Summer Economic Update: present action & signposts for the future

The Chancellor will wait until the Autumn before planning how to recover the costs of his spending spree.

Alliteration has gone into overdrive when it comes to government initiatives. Hard on the heels of “Super Saturday”, we had the Chancellor’s “Summer Statement “.

While there is understandable public concern over how the ever-increasing government debt is to be repaid, the government’s preoccupation is not so much with making repayments (or the largely affordable, low-interest cost of servicing the debt), but the more pressing challenge of re-starting the economy, stimulating recovery, and preserving and creating jobs.

Unsurprising then that the Chancellor focused entirely on these immediate and important objectives, calling this second phase of the government’s economic response its “Plan for Jobs”. The plan has three key objectives:

  1. To support jobs
  2. To create jobs
  3. To protect jobs

Highlights from the initiatives announced were:

 Job support:

  • The Kick-Start Scheme to encourage employers to create new work placements for 16-24-year olds, with the government contributing to their wages and associated overheads for six months
  • Further financial incentives to employers in England to offer apprenticeships – including apprenticeships for the over 25s
  • A Job Retention Bonus of £1000 for employers bringing back workers from furlough into meaningful jobs, that will continue through to January.

Job creation:

  • Investment in infrastructure projects
  • Incentives to create “green” jobs
  • Grants to make homes more energy efficient
  • An immediate temporary “Stamp Duty Land Tax (“SLDT”) holiday” in England and Northern Ireland until 31 March next year, through a rise in the threshold above which SLDT is payable from £125,000 to £500,000.

Job protection:

  • A temporary cut in VAT from 20% to 5% for the hospitality sector (e.g. on food and accommodation) from next Wednesday until January 2021
  • Half-price discounts on meals at participating restaurants on Mondays-Wednesdays inclusive, in August, of up to £10 per head. 

How to pay for it?

So, as expected, we heard nothing in relation to tax changes beyond the temporary VAT and Stamp Duty changes. We do, however, know that a much wider-ranging Budget and Spending Review will take place in the Autumn. At that time, the Chancellor will have more hard information and insight into progress on economic recovery, so will be better placed to plan in relation to more stimulus and any tax changes.

As for any debt, thought needs to be given to servicing it and repaying it. Low interest rates (some government gilts even have a negative yield) mean that servicing the debt is not a problem. In considering capital repayment, typically one would look to a combination of the following:

  • getting more in (taxation);
  • spending less …efficiency and focus without a return to austerity; and
  • some help from inflation to reduce the real burden of the debt over time – although that doesn’t look too likely in the short term.

Any tax rises need to be very carefully considered to ensure that they do not negatively impact on the recovery. Income Tax, VAT and National Insurance all raise considerable amounts of revenue, but increasing any of them would almost certainly have a negative effect on propensity to spend – and right now, the Chancellor is looking to encourage the opposite.

In relation to tax reliefs, we have already seen the slashing of the lifetime cap for Entrepreneur’s Relief from £10 million to £1 million. So that leaves the perennial topic of pensions tax relief and its future. It is often seen as easy pickings to save money for the government, but it is such a complex area, and has been consulted on so many times before, it would be a difficult thing to change in the short term.

Lock down

What may be at risk is the State Pension triple lock, even if it is a short-term measure. The triple lock guarantees the increase in state pensions is determined by the highest of national average earnings (NAE), CPI inflation or 2.5%. It is expected that NAE will be negative this year, taking it out of the equation. But next year, when the country hopefully gets back on its feet, earnings increases of 20% or more are being forecast. This could be very expensive and a long-term expense which may lead to a suspension or a cap on this lock for a short time.

Corporation Tax increases also appear to be unlikely. It’s important (especially post-Brexit) that we remain as attractive a country as possible in which to set up and run a business.

Changes to capital taxation are possible. Capital Gains Tax and Inheritance Tax could be in the firing line. Neither yield huge amounts of tax, but proposals for structural reform have been made by both the Office of Tax Simplification (OTS) and the All-Party Group for Intergenerational and Inheritance Fairness.

And then there is the increasingly discussed idea of a wealth tax. Superficially, one can see the appeal, but in practice, the challenges of valuation, cost of collection, fairness and liquidity (think high value, illiquid assets like real property and pensions) make the introduction of a wealth tax tough in practice. Many countries which had a wealth tax have dropped it and in the three countries that operate a wealth tax in Europe (Spain, Switzerland and Norway), the tax contributes a relatively low proportion to the overall tax yield. France and Belgium each operate a form of wealth tax on property and it’s in this, with a possible increase in the property values that drive Council Tax, that some feel there could be action here in the UK. The jury is still most definitely out. In Prime Minister’s Questions on the day of the Chancellor’s summer statement, Boris Johnson appeared less than enthusiastic about a wealth tax.

The one thing we can be sure of is that, quite rightly, the government will continue to “double down” on all tax evasion and aggressive tax avoidance in order to ensure that as much of the tax that should be collected is collected.

So, in summary, we can expect the subject of tax reform to be reconsidered in the Autumn Budget. In the meantime, and with the benefit of advice, you should give renewed consideration to any areas of acceptable, tried and tested financial planning that you can undertake under the current rules.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

James Bowers is a member of Sovereign Wealth LLP.

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