A taxing Budget? What to expect from next week's set piece statement

By Joe Cooper

Ahead of next week's Budget, speculation has been mounting regarding the Government's plans for tax reform as it seeks to lead the economic recovery from coronavirus.

While changes to the tax system were largely put-on hold at the Autumn Statement in 2020, as we approach – hopefully - the end of the pandemic and as attention turns to the economic recovery, tax reform is now firmly back on the Government's agenda.

The Treasury has already announced that it would be consulting on a number of tax changes following the Budget. These consultations will go live on March 23, and while they are not thought to be ones that need legislation, the Budget next week will give an indication as to which taxes are being looked at in the longer term.

Corporation tax

A rise in corporation tax is expected to feature in next week's Budget, with reports in the Sunday Times suggesting Chancellor Rishi Sunak is set to end the decade-long reduction in in place of an increase to 23 per cent by the end of the current Parliament. Expected to raise £12bn for the Exchequer, the increase would still leave the UK with the lowest corporation tax of the G7 - still some way short of the US rate of 26 per cent – but does buck the pre-pandemic trend of Conservative governments who have sought to lower rates further.

Reports suggest that this increase may extend as far as 25 per cent, though this may be a move to make the increase to 23 per cent more palatable for those Conservative backbenchers who are keen to see the rates stay where they are.

Politically the response to the touted increase has been mixed. Amid speculation of a rebellion on the Conservative backbenches, Chief Whip Mark Spencer has reportedly warned would-be rebels that any revolt over the Budget would be akin to breaking the whip on a vote of confidence – the most serious of offences.

Potential rebels to a corporation tax rise appear to have found an unlikely ally in the Labour Party, with Keir Starmer warning that increases to the tax in next week's Budget would risk "throttling the economic recovery".

Labour's position runs in contrast to the pledge made by Starmer in his leadership campaign just 12 months ago to reverse the Tories' cuts to corporation tax, though his team would no doubt cite the extenuating circumstances around COVID as a reason for reversing on this.

In the next few days expect to see Labour home in on a more concrete position on corporation tax, so don't be surprised to see this story develop further.

While tax increases are never particularly popular, polling from YouGov finds that corporation tax polls among the most popular among the public - with 47 per cent in favour to 25 per cent opposed.

In a year when so many people and so many businesses have been struggling, increasing a tax on business profits is perhaps the logical choice.

Capital Gains Tax

Speculation has also been rife about the potential increase in Capital Gains Tax (CGT), levied on the profit made when selling an asset that has increased in value. It is speculated that the Government will seek to align income tax rates to CGT, something that has been floated ahead of a number of previous Budgets and financial statements over the past year. At its current level, capital gains are taxed at between 10 per cent and 28 per cent, compared to income tax, which ranges from 20 per cent to 45 per cent.

Speculation in the Telegraph suggests that the Chancellor could consider closing the gap because of fears around fairness of the disparity between the rates, and because smaller companies could try to classify more income as capital gains in order to benefit from the lower rate.

However, the Times has poured cold water on these proposals, suggesting that the Government is unlikely to go ahead with these proposals due to opposition from leading Conservative donors. As with corporation tax, expect strong push back from Conservative backbenchers to any radical changes.

While Corporation Tax and Capital Gains Tax are those most likely to be in line for reform, as the Government continues to lead the recovery from COVID and with the vaccine rollout well underway, if this is to become the first attempted ‘recovery budget’ it will by no means be the last.