As Budget day creeps over the horizon, JMW partner Craig Harrison writes about which tax rumours are most worrying his clients in today’s Notebook
Tax rumours are worrying the business community
Much has changed since the last Budget. A key justification for previous tax increases focused on addressing the £20bn fiscal gap and establishing ‘headroom’ to ensure that the UK economy could weather unforeseen economic shocks and invest in the future. Recently the defence budget has come into sharper focus, but persistently high inflation is arguably even more challenging for our new Chancellor John Healey as it indirectly causes a significant hike in public spending on payments linked to inflation.
However, it appears that any headroom will be replaced with a deficit and with meaningful spending cuts unlikely, there is nervousness in the business community that new taxes will be announced on Budget Day. A wealth tax has been mentioned, but is notoriously difficult to introduce, and even more challenging to collect successfully. While there have been interesting reports about the mechanics to be used to collect a so-called ‘mansion tax’, property is far more straightforward to tax than worldwide assets, crypto assets and shares in private companies.
An exit tax, levied on those changing residency or tax domicile is also much discussed and while it may be popular there is a real possibility that wealth creators will leave in large numbers due to fear of an exit tax as from their perspective: if it is a possibility, why wait for it to be introduced? Their departure certainly won’t help the Treasury coffers.
Finally, aligning capital gains tax more closely with income tax is another tax increase that is a possibility. Although it’s been some time since entrepreneurs have benefitted from generous tax reliefs when selling their business, further disincentives would stifle entrepreneurship and deter the investors that support businesses.
Growth is an ambition shared across all main parties and should certainly be the focus for Mr Healy. Encouraging corporate transactions could generate significant tax revenue, which is perhaps needed now more than any other time in our lifetime. Enabling ambition and entrepreneurship to help grow the economy would provide the boost that the business community and government desperately need.
Entrepreneurship though acquisition is under celebrated
There are many signs that elements of the professional services sector are consistently performing well, and while it is only natural for sectors in distress to receive government support, it is important to remember that not all parts of our economy would benefit from reform or change. I would however like to see more encouragement for the entrepreneurship through acquisition business model as it plays a key role in inspiring economic ambition, often resulting in both job and wealth creation. This business model can enable commercially astute individuals to drive enterprise while avoiding many of the dreaded start-up risks.
Budget suspense is damaging
Our next Budget will take place on Wednesday 28 October, a date announced on Friday 31 July. Three months is a long time in the economy and successive governments have delayed Budget Day or have announced fiscal events with a long lead-in time. I would like a return to when Budget Day and the Spring Statement were at specific times of the year and could not be easily delayed. Why? The resulting uncertainty (especially with new administrations) can cause a slowdown in economic activity with no guarantee of a swift or prosperous restart.
Never say never, Mr Johnson!
It was widely reported last week that Jim Johnson, the chief executive of Hunting plc, declared that the country is uninvestable and that the company will never make a big investment in Britain again, citing political upheaval. I should say that I don’t know Mr Johnson and so I would not question his motives for making this announcement. I do however think it is important for business leaders to remember that situations and policies do change, but that absolutes never do.
My daughter’s school set her the summer task of reading R.J. Palacio’s 2012 novel Wonder which, given my age, had not featured in any of the reading lists to which I am regularly exposed. Enthralled by the book, my daughter then announced to the entire family that we must all watch the film adaptation together. The story embraces many themes including resilience, acceptance, compassion and perspective, all issues that frequently arise in the work environment. Businesses spend a fortune in training on these issues and rectifying problems when people don’t consider them. It is a great movie for children in their formative years.
Craig Harrison is a corporate partner at law firm JMW