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Budget predictions with Smith & Williamson LLP

Tackling egregious tax avoidance and evasion, together with tax-raising inventiveness, are likely to be high on the Chancellor’s agenda.

“The Chancellor won’t miss this opportunity for hefty revenue-raising in the upcoming Budget and the mass affluent will doubtless come off worst,” said Lee Blackshaw, Manchester Head of Private Client Tax Services at Smith & Williamson, the accountancy and investment management group.

“Tax relief on pension contributions for higher earners could be among the first cuts. After all, the first Budget of a new Parliament is often the best time to introduce unpopular measures,” said Blackshaw.

He added: “With the Chancellor’s hands tied to maintaining the rates of income tax, VAT and National Insurance, further revenue can only be raised if he is inventive, potentially widening the tax base or introducing new taxes. One area of new taxation could relate to internet usage in some way - on the basis that it places growing demands on infrastructure and power supplies – so we could see George putting forward such an idea.”

“His other options are around reducing or adjusting thresholds or reliefs and raising rates of the ‘minor taxes’ such as CGT, SDLT, wine, beer, spirits and the bank levy.”

“There are a dozen ‘minor’ taxes which, taken together, raise in the region of £40 billion a year. So if a further, say, 5% were raised from these, this could give a helpful boost to tax receipts.”

“The clampdown on tax avoidance and evasion is also set to speed up with measures such as the direct recovery of tax debts and a new strict liability offence for those who have not paid tax on offshore income still on the cards. Strong safeguards in primary legislation are essential.”

“We urge the Chancellor to review the many marginal rates of income tax to eliminate vertiginous cliff edges between rates which incentivise tax avoidance. Perhaps this could be a project for the expanded Office of Tax Simplification.”

“Non-doms are likely to face tighter restrictions – we would not be surprised to see a review of the application of the rules around inherited non-UK domicile for those born in the UK with non-dom parents or the Government consult on extending the deemed domicile rules beyond inheritance tax to limit the period for which non-dom status can be claimed. This would be relatively easy to implement yet have deep implications.”

“We think the Government should reconsider the way that the proposed additional inheritance tax nil rate band on family homes will be introduced. As proposed it will encourage older people to retain valuable homes rather than downsize, if the additional relief does not apply to other assets. That is counter-intuitive when there is insufficient housing.”

“We also urge a rise in the rent-a-room allowance, which has not kept pace with the rate of increase in rents since last increased in 1997. Putting it up to a more meaningful amount of, say, £10,000 would encourage more renting out of spare rooms, helping the property shortage, and take many taxpayers out of self-assessment.”

Further details and specific measures could include:

Boost funding to HMRC – every £1 spent on salaries generates a multiple in terms of revenue, sometimes as much as £8. Staff cuts have been widespread, leaving an ageing and reduced workforce. Response times have been worsening, with reports of HMRC taking weeks – and sometimes months - to answer basic queries. Clearly, as HMRC needs to boost receipts, it would do well to increase its workforce.

Tighten the crackdown on avoidance and evasion

The current regime is still bedding down although it is already succeeding in changing taxpayers’ behaviour. We consider that little further legislation is required here – more resources for HMRC to use the new tools they have already been given, to support the government in its stated aim of raising £5bn from avoidance and evasion.

Worryingly, the government has demonstrated its propensity to apply some rule changes connected to avoidance and evasion retrospectively. Some of these, such as the ‘fit and proper’ rules hitting charity trustees and pension administrators were designed to change behaviour, but to do that any such amendments should be forward looking to provide an incentive to change.

The ultimate challenge will be to ensure that anti-avoidance measures do not make the UK a less attractive place to do business.

Some populist moves: increase ISAs, reduce SDLT for people down-sizing

Inevitable tax increases could be offset by some headline grabbing populist moves, such as increasing the annual ISA allowance – potentially to say £18,000pa, from the current £15,240. At least that would be in line with the agreement from HMRC/HMT to make the figure easily divisible by 12 to encourage monthly saving.

Similarly, we await developments on the inheritance of ISAs by a spouse. As the legislation is currently written, the ISA wrapper is removed from the assets while they move into an estate and, even if inherited by the spouse, the estate can be liable to tax on the income and gains before transfer to the surviving spouse. In addition, the spouse’s new ISA allowance is frozen at the date of death, even if the assets increase in value; this creates unnecessary complications for people. We think the legislation needs to be amended to permit a seamless transfer to a surviving spouse.

To encourage individuals, especially ‘last-time buyers’, to downsize and free up larger properties, the Government could consider some form of relief from stamp duty land tax, when moving to smaller properties.

This was posted in Bdaily's Members' News section by Smith & Williamson .