Spring Statement: A clear direction of travel?by
Following the Chancellor’s announcements, future plans for tax policy seem clearer.
Perhaps the least surprising line in the Spring Statement Blue Book was that “the uncertainty surrounding the Office for Budget Responsibility’s (OBR) spring economic fiscal forecast is higher than usual.” Given the Covid-19 pandemic, spiralling energy costs, Brexit, the return of inflation, rising interest rates and the invasion of Ukraine, modelling the likely shape of the economy must be a daunting task.
But despite the economic and geopolitical currents trying to pull the Chancellor from his preferred course, some things – including the likely direction of tax policy – are clearer today.
Firstly, we shouldn’t forget some significant earlier announcements. The freezing of key allowances and thresholds means that fiscal drag alone will pull in significant amounts of tax over the remainder of this parliament; removing one element of the pensions triple-lock and the increase to corporation tax from April 2023 will pull in even more. Inflation however will increase the cost of borrowing for government with the interest bill for 2022/23 now forecast to be £83bn as against £23.6bn in 2020/21. As the Spring Statement Blue Book points out, this will be more than the budgets for day-to-day spending on schools, the Home Office and the Ministry of Justice combined.
Kick starting the plan
The clearest indication we have of the likely direction of tax policy is contained in the Tax Plan announced in the Chancellor’s speech. The plan contains three key priorities: helping families with the cost of living; creating a new culture of enterprise and the conditions for private-sector-led growth; and sharing the proceeds of higher growth fairly with working people through further tax cuts. The government also aspires to making the tax system simpler, fairer and more efficient.
We saw some immediate moves to kick start the plan.
The fact that the personal allowance has risen over recent years to take low earners out of the income tax net while still leaving many within the scope of national insurance has felt illogical, but the cost of aligning the thresholds was always going to be expensive. Aligning the Class 1 and Class 4 thresholds from July will cost over £25bn between 2022/23 and 2026/27. The government estimates that the measure will take around 2.2m people out of the scope of NI and the Health and Social Care Levy. Reducing Class 2 NI on profits between the Small Profits Threshold and Lower Profits Limit will also help the smallest businesses, as will the cut in fuel duty (and the proposed cut in income tax in 2024).
Looking forward – and believing that investment is a key driver of productivity growth – the Tax Plan puts down a clear marker that the government intends to look at the capital allowances regime. The Blue Book cites some possible changes to the regime: an increase in the permanent level of the Annual Investment Allowance; Increasing Writing Down Allowances for main and special rate assets; introducing a First Year Allowance for main and special rate assets; introducing an Additional First Year Allowance to permit claims in excess of 100% of initial cost; introducing full expensing to allow write of costs of qualifying investment in one go. It is likely that we will learn more in the Autumn Budget this year.
The government also intends to look at ways to increase investment – and the effectiveness of investment – in training and at the effectiveness of R&D reliefs.
Staying on course
The problem of course is the uncertainty that the OBR referred to. Inflation is already significantly worse than had been predicted at the time of the October Budget and the invasion of Ukraine has created an economic and political shockwave.
In addition to the economic effects of the events we have seen over the past two years (and who knows what others), the tax system will have to cope with changes to the way we work, the impact of new technology and fighting climate change. The mechanics of tax administration will change.
For many businesses – especially the very smallest – the practical burden of compliance is just as great a concern (and as great a barrier to productivity and efficiency) as headline tax rates and changes to allowances. The ambition for the tax system to be “simple, efficient and fair” is therefore fundamental to its success in driving rather than inhibiting growth. People’s experience of the tax system must be factored into the Tax Plan.
So, we can see the direction of travel and have some hints on what the Autumn Budget might contain. Let’s hope for calmer waters for the journey from here to there – and, indeed, beyond.
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Paul Aplin was for many years a tax partner with an independent West Country firm. He is a past president of ICAEW, a former Chair of the ICAEW Tax Faculty, a member of CIOT Council and the Tax Technology Committee of CFE. He is a non-executive director of three companies, a member of HMRC’s Admin Burdens Advisory Board and the OTS Board....