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Budget 2021 – what might be in store?

With continuing widespread coronavirus infections and another national lockdown, Mr Sunak may need to look again at the financial support available to businesses and individuals. The Government stated in December that “The Budget will set out the next phase of the plan to tackle the virus and protect jobs and will be published alongside the latest forecasts from the Office for Budget Responsibility (OBR).” 

The Government borrowed a record £284.7 billion from April 2020 to November 2020 to help fund schemes intended to support businesses throughout the pandemic. There are expectations that taxes will inevitably rise as a result, as the Chancellor has indicated that “once the economy begins to recover, we should look to return the public finances to a more sustainable footing.” Given the economy has by no means recovered, there is speculation that any tax increases will not take effect until April 2022.

Mr Sunak will be mindful of protecting consumer spending and therefore an increase in VAT is not anticipated. Indeed, a temporary reduction in the standard rate of VAT would be helpful in stimulating the economy. However, this would be dependent inter alia on businesses passing the VAT saving on to consumers, as opposed to increasing profit margins by keeping selling prices the same.

The tourism and hospitality sectors, which have been particularly hard hit by lockdown measures, are hoping that the reduction in VAT to 5% (applicable to those sectors) will be further extended beyond 31 March 2021. The VAT cut was introduced in July 2020 and was intended to support businesses throughout the winter period, but that was before the third national lockdown and a further extension would certainly be welcomed.

It is largely anticipated that there will be an increase in corporation tax; perhaps to a rate of up to 23%. Businesses that have struggled throughout the pandemic are unlikely to be affected immediately, particularly if they have been loss making, but once they return to profitability, and utilise any losses, they will then feel the impact.  

Online businesses, which have generally fared well throughout lockdowns, are more likely to see an increase in the amount of corporation tax payable. In addition, large multi-national companies that provide social media services, a search engine or an online marketplace, and already pay a digital service tax on revenue derived from UK users, could see this increase from the current rate of 2%.

Probably the most anticipated change is around capital gains tax. In November 2020, the Office of Tax Simplification (“OTS”) published its report following a request from the Chancellor to review the capital gains tax regime. If acted upon, the OTS’s recommendations could well result in fundamental changes to the regime, which could potentially mean an alignment of the capital gains tax rate with income tax rates. Further details of the OTS’s report can be found here.

Whether or not the government will rush to implement any potential changes to capital gains tax is debatable. This would be a bold move and one that would prove to be unpopular with investors and business owners.  

It is understood that Mr Sunak will announce further details of a fourth self-employed income support grant scheme, and there will be calls for the Coronavirus Job Retention Scheme to be extended beyond April 2021 (when it is due to end) if the current UK lockdown continues into the spring.

Overall, the Budget must consider the long road to economic recovery, but the Chancellor will need to ensure that this is carefully balanced with the health and economic impact of the pandemic until the economy is able to reopen fully. We will be providing further updates once the Chancellor makes his Budget speech.

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