Richard Teather has worked in tax since the ’90s, when it was fun. During that time he has advised businesses from small family enterprises to giant multinationals, helped governments with tax reform, researched and taught tax as an academic and travelled the world to talk about tax. You can find him on LinkedIn.
That could have been worse.
Indeed I was expecting something a lot worse. There are even some signs that the Chancellor actually gets it, at least in part, even if it doesn’t always translate into hard policy.
For my comment on Rachel Reeves’ first Budget, I said “I would have quoted the old cliché of ‘will the last business left in Britain please turn out the lights’, except that the government’s energy policy means the lights will have gone off already.” I was therefore a little apprehensive when her successor began by praising her, but fortunately that seems to have been political politeness rather than any intention of following her example.
Sure, I am not standing on the desk cheering, and there is plenty to criticise. Also, as we look into the detail more closely, there is a definite case of “the morning after”, with some of the promises looking a lot less attractive than they did on Budget Day itself. But even so, I am still less gloomy than I expected to be.
Is this just senile optimism? Actually I think it is pessimistic experience; I used to see all the bad things in a Budget (and there are always plenty), recognise the problems they would cause (and they always did happen), and think things couldn’t get much worse. But then the next Budget would show that they certainly could, and we would look back on the previous year’s with nostalgic longing.
So yes, this is probably as good as we were going to get, and better than we dared to expect.
What was good?
The first good thing was that the feared capital gains tax hikes didn’t materialise. There was a little one slipped in, but not the alignment with income tax that was trailed.
Also, some of the rhetoric was encouraging: a stated desire to “unleash innovation”, a Budget not just for “the British people” but also for “British businesses, big and small”, underpinned by “fiscal discipline”.
Yes, of course, as soon as politicians make announcements like that, you tighten your hold on your wallet. But in this case there are some positives.
The Chancellor’s desire to “prevent regulation holding back businesses” should be painted on every door in Whitehall; we shall see whether it has any effect.
Founders’ Relief
I initially wrote that “the big positive that we will remember from this Budget is probably Founders’ Relief”. Unfortunately, although the general principle is good, the more we find out about it, the less it looks like being of any practical use.
This reduces capital gains tax on a qualifying sale of a business to 10% on the first £10m. If that sounds familiar, that was the old Entrepreneurs’ Relief, first introduced by Alistair Darling (a sadly under-appreciated Chancellor) on £1m nearly twenty years ago. Renamed a couple of times, the level was soon increased to £10m, and it was an effective encouragement to entrepreneurship. Unfortunately the level was subsequently slashed back by Sunak, and the rate pushed up to 18% by Reeves, leaving it largely unimportant.
So has Healey just restored the old relief? Obviously not, because that still survives, now known as Business Asset Disposal Relief, and he has just reduced the qualifying gain on it even further, to just £500,000.
It was clear therefore that the new relief is going to have significantly tighter conditions on who qualifies than the old one. What was disappointing, though, was just how restrictive it is going to be. If this is his flagship policy, to back up his new rhetoric of “unleashing innovation”, you really want it to be something that people will actually use.
There are, as expected, much tighter conditions on who can invest, and in what. You need a much bigger stake in the business than for the old relief, so businesses with several founders are unlikely to qualify, and you need to hold the shares for longer. But the big problem is the ongoing conditions, based on growth (in turnover and employees) and qualifying research and development expenditure.
That adds all sorts of problems, primarily the huge uncertainty; if founders do not know whether they will qualify for the relief at the time they are considering setting up a business, it is not going to be an effective incentive to invest time, money or effort.
Tellingly, the Treasury predicts that its “cost” of Founders’ Relief will be small, pretty much what it raises from reducing the old Business Asset Disposal Relief, which suggests there will be very few successful claimants; from the numbers, potentially fewer than 200 a year.
So overall, yes, it’s good that the Chancellor’s speech recognises the importance of encouraging new businesses, and the role of tax in that. But the concrete proposal is far too restrictive to be effective. Still, perhaps we can hope that, now the principle is re-established, the conditions can be changed in future to make the relief more useable.
