Autumn Budget 2021—tax predictions from the market

As the Treasury begins to focus in earnest on how the tax system can best support the post-Covid recovery, we expect this Budget to be another opportunity for the Treasury to pledge additional funding to HMRC. 

This is always couched as an ‘investment’ – £180m here to secure £1.5bn of tax there – even if it remains to be seen whether HMRC and its new task forces and special units are able to meet such ambitious targets (and experience on the ground is still very much of post-Covid delays and long HMRC response times). But there are new measures on the horizon that warrant further support for HMRC. 

After a year of delay, companies will soon have to notify HMRC of tax positions that HMRC might dispute. We already have draft legislation for this, and while there have been recent calls for evidence about the provisions, we doubt there will be anything in this Budget to lighten the load for HMRC in reviewing these notifications (and taxpayers should, quite rightly, expect prompt engagement if HMRC intend to challenge the position

There are also murmurs that HMRC may look to introduce specific measures aimed at targeting avoidance and evasion in small businesses following reports that they account for 43% (£15.1bn) of the tax gap, and there have even been suggestions of HMRC offering a disclosure facility for taxpayers to disclose ‘mistakes’ made during the pandemic. Add in the Chancellor’s comments that HMRC will be reviewing the Pandora Papers with interest, and it is easy to see why the Treasury may be moved to make further ‘investments’ in HMRC this October.

Otherwise, and as with the general expected tenor of this Budget, we would only expect technical changes to existing provisions given the number of announcements made earlier this year. The Treasury has already announced the reform of the VAT and income tax penalties regime, provided HMRC with additional powers to target the promoters, enablers and users of tax avoidance schemes and expanded HMRC’s information gathering powers. We may, however, finally see the launch of the consultation regarding the UK’s adoption of the OECD’s mandatory disclosure rules following the repeal of the majority of DAC6 provisions in light of the UK’s withdrawal from the EU. This will also be the first opportunity for the Treasury to indicate how it intends to change and modernise the UK’s overarching tax administration framework following recent consultation, but given the scope of this task, this Budget may come too soon for anything concrete.

Following the October 2021 statement of agreement by 136 countries, negotiations around the remaining elements of technical detail continue among the inclusive framework of the OECD. As the possibility of measures implementing a new global minimum tax and new rules around the distribution of profits and taxing rights become increasingly tangible, some countries are giving serious thought to what implementation may look like for them. The UK is no exception and we would not be surprised to see some more concrete positions taken by the government on this. If these international measures are brought in, domestic implementation would be expected from early 2023 and, therefore, now might be the time for the UK to set out how it will get there.

A wide-ranging review of research and development (R&D) tax credits was launched at the last Budget, concluding early in the summer. This followed an earlier review on widening the scope of the relief to bring data and cloud computing costs into scope, highlighting the importance that the government places on the role R&D tax credits play in raising the total investment in R&D. This Budget may prove one too early for the government to set out its plan here, not least because it will surely want to reflect on the impact of a proposed global minimum tax on the R&D regime.

The government has previously announced a review into the 8% surcharge on the banking sector in light of the corporation tax hike, and that review is scheduled to be published this autumn. The government could also take the opportunity to review the bank levy generally but, as it continues to raise a reasonable amount of revenue, we expect that they will feel quite attached to it and would be loathe to lose those amounts from the public purse.

With the UK’s newfound VAT freedoms following Brexit, there is much anticipation about the government’s future VAT strategy. There is a promised review of VAT and financial services but the moving goalposts mean there is little confidence that anything material will arise at this fiscal event. Given the significant opportunity here, it will be important for the government to get this right, however the EU have also undertaken their own consultation which places additional pressure on lawmakers.

The government published draft legislation for the new residential property developer tax (RPDT) in September, with a consultation on the same remaining open until 15 October. Although the government is set to announce the full design and rate of the tax in the Budget, the short gap between the closure of the consultation and confirmation of the final structure may mean that there is room for certain details to continue to evolve in the aftermath.

The final report on the fundamental review of business rates - in what feels like an unending series of reviews on this topic - is due this autumn. The Labour Party have applied some pressure by announcing they would abolish business rates (but have not explained what a replacement would look like). This pressure, alongside continued concerns about the British high-street mean business rates are never far from the agenda. The government has considered an online delivery sales tax and this could offer a neat link to bolster the government’s environmental credentials. The government also has the opportunity to finally grasp other issues that have been under consultation such as more frequent revaluations, easier administration and simpler exemptions.

The government has yet to publish any updates on the consultation it held earlier this year on whether the EMI scheme should be extended to benefit a wider range of companies. As several months have passed since this consultation closed, it would be reasonable to expect a Budget announcement on the government’s response. EMI options allow the grant of tax advantaged options to employees of certain small and medium companies, with the objective of helping such companies attract and retain talent and maximise growth. In light of the current drive to reinvigorate the economy post-Covid (and indeed the government’s “levelling up” agenda) it would not be surprising if the government heeded calls to expand (and simplify elements of) this scheme.

The Budget precedes the Glasgow-set COP 26 by only four days and unveiling new environmental tax measures would be well-timed to create an atmosphere of credibility and commitment from the UK government. There are, however, no obvious candidates in the pipeline. The year has seen various rumblings around a range of possible measures – from various forms of domestic carbon taxes to a UK carbon border tax. The most concrete possibility is a shift in the current surcharge on household electricity consumption to gas, to nudge consumers towards the former and away from the latter. There has also been speculation around a possible rise in fuel duty - following a decade of successive freezes in each year since 2010, it is ripe for reform. However, with the Budget coming off the back of the petrol crisis, hitting consumers with a tax hike is likely to be a step too far.

Following a series of Office of Tax Simplification reviews into design aspects of inheritance tax (IHT) and capital gains tax (CGT), we are still awaiting a response from the Chancellor on what, if any, recommendations the government will consider taking forward. Questions around the rate of tax and the various exemptions within IHT and CGT, as well as their interaction with each other, are inherently political, which may mean we are waiting some time before the government decides how to proceed.