The valuation date would be on or shortly before the first formal announcement of the tax, to prevent post-announcement forestalling actions. The value of housing and land would in the first instance be calculated by HMRC’s Valuation Office Agency (VOA).
  • In practice the tax payment would normally be at the rate of 1% (plus nominal interest) for five years.
  • Deferred payments could be made by asset-rich, cash-poor individuals. For pensions, payment would be drawn from the tax-free lump sum, when benefits are drawn.

The Commission estimated that such a tax would raise a net £260 billion. It would be payable by 8.25 million people, meaning it would reach many who pay income tax at no more than basic rate.

It should be noted that earlier in the year, (in July 2020 to be exact), Rishi Sunak had said, “I do not believe that now is the time, or ever would be the time, for a wealth tax”. However, as several commentators have noted, the Commission’s report has given the Chancellor cover to increase revenue from two related taxes he currently has under review – capital gains tax and inheritance tax.

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Is An Increase in Capital Gains Tax Inevitable?

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A recent report could herald changes to capital gains tax.

Last July the Chancellor asked the Office of Tax Simplification (OTS) to undertake a review of capital gains tax (CGT) “in relation to individuals and smaller companies”. The request was something of a surprise for two reasons. Firstly, there had been no suggestion that Mr Sunak wanted to reform capital gains tax. Secondly, two earlier reports on another capital tax, inheritance tax, had been sitting in the Treasury’s in-tray for over a year, awaiting attention.

Cynics pointed out that while the Conservatives’ 2019 manifesto promised no increases to the rates of income tax, VAT and national insurance, there was no such protection for CGT. Certainly, the ideas put forward by the OTS would raise extra revenue for the Treasury’s depleted coffers, but probably not the £14bn seen in some of the November headlines.

The OTS made eleven proposals for the government to consider. The more significant were:

  • CGT rates should be more closely aligned with income tax rates, implying the maximum tax rate on most gains could rise from 20% to 45%.
  • The annual exempt amount, currently £12,300 of gains, should be reduced to a ‘true de minimis level’ of between £2,000 and £4,000.

When inheritance tax relief applies to an asset, there should be no automatic resetting of CGT base values at death, as currently occurs. The OTS also suggested that the government should consider whether to end all rebasing at death, meaning that the person inheriting an asset would be treated as acquiring it at the base cost of the person who has died.

The £1m Business Asset Disposal Relief, which only replaced the £10m Entrepreneurs’ Relief in March 2020, should itself be replaced with a new relief more focused on retirement.

The OTS paper underlines just how favourably capital gains are currently treated relative to income. As the tax year end approaches the report is also a reminder to examine your use-it-or-lose-it options for the 2020/21 annual exemption.

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Changes to the National Minimum and Living Wages

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One of the announcements to come out of the Chancellor’s Spending Review was welcome increases to minimum wages.

From 1 April 2021, the National Living Wage will get a 19p increase, going up to £8.91 per hour, with this rate being extended to employees aged 23 and over. It currently applies to employees aged 25 year and over.

The original plan was for a more substantial increase, but the Low Pay Commission advised against this as it would have had a negative effect on businesses already struggling from Covid-19 restrictions. National Minimum Wage rate increases are similarly constrained, although the apprentice rate will go up by 3.6%. Future and current rates are:

Age From 1 April 2021 Current
National Living Wage 23 and over (currently 25 and over) £8.91 £8.72
National Minimum Wage 21 to 22 (currently 21 to 24) £8.36 £8.20
National Minimum Wage 18 to 20 £6.56 £6.45
National Minimum Wage 16 to 17 £4.62 £4.55
Apprentices under 19 or in first year £4.30 £4.15

 

Apprentices over 19 who have completed the first year of their apprenticeship are entitled to the rate for their age. The provision of accommodation is the only benefit that counts towards national minimum pay, with the maximum offset increasing to £8.36 per day (£58.52 per week).

What counts as working time?

If you are required to work off-site from the main premises, deciding when to charge for your time is not always straightforward. For example:

  • Count time on standby near the workplace, or waiting to collect goods, meet someone for work or start a job, but not rest breaks.
  • Count time travelling in connection with work (including travelling from one assignment to another) and for training, but not travelling between home and work.

For example, if an employee has an appointment in the morning, then travels to the office to work there she should be paid minimum wage for the duration of the appointment plus the journey to the office. The break she takes for lunch at the office, however, is unpaid.

HMRC has a calculator to check if you paying the correct amounts of National Living Wage and National Minimum.

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The government announced increases to both the National Living and National Minimum wages, although Covid-19 curtailed more substantial rises.

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Self-Employed Granted Furlough Extension

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Two further grants under the SEISS were announced in September and have now been updated.

Following the announcement last week, of a second lockdown, the government’s new package of support measures announced in the Chancellor’s Winter Economy Plan has been reworked, including an increase to the self-employed income support scheme (SEISS).

The extension covers a six-month period divided into two additional grants. The level of the upcoming third grant has now been increased from its initial 40% to 55% of average monthly profits. Applications for the third grant covering the three months from November 2020 to January 2021 will open on 30 November and will be capped at a maximum of £5,160, paid in a single instalment.