Investment taxes
The increase of 2 percentage points in the income tax on interest income would be more worrying if it were not partly offset by reversing Reeves’ reduction in the cash ISA limit, which will now stay at £20,000 p.a. rather than the threatened cut to £12,000.
However, the numbers are not encouraging; the rate hike is expected to raise over £500m per year, with the protection of the ISA limit “costing” barely a tenth of that.
I think that gives us the highest specific income tax rate on interest in the OECD.
This will reduce the net return on corporate bonds for individuals, making borrowing more difficult for British companies. Yes, most corporate bonds are held by institutions, but for smaller growing businesses, funding from private equity tends to mix bonds and equity.
The tax rise will also cause problems for people for whom equity investments are not suitable, particularly retirees taking a pension fund lump sum or downsizing their home and needing an interest income to supplement their pension.
There is also more pain for the private rental sector, with the 2-percentage-point rise in tax applying to landlords as well. With years of constant attacks on landlords, including the restriction on mortgage interest deductions for tax, increased tax rates, stamp duty surcharges, increased regulation and environmental performance requirements, and the new tenants’ rights law, it is not surprising that Zoopla reports a reduction in the number of properties available for potential tenants to rent. Yet another tax rise will not help that.
Dividends fortunately seem to have escaped a tax rise, so if this encourages people with more savings than the ISA limit into equity investments instead, it might even indirectly do some good.
There was a brief and worrying mention of “changing outdated rules so that people taking profits out of their companies are taxed consistently”. Fortunately it looks like that isn’t a back-door increase in dividend tax, but it will mean higher taxes for some company owners by taxing some capital gains as dividends.
Green levies
Funding “green energy” directly from government, rather than hiding it in our bills through levies and regulatory requirements, is a small victory for transparency.
Other positives
The increase in allowances for business vehicle use will be welcomed by many, particularly self-employed contractors.
The increased bank levy will be unwelcome, but was less than feared. However, this is still taking an extra £1.5bn out of the banking system – over 30 times what the Chancellor is putting back in for investment through the much-trumpeted increased funding to the British Business Bank and National Wealth Fund over the next three years. That is going to restrict banks’ ability to lend, including to the small businesses that the Chancellor says he wants to help grow.
The announcement of “EMI 2”, an improved share option scheme, is welcome, but again it looks like it is going to be too restrictive to be effective; the Treasury’s “cost” estimates over the next three years are just 15% of the amount for the Founders’ Relief, which was itself pretty small.
The Young Entrepreneurs’ Relief and the increased income tax trading allowance (from £1,000 to £3,000 p.a.) might do some good if the Chancellor can keep them simple enough to claim rather than giving in to HMRC’s usual desire to impose too many conditions to “prevent abuse”.
The new First Time Buyer ISA and housing equity loan scheme might help some young people, but mostly just look like another desperate attempt to prop up the housing market.
Leaving business rates in the hands of local authorities might be just the catalyst needed to encourage a more pro-business attitude in town halls; I shall watch that with interest.
Mixed news for the High Street
The increased threshold for business rates exemption (from £12,000 to £18,000 rateable value) for qualifying hospitality and leisure businesses will be welcome for many.
Yes, business rates are, in the long term, ultimately paid by landlords, with market rents going up or down to reflect the total premises cost for the tenant. But the prevalence of upwards-only rent reviews in commercial tenancies has left many businesses facing what have become, in the current trading environment, excessive costs.
Whether this actually helps businesses, or only helps them keep paying their rent for a few more months, remains to be seen.
Paying for this by increasing gambling taxes and taxing vape shops may sound good at first, but is likely to be an administrative headache and may just lead to even more empty premises or charity shops. The vape shop tax is trivial (overall; not for those businesses affected); at £10m a year it may cost more to administer than it collects. But the gaming machine duty is going to be a big hit.
Where does the action not match the rhetoric?
Inheritance tax
Again, it could have been worse; there were various proposals floating around to push inheritance taxes up even higher. But the Chancellor missed an opportunity to actually encourage small businesses.
I said I was disappointed that Healey praised Reeves, but what was even more disappointing was that he did not do anything to mitigate her inheritance tax raid on family businesses.
