Budget speculation focuses on business investment and pension tax relief

Despite a surprise £5.4 billion surplus in January appearing to give the government room for manoeuvre, both the Prime Minister and the Chancellor are reportedly against a significant tax ‘giveaway’, stating that the government is committed to “balance the books” and cut borrowing.

Research from the National Institute for Economic and Social Research (NIESR) this week suggested that the Treasury would have headroom as high as £166 billion, thanks to a surge in tax receipts and a significant drop in energy prices. Treasury sources disputed these figures, suggesting the fiscal headroom had not changed at around £9bn amid a downgrade in the UK's long-term growth prospects.

Below we summarise some of the key areas of speculation ahead of Wednesday’s statement.

Business taxes

There is no sign of the government pulling back from its plan to increase the main rate of corporation tax to 25 per cent from 1 April, despite significant pressure from Conservative MPs and business figures to do so. During his recent interview, the Chancellor, Jeremy Hunt, reiterated the government’s position, saying, “if we’re going to cut taxes permanently, then it needs to be a tax cut that we earn, through higher growth and the first step is stability.”

Some Conservative MPs acknowledge the constraints facing the government but have urged Hunt to “show there is a path” to lower taxes in his Budget. They include the party’s cohort of London MPs, who have acknowledged “there are limits to what he (Hunt) can do on tax at the moment”.

MPs including former party leaders Boris Johnson and Iain Duncan Smith are calling for corporation tax be cut to Irish levels or lower.  MPs in the Conservative Growth Group, as well as former Chancellor George Osborne,  the entrepreneur Sir James Dyson, and Simon Lowth (BT’s chief financial officer) have warned that the plan could stifle businesses and the UK’s ability to attract investors.

However there is a widespread expectation that the Chancellor is preparing a replacement for the capital allowance super deduction. According to the Financial Times, Jeremy Hunt recently told business groups the new regime would not be anything like as generous as the “eye-wateringly expensive” super-deduction. This suggests it is unlikely that he will announce “full expensing” (allowing all qualifying capital expenditure to be written off by companies against their taxable profits in the year it is incurred) as this has been estimated to cost £11bn a year — not much less than the £12.5 billion per year super-deduction.

The CBI – again reported in the FT – estimates that full expensing would cost between £4.4bn to £7.7bn in 2023-24. But it says that a more gradual “road map” option offering a 50 per cent rate would cost between £1.2bn and £2.5bn in the financial year ahead.

Some business groups are also asking the Chancellor to extend three tax incentives for investments – the Seed Enterprise Investment scheme, the Enterprise Investment Scheme and the Venture Capital Trust relief. They claim that the uncertainty over these schemes is negatively “impacting start-ups looking to raise investment.” The Treasury Committee has called for the Chancellor to give certainty to small business investors by announcing in the Budget whether the reliefs will be extended.

There is also pressure on the Chancellor to backtrack on R&D tax credits. The Federation for Small Businesses has argued the Chancellor still has time “to do the right thing” and eliminate the plan to cut R&D credits for small business. The Institute of Directors has urged the Chancellor "in the strongest possible terms" to reverse the planned cuts. In an open letter over 150 start-ups also cautioned Hunt that the planned reduction of R&D credits would severely harm the UK's start-up ecosystem. Likewise, Joe Spencer, a partner at rural accountancy firm MHA, is urging the Government to “clear its intentions” to extend R&D tax reliefs on energy efficient solutions to help farmers drive the country’s green transition.

There is little expectation of the government dropping this policy, though some speculation that  the Treasury could sugar the pill and offer some relief to all firms by marginally increasing the R&D allowance.

According to The Times, the Chancellor will confirm in the Budget that the UK will begin implementing the international agreement to set a global minimum tax of 15 per cent on big international firms by the end of this year. However, a group of Conservative MPs are claiming Hunt could undermine Brexit by agreeing to these rules. In a letter to the Chancellor, MPs including Liz Truss and Priti Patel have urged him to pull out of the agreement, stating that it is “remarkable” that a party elected to ensure Britain ‘Takes Back Control’ from the EU “should be asked to rush ahead and surrender sovereign tax rights under the OECD initiative, especially while so many questions about the measure remain unaddressed.”

There is also some speculations that Hunt may announce plans to eliminate the small company IR35 exemption. The Conservative Growth Group is advocating for a comprehensive reform of the IR35 regulations.

Personal taxes

The Chancellor’s primary focus with the Spring Budget will be to get Britain back to work, according to the Daily Telegraph.

A key element of this, according to the Daily Mail, is that the lifetime allowance on tax-free pension savings (currently just over £1 million) will see its first substantial increase for a decade. The £40,000 cap on annual pension contributions will also be raised, the paper says, quoting ‘Whitehall sources’.

This announcement is largely prompted by doctors leaving the NHS early to avoid being ‘trapped’ by taxes on their pension saving. However, while there had been some speculation that a doctor-specific solution could be sought, it appears that the allowance changes will be across the board. They are expected to be presented as part of a wider plan to keep older workers in the workforce, and to persuade those who have taken early retirement to return. The Mail says that the changes are being considered as part of a major 'workplace review' led by Work and Pensions Secretary Mel Stride, which will be published alongside the Budget.

Also on the theme of encouraging older workers back to the workforce, the Chancellor is being urged to increase the money purchase annual allowance, a limit which restricts tax-free saving into a pension once a person has started to draw an income from it. A coalition of pension companies has written to him pressing for this.

Childcare support for low-income parents will be increased in the Budget. Again this appears to be a leak to the Daily Mail, who say that “Treasury sources have revealed the Chancellor is looking to increase how much parents on Universal Credit can claim back for childcare”. The maximum level has been frozen since 2006, at £646 per month for one child, or £1,108 for two or more children.

Fuel duty is expected to remain frozen. The scheduled rise by RPI inflation in April would otherwise add 7p to the price of a litre of fuel. A temporary 5p fuel duty cut, due to expire this March, is expected to be extended.

While there has been no specific pre-Budget speculation, another area where we may see changes is the non-domicile tax regime. Ministers hinted in January that changes may be forthcoming. These could include raising the fee paid by non-doms or reducing the timeframe for an individual to be deemed UK-domiciled.

It is also believed that over 40 MPs have written to Hunt, urging him to eliminate the ‘pavement tax’ on electric vehicle car owners who use public charging points. They argue that the Chancellor should close the gap by reducing VAT on electricity from public charges to 5 per cent. Moreover, the Independent Business Network, a group established by prominent Brexit supporters, has urged Hunt to implement a bold strategy to stimulate the economy by reducing VAT and raising the threshold for income tax exemption.

The Government is expected to extend Energy Price Guarantee support in the Budget. Additionally, there are expectations that the Government will allocate £20 billion for the next two decades towards the development of carbon capture technologies.