Two-thirds of businesses expect taxes to increase

Many commentators expect the Chancellor to be looking for headroom to cut taxes in the Spring Budget ahead of a general election later in 2024. However, according to a survey conducted by BDO, the majority of UK businesses expect to be paying more taxes after the general election than less. 

More than 500 mid-market businesses were downbeat about the prospect of taxes falling in the near future ahead of the Autumn Statement on 22 November, with 77% expecting to pay the same or more taxes after the country goes to the polls next year, and only 23% placing their bets on a reduction in taxes.

The survey was taken with 513 C-suite executives of businesses ranging between £10–300m revenue, as inflation remains at 6.7%, interest rates haven’t budged from 5.25%, and the Middle East conflict casting a further shadow over the global economic outlook. 

The unresolved economic uncertainty has handcuffed the government and the Chancellor’s fiscal choices, and the current mood from businesses is that this monetary tightening isn’t set to change after the Budget or if there is a change of residents in Downing Street after the general election.  

Jonathan Hickman, a tax partner at BDO, noted that while the Chancellor has warned that tax cuts are off the table at the Autumn Statement, there is a growing and “grudging” acceptance among businesses that the current high levels of business taxation may be “here to stay and could even rise post the general election”. 

Autumn statement wishlist

Although the surveyed businesses may have resigned themselves to the prospect of higher taxes, the respondents still had a wishlist of policies they want to hear from the Chancellor on 22 November and top of the list is an investment in HMRC service levels. 

The Chancellor was urged before the Spring Budget to prioritise investment in HMRC. A group of professional bodies signed an open letter to Hunt, highlighting the impact the “unacceptably low” HMRC service levels are having on businesses and agents. 

However, the professional bodies’ letter did not sway the Treasury earlier this year. Victoria Atkins, the financial secretary to the Treasury, then rebuffed the calls in a response to the professional bodies, where she acknowledged that HMRC service levels “have not been where they want them to be” but said that investment in building a digital tax system between now and 2030 will reduce errors and further support taxpayers. 

Aside from investment in HMRC service levels being on mid-market businesses’ Autumn Statement wishlist, 35% of respondents wanted to see simplification of the tax rules, while 27% are eager for a cut in government spending. 

R&D concerns

Expectations are that at the Autumn Statement there will be a confirmation of the new merged research and development (R&D) scheme. 

The R&D tax relief has become a growing concern among small or medium-sized enterprises (SMEs). In the summer, the Chartered Institute of Taxation (CIOT) raised concerns about valid R&D claims being rejected as part of HMRC’s crackdown on abuse of the tax relief, and businesses that challenge the verdict meet a “brick wall”. 

Meanwhile, the merger of the large and small R&D scheme is set to further tighten restrictions. Some of the significant changes in the draft legislation are that expenditure may not qualify under the new merged scheme if it has been subsidised and companies won’t be able to claim the relief activities contracted to them by another company.

And the BDO survey found that 85% of the surveyed businesses said they may shift their R&D activities overseas due to the prospect of a reduction in the rates. 

Hickman said the proposed reforms that are expected to be confirmed in the Autumn Statement may provide an indication of the government’s commitment to tax simplification, but the changes have also caused a “high degree of concern among SMEs” about the proposed reduced rates of relief. 

“While the likelihood of such a high proportion of businesses taking this course of action is probably slim, it does nevertheless reflect growing unease about the likely competitiveness of the UK’s future R&D regime when compared to other international jurisdictions,” he said.

Beyond the Autumn Statement

Looking beyond the Autumn Statement, and even the Spring Budget, the respondents were asked what tax changes they wanted to see when the economic conditions improved. 

The most popular option for 31% of respondents was for new green tax breaks. This was ahead of a cut to the headline rate of corporation tax, which was top of the list for 28% of respondents. 

The majority of the mid-market businesses (74%) said they would also support the introduction of a new UK carbon border tax to prevent companies from offshoring their carbon emissions.

Hickman said this statistic demonstrates that middle-market businesses are willing to reduce their environmental impact but “they are looking for the government to introduce new green tax breaks to help them do so.”

Elsewhere, 28% of respondents want to make the 100% first-year capital allowance permanent, while 15% want to see a cut in employers’ national insurance contributions.