This has the potential to cause huge problems, particularly in some sectors with high asset values but low profits. I calculated that a typical farm might not even make enough profits each generation to pay the inheritance tax, and William Lees-Jones, director of JW Lees brewery in Manchester, has drawn attention to a range of problems, not just for regional brewers with pub chains.
The broader problem though is the feeling that this discourages family businesses from keeping going. The Chancellor praised small businesses as being at the heart of what “make the places we live and work, the places we love”, but if a local business cannot be passed on to the next generation, the incentive now will be to sell out to a big chain once it is successful.
The Chancellor claims he understands “that starting a company means taking risk”, and that “we should recognise that success”, but this does not follow through into his proposals.
Yes, there was a promise to “protect … families passing their businesses down to the next generation”, but there doesn’t seem to be anything significant on that yet. Any such measure might encourage the transfer of a family business down to the younger generation while the first generation is still alive, but it would not remove the seven-year period of being at risk from an inheritance tax charge if the founder dies, and it does not look like it will help longer-established family businesses.
Government picking winners
One disappointment with the Budget is that, although the Chancellor said that he wants to “unleash business innovation” and supports “business founders … [who] take that risk, build an exceptional company, create wealth for Britain”, his actual policies are for £20bn more government investment in business and very little to encourage private investment.
Do we really think that is going to be productive? Either he will just be replacing investment that would have come anyway, in which case it adds no value, or he will be investing in businesses that a multitude of banks, venture capitalists and angel investors have all decided are not viable. Yes, there might be some overlooked gold nuggets amongst the dross, but do we really think civil servants have the experience, skills or even attitude to find them?
Even more complexity
Because the income tax threshold has not been raised for five years of high inflation, but the triple-locked state pension has been, the pension is now set to exceed the threshold. That would bring perhaps a million pensioners into income tax, often involving a lot of administration for less than £2 of tax a week.
Unfortunately the Chancellor’s response is to make the system more complicated, giving a higher tax allowance but only for low-income pensioners rather than everyone. If the allowance had been indexed properly since Hammond increased it to £12,500 (as I had proposed in a flat tax paper some years earlier), it would now be £4,000 to £5,000 higher than it actually is, which would both remove the pension issue and really leave more money in the pockets of “working people”.
Powers for HMRC
The announcement of more money and powers for HMRC is predictable but alarming, particularly their ability to take regular deductions from bank accounts for smaller debts, extending powers that already bypass the courts.
This is an organisation that has an increasing reputation for both making big mistakes and being almost impossible to contact to sort things out. Remember they advertised for staff specifically to deal with post that had been left unopened for more than a year. They didn’t even manage to get their pre-prepared information up on their website with the essential detail behind the Chancellor’s tax announcements until hours after the speech was finished.
Even if HMRC are ever to be given these powers, it should not be until they have sorted out these problems and can be trusted to take only what is due.
Similarly, making small businesses pay income tax on their profits earlier and more regularly is going to load costs onto them – not just cashflow, with many having to pay tax on notional profits before they have been paid by their clients, but also administrative, since each payment will require a calculation and probably some sort of tax return. There will of course also be penalties for getting it wrong, which HMRC will probably prove better at demanding than they are at answering the phone.
There are various additional burdens on businesses coming, including compulsory online reporting and immediate tax payments for company cars and some other employer-provided benefits, from April next year, regardless of how small the employer is.
Council housing
Some £40bn is to be given to local authorities to fund council housing. Not social housing or affordable housing, large numbers of which are built every year by independent, not-for-profit housing associations, but specifically for council houses.
For those who cannot remember, the reason housing associations were set up and council housing transferred to them was that local councils were not very good at managing housing, with decades of under-investment and maintenance shortfalls. Indeed on Budget Day itself the housing regulator issued highly critical reports on several local councils’ housing provision, including Haringey Council, which had 1,400 overdue high-risk gas safety works (disclosure: I am an Independent Member of a housing association, but we really do run things better than local councils do).
Trivialities
One thing that really stands out from the Budget is the triviality of a lot of its measures.
Abolishing the gas standing charge, to instead load the cost onto unit usage prices, will save a bit of money for some households (probably single people in small modern flats) but can have no effect on average.
