Tax changes on the horizon

Back in January, when I was writing about pre-Budget planning for Entrepreneurs Relief withdrawal, I said: ‘The really big change would be to align income and capital gains tax rates or increase the latter.  There was no chatter on this (or not from the Conservatives anyway).’

We now have chatter……

If you missed the article in the Sunday Times 30^th August 2020 the highlights include corporation tax rates up to 24%, equalisation of CGT and income tax rates, capping the income tax relief for pensions at 30% and increasing the tax take from dividends.

The Institute for Fiscal Studies (IFS) suggested that these measures are not enough to raise the 2% (£40bn) extra tax required. It is also of note that the IFS has undertaken a study as to whether a UK wealth tax is desirable and deliverable. Whilst ‘the wealthy’ in words of The Sunday Times, may have the deepest pockets, there are relatively few pockets from which to dip.

The only way to raise more significant funds is from wider tax rises. However, by also targeting ‘the wealthy’ this might make, wider tax rises more politically acceptable.

Second guessing tax changes is a fool’s game, especially with a government which isn’t afraid to change its mind on decisions. We would never recommend altering commercial decisions to anticipate potential Budget changes but if timing can be tweaked, that is one thing. If a decision relies on a particular tax outcome to be beneficial however, you might be focusing on the wrong metric.

Whilst we don’t know yet when the Budget may be, in recent years it has ranged from 29^th Oct to 23^rd Nov. All we know at the moment is that it is in the ‘autumn’, so if you want to start planning ahead to see where you are potentially exposed to tax changes, get in touch to review your options.

Corporation tax

There is little to be done as regards Corporation Tax.  It is an annual tax, that taxes profits as they arise.  You might want to bring forward disposals of businesses that wouldn’t qualify for the Substantial Shareholding Exemption, but other than that we see little changes.

Clients may think it worthwhile delaying investment to benefit from higher tax relief on capital assets (e.g. through the Annual Investment Allowance (AIA)).  This approach relies on the AIA remaining at the same level – there is always the possibility it may be reduced or eliminated.

Capital disposals

We considered ways of banking Entrepreneurs Relief before the Spring budget.  Most of these were stopped in the Budget, or whilst they worked in the past would almost certainly be stopped by the General Anti-Abuse Rule.

It remains true, as with any year, it makes sense to bring forward disposals if at all possible, to before the Budget.

Deciding on whether to defer tax points by taking loan notes is not straightforward either. Loan notes have to be a commercial part of the deal (it doesn’t work just for the vendor to ask for them). Consideration needs to be given as to whether there will be sufficient cash to pay any tax and the risk of the purchaser not having funds available to meet subsequent payment terms for the notes.

Pension contributions

If you are considering pension contributions for 2020/21 it does make sense to make them now rather than post the Budget.

Gift aid

Whilst there was nothing in the press coverage that suggested the benefits of Gift aid might be restricted, this was a target for HMRC back in 2012 – it might be again.  We would suggest that if significant gifts are being considered for 2020/21 that these are again made pre-Budget.

Dividends

The prospect of tax increases on dividends was discussed. Again, if dividends are intended to be taken this tax year it would make sense to do so pre-Budget.

However, it is not dividends that are taken that is the issue for the Government; it is dividends NOT taken. Many entrepreneurs defer their tax liability by leaving cash in their company until they require it. Back in the mists of time (the 1970s and 1980s), there was something called ‘Close Company Apportionment’ where companies under the control of five or fewer people had surplus cash treated as a deemed distribution on the shareholders.

Whilst the past may be a foreign country, it might turn out that they don’t do things that much differently after all.

If you have any queries, or for further information on this topic, please contact me here.