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What have we learnt from Rishi’s second Budget?

We have now had two Budgets delivered by Rishi Sunak and it is possible to start to get an impression of what he is about as Chancellor.

In advance of the Budget I had contemplated there might be a fiscal tightening, which would most likely take the form of tax rises rather than austerity. It seemed to me that this would be likely to take place during 2024/25 and 2025/26. That is, after the next general election (most likely in Spring 2024) with enough time for tax cuts later in the electoral cycle.

So, with that in mind I didn’t expect any tax rises at this time, but it was interesting that Rishi went further than just indicating that there would be tougher times ahead. Instead he laid out a generous level of government support in 2021/22 with a progressively tightening period through 2022/23 to 2025/26.

Apart from the Covid support measures in the coming 12 months, together with increasing personal tax allowances and rate thresholds for one year, there is also enhanced relief for business investment.

From April 2022, personal tax rates and allowances are frozen, so raising more tax revenue in real terms, followed by corporation tax rising in 2023 and these measures being held in place until at least April 2026. And the indication is that there is more to come. Jam today, bread and dripping tomorrow – or something like that. Fiscally conservative, and it reminded me of Norman Lamont’s March 1993 Budget. Many of the measures even seemed like a throwback to 1993 as well (corporation tax marginal rates, business investment, Free Ports feeling like Enterprise Zones etc).

Continuing this theme, Rishi definitely feels more like Norman Lamont than George Osborne. Maybe not the comparison he wants, but as a tax adviser at that time, the business investment led recovery worked. Personal finances were tight but the combination of the favourable exchange rate and tax incentives on investment did boost the economy.

Norman Lamont was hamstrung by having capital gains taxed at the same rates as income, and so the comparison is also interesting as there have been many calling for Rishi to return to that approach. In advance of this Budget, much of my discussion with clients has been over “will he or won’t he” increase capital gains tax (CGT).

Not only did Rishi not increase CGT in any way, he went further and laid down some markers that increasing it is not on his agenda. In particular, the current CGT annual exemption of £12,300 is quite generous for portfolio investors and a cut in it had been considered one of the most limited changes that could be made to increase CGT. However, Rishi has announced that the annual exemption will remain unchanged until April 2026. Is that a marker to those calling for an increase in CGT?

It’s not just that comment, though. Rishi highlighted a desire for high growth in looking to boost capital expenditure on plant and machinery, on research and development and to incentivise management to grow businesses by expanding the Enterprise Management Incentive share option scheme.

In addition, there is a clear desire for the UK to be a desirable place to locate high growth and tech start-up companies and for those companies looking to achieve a stock market listing. There is a desire to make the listing rules more attractive to encourage businesses to be located in the UK. That doesn’t fit with increasing CGT. The clear implication is that you can come here, build up a business, get it up and running and that the tax regime will be conducive to that.

He also signalled a desire to tackle the UK’s longstanding productivity problem through grants to help small businesses access management training, digital skills and software to make them more productive – the Help to Grow scheme. Whether cut-price software and subsidised executive development courses are top of most small business owners’ wish lists as we emerge from the pandemic remains to be seen, but I certainly believe that they are heading in the right direction. We need to develop world class businesses that can compete on a global stage. That’s hard work and graft and it needs leadership and desire.

Overall the mood music that Rishi is sending out seems to have the right tone but it is early days there is a very long way to go.

Read John’s blog on the Treasury Committee’s ‘Tax after coronavirus’ report here.

FEATURING: John Endacott
John is the firm’s head of tax. He provides high level tax advice combined with commercial acumen in terms of managing and advising on personal… read more
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