Which taxes could Rachel Reeves be targeting at the Budget?

The Chancellor has handed headline writers an absolute gift, though it’s one they’ll have to wait a few months to cash in. Reeves’s first Budget will take place on 30 October – the day before Halloween – and will very probably include spending cuts and tax hikes, so we can expect to see, ‘The Wicked Witch of the Left’, or similar, across the front pages the following day.

In a speech to the House of Commons, the Chancellor explained there was a £22bn black hole in the public finances. ‘Difficult decisions’ would have to be made, so … the winter fuel allowance has been removed from all but the poorest pensioners; the Stonehenge tunnel project is on hold, again; and a there’s to be a clamp down on Departmental spending. Tax hikes were also strongly implied.

We don’t know what taxes exactly might be under consideration but we do know that were she to raise income tax, national insurance or VAT, the Chancellor would be breaking a manifesto commitment. Labour won’t want to do that (note ‘won’t want to’ isn’t the same as ‘won’t’, but still, they probably won’t) so they’ll have to look elsewhere.

Below, I take a look at some of the taxes that could be in Reeves’ sights and review how such changes could impact the sector.

Corporation Tax

The next biggest earner for the taxman after the aforementioned big three, Corporation Tax nets around £100bn a year for the public coffers. It was hiked quite a bit under the Conservatives for companies with larger profits, with a new, somewhat complex tapered relief put in place for smaller businesses.

Many contractors benefit from that relief and there is a danger it could be reduced or even removed under Labour. There’s no clear indication this particular measure is under active consideration, but while Labour has said it won’t raise the top rate of 25%, it hasn’t made any guarantees about the lower rate thresholds.

Pensions Tax Relief

Putting money into a pension makes a lot of sense, particularly for higher rate tax payers, due to the 40% tax relief on contributions. It’s rumoured the Chancellor is considering a flat 30% rate of relief – effectively imposing a 10% hike on the higher rate band that save into a pension.

Many contractors – particularly those still managing to work outside of IR35 – still save into a pension so they would be hit by this, if Reeves pushes ahead with it.

Capital Gains Tax

There’s quite a bit of speculation about this one and it seems likely at the time of writing that the Chancellor will look at CGT. One option would be to align it with the rates of income tax.

Another tweak to look out for is anything around Business Asset Disposal relief (formerly Entrepreneurs Relief). Under current rules, if you sell your business you can claim the relief and pay 10% on the profits. There are quite a few tax commentators who have called for the relief to be scrapped, so the Chancellor could be tempted. However, it won’t put much of a dent in the £22bn problem. It’s estimated to cost the revenue around £800m a year.

In the past, we know that some contractors have made use of the Business Asset Disposal relief as a way of preparing for retirement, so this could have implications for the sector.

Inheritance Tax

Several commentators believe the Chancellor will look to ratchet up inheritance tax. There’s a number of ways this could be done from lowering the tax free threshold, to bringing pension pots into scope, to scrapping business property relief (relevant for those looking to pass their business on to their children).

Increasing inheritance tax will be unpopular with voters, and depending on exactly how it’s done, may not bring in the big money needed. Nevertheless, the rumours that Reeves will put it up are fairly persistent and worth keeping an eye on.

What does all this mean for getting rid of IR35?

According to the OBR, the off-payroll working (IR35) rules generate more than £1.5bn annually. We believe that quite a bit of that is a result of incorrect determinations and is therefore money the government isn’t entitled to. Sadly though, it remains very unlikely that a government which is desperate for cash will seek to scrap IR35 when it brings in significant revenue.

Yet, there is hope. The government seems interested in exploring employment status rules, which - among other things - govern when IR35 does and doesn’t apply. If we can get the rules right, we can make IR35 easier to live with in the short term. Longer term, we will continue to make the case for getting rid of IR35 altogether.

Tax hikes likely in the first year...

Governments will generally seek to do the unpopular stuff in the first year or two of a Parliament, hoping the electorate will forgive and forget by the time they are next asked to go to the polls. On that basis, and given the Chancellor’s determination to impress upon us the dire state of the public finances, it seems highly likely we’ll see tax rise announcements at the end of October.

Whether they ‘suck the blood of pensioners’ or ‘feast on the flesh of business’ will remain to be seen but we should brace ourselves for something ghoulish this Halloween