The fourth grant will cover the three months from February to April 2021, however, no further details have been released as yet.

Eligibility

To be eligible for the third grant you must have been eligible for the previous two (even if they were not actually claimed), so this excludes anyone with:

  • average annual profits exceeding £50,000; or
  • self-employed income that makes up less than 50% of total income.

In addition, you will have to declare that you intend to continue trading and are either currently actively trading, but are impacted by reduced demand due to Covid-19, or were previously trading but are now temporarily unable to do so due to Covid-19. The requirements to be actively trading and to be impacted by reduced demand are new and might indicate that HMRC is tightening up the rules.

The first two grants were based on average profits for the tax years 2016/17, 2017/18 and 2018/19. At this point, there is no indication if HMRC will allow profits for 2019/20 to be taken into consideration.

The Chancellor’s latest round of grants have faced widespread criticism offering less support than that available for employees who cannot work due to Covid-19, and, even with the increased level of 55%, the third grant is still less than 70% of the amount paid under the first grant.

If you need help with any support grants, please get in touch.

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What Now, Autumn Budget?

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So, the Autumn Budget has been pushed into spring 2021, with tax rises on the cards. What should we expect in the Spring Budget?

With intense speculation around tax rises to pay for the raft of Covid-19 support measures, the first serious clue to a possible Autumn Budget delay emerged on 8 September, when the Office of Tax Simplification (OTS) slipped out a statement about its review of capital gains tax (CGT), which had been commissioned by the Chancellor in July. The statement announced the response deadline on the technical part of the OTS consultation would be deferred by four weeks, to 9 November. This was a surprising move as the OTS CGT report was expected to feed into the Autumn Budget.

Soon after, the Chancellor himself issued a brief written statement saying he had asked the Office for Budget Responsibility (OBR) to prepare an economic and fiscal forecast ‘to be published in mid-to-late November’. The vagueness surrounding the timing was evident, as the OBR report is produced alongside the Budget and incorporates costings for Budget measures.

What had started to look inevitable was confirmed on 24 September when the Treasury cancelled the Autumn Budget. The Chancellor will still have a set piece event towards the end of the year; not only is there the OBR report to present, but Mr Sunak must also publish a Spending Review. The latter was also a victim of the general election and ought to have been produced a year ago to cover the three years from April 2020. Instead, the then Chancellor published a one-year Spending Round. Given the pandemic uncertainties, it is likely that Mr Sunak will take a similar short-term view, rather than introduce a multi-year plan.

The postponement of the Autumn Budget does not mean the spectre of tax increases has also evaporated. The level of government borrowing (£174 billion in the first five months of 2020/21) makes tax rises virtually inevitable. However, the Chancellor has afforded you more time to plan and take action in areas such as CGT and pension contributions.

Any thoughts?

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Covid related VAT reduction extended to 31 March 2020

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The temporary reduced standard VAT rate of 5% for the tourism and hospitality sector was due to end on 12 January 2021, but has now been extended to 31 March 2021.

You don’t get that many gifts from HM Government, so it’s worth repeating something you’ve no doubt already heard recently ie that with Covid-19 restrictions continuing for the foreseeable future, this winter is likely to be quite challenging for many tourism and hospitality businesses, so the extension will be welcomed across the sector.

The current reduced rate applies to food and non-alcoholic drinks from restaurants, pubs, bars and cafes. Holiday accommodation and admission fees to tourist attractions are also included.

Businesses can choose to pass on the VAT reduction to customers and benefit from increased footfall or pocket the savings.

Flat rate scheme

Flat rate percentages have been correspondingly reduced and these will also continue through to 31 March 2021. For example, the rate for restaurants and takeaways has been cut from 12.5% to 4.5%. Given the reduced rates do not apply to alcohol sales, any decision on joining or leaving the flat rate scheme is currently quite complex. Professional advice is essential.

Some anomalies

  • A gin and tonic consists mainly of tonic, but the 20% standard rate still applies (the tonic being an incidental extra). On the other hand, VAT is apportioned for an offer combining food (5% rate) and a pint (20% rate).
  • Hot takeaway food benefits from the reduced rate, but not confectionery, crisps, and the like. However, they qualify if eaten on the supplier’s premises.
  • Off-premises catering is not included within the reduced rate as it is not on the supplier’s premises.

The use of the flat rate scheme eliminates these anomalies, as just the one rate is used across a business sector.

VAT deferral

The government has also introduced an interest-free payment window for any VAT payments deferred from 20 March to 30 June 2020. Instead of paying the full amount by March 2021, businesses will now be able to make 11 equal instalments over the 2021/22 financial year.

Full details of HMRC guidance can be found here.

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Bounce Back Loan Scheme Extended

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The application date for the Bounce Back Loan Scheme (BBLS) has now been extended to 30 November, and the loan repayment process made more flexible.

To date, the BBLS has provided more than a million loans between £2,000 and £50,000 to businesses affected by the Covid-19 crisis.

