Budget 2021: The ‘honest’ Budget – the implications for insurance intermediaries
An analysis of Budget 2021 from the perspective of insurance brokers from our Head of Tax, Chris Riley
In recent years, the annual Budget has been defined by the phrases employed by the Chancellor in his speech. Twelve months ago, the phrase “we’re getting it done” was repeated throughout the speech in summarising specific measures that were proposed. Just six days later, however, the beginning of the first lockdown meant in some areas of the economy we very much stopped getting anything done.
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The effect of the pandemic on government finances has been, by any measure, astonishing. The 2020 Budget contained spending commitments of £12 billion. There have been 15 fiscal announcements since 11 March 2020 when there is normally only one per year. Combined with this week’s Budget Day spending announcements, total support committed by the Chancellor is now £407 billion.
At the beginning of his speech, the Chancellor addressed the extraordinary level of support provided, and the impact that this has had: “once we are on the way to recovery, we will need to begin fixing the public finances – and I want to be honest today about our plans to do that.”
In fact, on six separate occasions, the Chancellor spoke about being honest. So the conclusion could be drawn that this Budget would resolve the public finance issue, and there would be no further need for fundamental changes to raise taxes.
However, is that really the case?
The ‘Red Book’ – published by the Treasury immediately after the Budget – outlines the anticipated costs and incomes arising from the announcements. In it, we see the £65 billion cost of the new pandemic-related measures (mainly the extension of furlough scheme and Self Employment Income Support, and Business Rates and VAT relief for hospitality businesses) that are included within the £407 billion.
We also see increased tax collections in future years. Only two items are truly significant in value – the increased rate of Corporation Tax from 2023 which has received most attention from commentators, and the effect of freezing personal tax rates and bands rather than increasing them in line with inflation. The total net increase in tax yield over the next five tax years (which derives mainly from these two measures) is £74 billion. In short, the changes announced this week broadly break even, and go no way to address the significant amounts already spent. Even though the Chancellor stated that it would take decades to repair public finances, the mood music implies a somewhat quicker pace is being planned.
Some of the key tax concerns that affect insurance intermediaries were not touched upon, or even acknowledged, in the Budget, but have been rarely out of the news in recent months (and years). Capital Gains Tax (and Entrepreneurs Relief as it was previously named) has been tipped by the media as ripe for an increase since the 2019 General Election, and the Office of Tax Simplification (OTS) has led a review into this key area. There continues to be significant noise around reforming Inheritance Tax and reducing Income Tax relief on pension contributions.
If the government does indeed plan to reduce the national debt, whilst keeping firm to its manifesto commitments not to increase the rates of the ‘big three’ (Income Tax, National Insurance and VAT) and stay true to its pledge to not repeating austerity, it will surely have to raise some taxes further. Corporation Tax cannot go much higher, which means that those areas that weren’t mentioned during the Budget could still be next in line. But when will we know for sure?
We may not have long to wait. The structure of Budget day changed this year. In previous years, a raft of consultations and policy responses have been released alongside the usual Budget announcements. However, this year these announcements will be made later – on ‘Tax Day’ – 23 March. The reason for this separation of events, we are told, is to ensure that both the Budget announcements and these policy matters receive attention.
For insurance intermediaries, perhaps more importantly, the final OTS report on Capital Gains Tax is due “this spring”. The status of CGT has been a key matter of concern for several years now. The sale of a business (and taxation of this) is a life changing event, and the outcome has a significant bearing on retirement plans. With the prospect of the tax rate on disposals more than quadrupling compared to 2019 (if the CGT rate ultimately aligns with Income Tax, as has been mooted), some brokers have accelerated their exit plans to lock in lower tax rates. Others have chosen to hang on – but worry whether they’ve made the right decision.
It’s quite possible that there are no further planned significant changes to raise tax revenues. But continued uncertainty is unsettling for businesses and their owners, and can lead to poor decision making. In some cases, the uncertainty has gone on for far too long and is proving a distraction to brokers who want to move forward with confidence.
I would hope that alongside any reports or announcements on 23 March, the Chancellor gives clarity to the long-term position for Capital Gains Tax in particular. Otherwise my response to the frequently asked question “What tax will I pay when I sell my business?” will continue to be “We’ll see on Budget day” – which, to be honest, isn’t the best way for people to plan their lives.
This article first appeared in Insurance Age on 5 March.