Similarly, extending the VAT cut on domestic energy to July, a related energy price support for a few businesses, the £100 payment to households in low council tax bands and the fuel duty freeze, will no doubt be welcomed by their recipients, but do not even try to get to the heart of the problem of Britain’s sluggish growth.
Government money for charities that try to provide books to children is well-meaning, but looks like trying to gain credit for other people’s initiative.
As a free trader, I welcome the promise to freeze tariffs on some products, but it does not go far enough. And of course I shall raise a half-glass to the tax relief for small brewers, but a £10m per year relief on a duty that raises £12.4bn is, well, small beer.
Bury market does sell the best black pudding in the country, but is £10m for its upgrading really such a vital part of revitalising the British economy that it merits a mention in the Budget speech? And I do hope the “£18m for advanced chip design led by Edinburgh University” is for the computing sort of chips.
Although you can make an argument for any of these, overall they are what my son, Edward, calls “Martin Lewis policies” – a lot of fiddling around to save a few pounds.
There’s nothing wrong with that in itself; indeed by encouraging people to shop around, Lewis has probably made free markets more effective by increasing the incentive for companies to keep their costs down and help more efficient new entrants to build a viable market share. But these are consumer responses – what you do when you have no control over the situation, and can only pick the best of the options available. Gladstonian vision it is not.
But perhaps even that narrowing of scope merits a small celebration. Whenever governments think they can control markets, it ends in disaster, so perhaps this is a sign of increased realism from the Treasury. We can hope.
Passing the buck
The problems of inflation, and the increased cost of government borrowing, were blamed on the convenient scapegoat of the war in the Middle East. This ignores the huge increase in the money supply by successive governments, starting back in lockdown, and the massive increase in government borrowing (which Healey is to add to).
Verdict
These are initial thoughts; there are hundreds of pages of backing documents with more detail, some proposals are currently just consultations so could change before they come into effect, and there are certain to be hidden problems that will come to light over the coming weeks.
It didn’t help that HMRC failed to post their additional information on their website until hours after the Chancellor finished his speech, and that is where a lot of the detail is about what the Chancellor’s announcements actually mean. I cannot decide whether that was down to HMRC’s well-documented delays or a cunning attempt to keep the nasty surprises back until the headlines had been written.
But overall? This was not an exciting Budget, and perhaps that is a good thing.
There was some welcome rhetoric about business, and although there was very little practical change to back that up – nothing to really energise business, investment or entrepreneurship – there was also nothing disastrously bad.
Yes, there was no attempt to tackle the huge problems facing the British economy – the high tax and regulation; the disincentives to work; the young people not in employment, education or training; the general atmosphere of pessimism and “why bother?” that I remember from the 1970s. But we didn’t expect that.
And if this was a Budget of trivial changes, just think of the big changes we have seen in Budgets over the last six years – the corporation tax hike from 19% to 25% after years of stability; the abolition of the centuries-old non-dom exemption; furlough; bringing pensions into inheritance tax – I could list many more, but all of them were disastrous.
Given some of the dreadful Budgets we have had in the last decade or so, increasing taxes and showing no understanding of how this would affect the rest of the country outside Whitehall, dull is good.
Yes, the big problems are still coming down the road, but for now the mood is better than it was, and you can feel the sigh of relief.
That was a good tea-time read, thanks.
I despair at the triviality of the whole thing. Last time there was a £100 pound Council Tax refund, councils expended a lot of admin asking people how they wanted the money if there wasn't a Direct Debit set as the payment method, and also dealing with whingers in Bands E-I who were 'poor pensioners' or on Council Tax Support, and a separate fund was allocated for these people. The total compensation in the system probably reduced as we didn't get more efficient at producing energy or more efficient at identifying the hard cases who really needed help.
Then we find Mayoralties are to retain business rates receipts, while councils get the Council Tax, which will lead to an obvious conflict of interest when a 'change of use' application comes in to convert an empty unit from retail to residential. The Mayor will beg to give the owner a bit longer to find a retail tenant on a deserted high street while the Council leader will want to say 'make it so' and then the Council gets the property tax instead.
Why does Government always find the least efficient way to get anything done?