The business community and many individual tax payers are waiting with bated breath to find out what new tax measures will be introduced by the new government in Chancellor Rachael Reeves’ first Budget on 31 October this year.
Labour ran on a platform of stimulating growth in the economy, which will raise tax revenues for the treasury. However, the chancellor will be reluctant to raise taxes or introduce new taxes that will end up having a negative impact on growth. So what can she do?
In this guide we explore the taxes that the new chancellor may seek to raise, for much needed funds. We will also assess the impact that this may have on businesses and advise on actions they should consider ahead of the budget.
The new government have somewhat boxed themselves in by committing in their manifesto ‘not to raise taxes on working people’. Their manifesto went on to say that:
‘Labour will not increase income tax, national insurance or VAT. Unlike the Tories, we have been clear about how we will pay for our first steps in government: by making the tax system fairer.
Ending the VAT and business rates tax breaks for private schools has been widely trailed in the press. So has closing reliefs for non-dom individuals and increasing the windfall tax on energy giants. Rachael Reeves therefore has a tricky balancing act.
The seed enterprise investment scheme (SEIS) and the enterprise investment scheme (EIS) have provided vital help to start-up companies for many years. The schemes have helped to partially de-risk investments made by individuals and to provide significant tax benefits to them.
Relief is given by reducing the investor’s income tax liability by 50% of the sums invested by individuals subscribing for shares in qualifying companies. Investors may claim relief against their income tax liability, up to an annual investment limit of £200,000. The investor will pay no capital gains tax when they sell their shares, so long as they sell their shares after three years of originally subscribing for those shares. Capital gains on previous sales of chargeable assets can be deferred until the SEIS shares are sold.
Qualifying companies must be trading companies and cannot issue SEIS qualifying shares more than two years after the company first commenced its qualifying trade. The maximum a company can raise by issuing qualifying SEIS shares is £250,000.
This is very similar and is the forerunner to SEIS but helps larger and more established companies. Individual investors’ income tax relief is restricted to 30% of the amount invested. Investors however can claim relief on subscribing for shares in a qualifying company of up to maximum amount of £1 million a year if the company is trading or up to £2 million a year for knowledge intensive companies.
A trading company must not be more than seven years old from the date of its first commercial sale at the time the company issues qualifying shares. This time limit is extended to 10 years in the case of a knowledge intensive company.
Qualifying companies can raise up to £5 million (£10 million for knowledge intensive companies) a year by issuing shares to investors, and a maximum of £12 million (£20 million for knowledge intensive companies) over the company’s lifetime.
Labour published a review this time last year called Start-Up, Scale-Up, making Britain the best place to start and grow a business. One of the key recommendations in the report was to maintain and build on existing incentives, such as SEIS, EIS and the research and development (R&D) tax credit system, to ensure investors and firms have the best possible incentives for growth.
It’s very unlikely that the chancellor will do anything to limit any of the tax reliefs or the effectiveness of these schemes and reliefs. Given the budgetary constraints it’s also probably unlikely that she will improve existing reliefs. She may however signal that she may choose to do so in future budgets.
Capital gains tax rates are a strong contender to rise in the next Budget. This is explored in more detail below. Individuals who have recently disposed of assets and have realised a chargeable gain can defer paying the chargeable gain by investing in qualifying shares in a SEIS or an EIS company.
Assets could be realised before the Budget to create the chargeable gain. Investors considering deferring chargeable gains should consider investing in shares in qualifying SEIS or EIS companies before the Budget.
The current rates of CGT are currently:
Business assets disposal relief (BADR) is available for entrepreneurs who sell qualifying assets. Qualifying assets include a 5% or more shareholding in a trading company where the individual is an employee or a director and who have owned the shares for at least 24 months. A similar relief is available for assets used in a trading business. The CGT rate is reduced to 10% in respect of the first £1 million of chargeable gains made by the entrepreneur. Any chargeable gains made in excess of £1 million will be taxed at the flat rate of 20%.
Commentators are widely predicting an increase in the rate of CGT either increasing the CGT rates so they align with income tax rates or signalling such an increase for future Budgets. Raising the rates of CGT will be an obvious target as it’s not perceived to be a tax on ‘working people’.
It’s however unlikely that the Chancellor will make changes to BADR as this will be contrary to promoting growth. The Chancellor may however actually signal that she may make improvements to BADR in future Budgets. The rate of CGT payable in excess of the £1 million threshold may however be materially increased in the next Budget.
There are also suggestions that holdover relief on gifts of trading business assets (including shares) may be withdrawn or restricted, which would remove or limit the ability to defer CGT on gifts.
Investors could consider realising gains before any Budget announces are made on 31 October and either pay the CGT at the lower rate or defer any chargeable gains against investments in qualifying SEIS or EIS shares.
Investors should be very wary about entering into artificial transactions like transferring assets to a company or a relative or a trust. It’s likely such arrangements will be caught by any changes in the rates proposed by the new government.
If gifts of business assets are being contemplated as part of investors’ personal estate planning or business succession, it would be sensible to consider that ahead of the Budget.
The Labour manifesto committed to publishing a ‘roadmap for business’ and the chancellor has confirmed this will be published on Budget day.
There are broadly three primary objectives behind the creation of this tax roadmap:
Labour has committed to keep the current rate of corporation tax at 25% for the remainder of this parliament. This still remains a relatively high rate of tax compared with other countries but it at least gives companies some certainty to plan in the future. The chancellor may however signal possible reductions in the rate if she considers Britain's ‘competitiveness is under threat’.
It’s likely that the current generous capital allowances regime, which included ‘full expensing’ for certain asset investments which enables companies to offset the full cost of qualifying plant and machinery investments against taxable profits, will continue for the foreseeable future under this government.
The business tax roadmap will include details of other anticipated changes to business taxes, which will gradually be introduced over the course of the current parliament.
The roadmap has been widely trailed in the business press and will set out proposed future changes to business tax no doubt with the launch of various consultations.
As the Chancellor is seeking to promote stability it is unlikely there will be any corporation tax surprises in the forthcoming Budget.
IHT raises relatively little tax, although it’s increasing year-on-year, but is a political minefield. It can be expected therefore that IHT will be on the agenda for changes in the Budget, or at the very least to indicate future changes and consultations.
Particularly relevant for business owners is the possibility of a restriction or removal of Business Relief (BR) on shares, business interests and assets used in a business. This relief reduces their value chargeable to IHT by either 50% or 100%. The ability to gift assets during lifetime relatively freely may also be restricted.
BR currently applies to shares in companies listed on the AIM stock exchange and they seem fair game for BR to be removed.
BR may be restricted more generally, which could impact on business owners’ ability to plan their own affairs tax-efficiently. Any restriction would need to be balanced against the impact this may have on businesses as the tax will need to be funded from somewhere, which is a key underlying rationale for the relief in the first place.
If business owners are considering gifting shares or interests in their businesses, then it would be sensible to consider doing this ahead of the Budget.
For further information and advice, please contact the tax team.
This article was originally published on Tech South West’s website, as part of the Growth Forge campaign. What taxes are predicted to rise in the Autumn Budget to fill a ‘£22bn black hole’? - Tech South West.
We produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
Sign up