Businesses can borrow up to 25% of their annual turnover, subject to a maximum loan of £50,000. Loans are 100% guaranteed by the government and are interest-free for the first 12 months, with no personal guarantees required. After 12 months, the annual interest rate is set at a very attractive 2.5%.

Flexible repayments

The original terms of the BBLS required repayment over six years. The new terms provide for more flexibility:

  • The repayment period can be over ten years, although full repayment can be made at any time without penalty.
  • It will be possible to make interest-only repayments for periods of up to six months. This option can be used three times.
  • A business can suspend repayments altogether for up to six months. This option can only be used once.

What can a loan be used for?

The BBLS was introduced quickly and relied on self-certification rather than extensive credit checks. There is little restriction on what a loan can be used for, so long as it benefits the business.

Even if you are unsure whether additional business finance is required, there is no downside to having the funds sitting unused for a year and then repaying in full. Alternatively, an interest-free bounce back loan could be used to repay existing finance, which is likely to be much more costly.

Additionally, the loan can be used to support your personal income, considering it drawn from self-employment, or remuneration/dividends from a company.

Not surprisingly, the BBLS is expected to result in widespread fraud, with the government unlikely to receive value for money.

The BBLS application process can be found here, along with a link to accredited lenders.

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Chancellor Unveils Winter Economy Plan

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The latest pandemic support measures are much less generous than before.

Despite cancelling this year’s Autumn Budget, Rishi Sunak has still made an early autumn appearance before the House of Commons to announce his ‘Winter Economy Plan’. He announced new employment support and amendments to existing schemes.

Job Support Scheme (JSS)

The JSS is the next stage of the furlough scheme (strictly the Coronavirus Job Retention Scheme (CJRS)), which comes to an end on 31 October. The JSS, which will run until 30 April 2021, is aimed primarily at small and medium-sized employers and will only apply to employees who work at least one third of their normal hours. For the hours that are not worked, the government and the employer will each pay one third of lost pay. The net results in terms of employee income and employer costs are shown in the table.

Hours Worked

As

%

Normal Hours

 Employee Income Earned

 

% Full Pay

 Employer Non-working Contribution

 

% Full Pay

 Government Non-working Contribution*

   

% Full Pay

 Total Employee Income

 

% Full Pay

 Total Employer Outlay  

          

% Full Pay
25.00 25.00   0.00   0.00 25.00 25.00
33.33 33.33 22.22 22.22 77.77 55.55
50.00 50.00 16.67 16.67 83.34 66.67
75.00 75.00  8.33  8.33 91.66 83.33
      100.00    100.00 – –     100.00     100.00

*Capped at £697.92 per month.

Payments under the JSS will not affect an employer’s entitlement to the £1,000 Job Retention Bonus.

Self-Employed Income Support Scheme (SEISS)

The existing scheme has been restructured and extended to April 2021. Only those already eligible will be entitled to claim. The first grant, covering the three months to 31 January 2021, will cover 20% of average monthly trading profits and is capped at £1,875. The terms of the grant for the next three months will be set ‘in due course’.

Both the JSS and revised SEISS are considerably less generous than the existing CJRS and SEISS, which have so far (to 20 September) cost the Treasury over £52 billion. This cut to support is understandable from the government’s financial viewpoint, but it is also a reminder of the importance that your personal financial planning makes provision for an adequate cash reserve.

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A new season, a new Budget

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As autumn arrives, attention is turning to possible measures in the next Budget.

Yet another extraordinary turn for 2020, normally seen only in an election year, will be upon us soon: the second Budget of the calendar year. The last Budget, on 11 March, now belongs to a different (pre-pandemic) era. Back then the Chancellor announced £12bn of “temporary, timely and targeted measures to provide security and stability for people and businesses” in response to Covid-19.

To put it mildly, matters have moved on since then. The latest estimate from the Office for Budget Responsibility (OBR) is that the direct effect of government decisions, in terms of increased spending and tax reductions, will amount to £192.3bn in 2020/21. That is not the end of the story because the other side of the government balance sheet has been hit by lower tax receipts due to the recession.

So far, the Chancellor, Rishi Sunak, has won plaudits for his do-whatever-it-takes approach to support the economy, but the next Budget could be less well received as he begins to address the financial consequences of his actions. The current state of the UK economy, which shrunk by 20.4% in the second quarter of the year, makes it highly unlikely that Mr Sunak will reveal any significant direct tax increases in his Autumn Budget. However, he may well start the long process of book-balancing by reducing some tax reliefs and exemptions. As Parliament resumed in September, the Chancellor was already trying to quell backbench unease while simultaneously talking about “short term challenges” and a plan “to correct our public finances”.

There are several obvious revenue-raising candidates where the government is already in the midst of consultation: inheritance tax (IHT), tax relief on pension contributions, capital gains tax (CGT) and yet another review of business rates. Lurking in the background is the possibility of some form of wealth tax, although this might just be cover for the alternative of raising more revenue from IHT and CGT.

The date for the Budget had not been announced at the time of writing, although the present expectation is that it will be in November. Ahead of the Chancellor returning to the despatch box, you should review whether any plans you have – such as realising capital gains – need to be brought forward.

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