Paul Aplin OBE reflects on the Spring Budget announcement
We invited renowned tax expert, Paul Aplin OBE, to share his thoughts on the announcement of the Spring Budget. As usual, Paul provides a simple breakdown of complex changes, and what they mean for the wider industry. We hope you find it useful.
I spent 40 years in practice and have sat through literally dozens of Budgets. In the very early years of my career, I was interested in the headlines and as my career progressed (and became more focused on taxation) the technical details. As I became more involved with ICAEW and CIOT, however, I started to become fascinated by the difference in perspective between discussions I took part in with HMRC and Treasury in London about tax policy and the actual, practical impacts of policy that I saw in my day job. That, inevitably, changed the way I approached Budgets. I’m less interested in the theatre surrounding the Chancellor’s speech than in what I am going to read after he sits down in the Red Book and OOTLAR (the Overview of Tax Legislation and Rates).
Backdrop
It is impossible to really understand the Budget measures without looking at the economic backdrop. That, effectively, is the canvas upon which the Chancellor can paint.
Public Sector Net Borrowing (PSNB) is forecast to be £114.1 billion for 2023/24 (£9.8 billion better than forecast a year ago) and is set to fall to £87.2 billion in 2024/25, £77.5 billion in 2025/26, £68.7 billion in 2026/27, £50.6 billion in 2027/28 and £39.4 billion in 2028/29. That falling trend is of course encouraging, but those of course are the amounts being added in each of those years to the existing National Debt. Many variables could blow these forecasts off track.
Three of those variables are inflation, productivity and growth.
The latest inflation predictions included in the Red Book show CPI inflation for 2024 coming out at 2.2% and remaining at or below 2% for the following four years. Low inflation directly impacts government borrowing costs (part of the reason for the better than forecast 2023/24 PSNB).
UK productivity has remained stubbornly low since the 2008 financial crash and the Red Book figures show it remaining low for 2024, but steadily improving over the next four years, though still to relatively low levels.
GDP growth is forecast at 0.8% for 2024, 1.9% for 2025, 2.0% for 2026 and 1.8% for 2027.
In framing the Budget, the Chancellor has three main interconnected levers to pull on: raising or lowering taxes, raising or lowering public expenditure and raising or lowering borrowing. The degree of friction in those levers and the extent to which they have to be pushed or pulled varies with the variables: inflation, productivity and growth.
My focus here is on the tax lever.
Pulling the tax lever - 1
For much of the Chancellor’s speech it was tempting to think that he was avoiding tax altogether. One commentator on Twitter posted a gif of tumbleweed on a desert road. But when the tax announcements started coming, some were radical.
No-one would have been surprised by the further cuts to National Insurance (the employee rate falling to 8% from 6 April 2024 and the self-employed Class 4 rate to 6% from that date). An alternative option would have been to cut income tax, but a 2% cut in income tax would have had a much greater cost than the 2% cut in NI. Cutting in NI also enabled the Chancellor to focus on earned income and therefore on driving productivity (the Red Book notes that the OBR forecast that, as a result of the reductions to National Insurance in this Budget, total hours worked will increase by the equivalent of almost 100,000 full-time workers by 2028-29. Combined with the impact of the NICs cuts announced at last year’s Autumn Statement, the OBR expects that total hours worked will increase by the equivalent of around 200,000 full-time workers by 2028-29). Remember that productivity variable.
Perhaps the first surprise was the increase in the VAT registration threshold to £90,000 from 1 April 2024. Business lobby groups welcomed this as a deregulatory measure while other commentators felt it was a step backwards, simply pushing the behavioural cliff edge a little further out.
The announcement that the rules for taxing non-domiciled individuals will move to a residence-based system from 6 April 2025 represents a very significant change. The remittance basis will be abolished. Individuals who opt into the new regime will not pay UK tax on foreign income or gains in their first four years of UK residence, provided they have been non-resident for the previous ten tax years. There will be some transitional arrangements including an option to rebase the value of capital assets to their value on 5 April 2019 and a temporary 50% exemption for the taxation of foreign income for the first year of the new regime.
There is also a proposal – on which the government will consult - to move to a residence-based regime for IHT.
Pulling the tax lever - 2
Another significant change was the announcement that the Furnished Holiday Lettings (FHL) regime will be abolished with effect from 6 April 2025. This will be a concern for many farmers who have diversified into FHL (often using roll over relief and in the expectation of Business Asset Disposal Relief – BADR - at some point in the future). It will also concern many in the hospitality industry.
Anyone with clients who have properties within the FHL regime will need to think about how the loss of reliefs will impact, particularly interest relief (which will change to the restricted regime for non-FHL letting), roll over relief, hold over relief and BADR. There are also pension premium capacity and capital allowances issues to consider.
The FHL changes will fuel a great deal of comment in the tax and financial press, but not – I suspect -as much as the changes to the High Income Child Benefit Charge. The charge has attracted criticism from the outset. In the Budget, the Chancellor announced that the charge will – from 6 April 2024 – be at the rate of 1% for every £200 above £60,000 income so that clawback will be complete where income exceeds £80,000. This is a significant change from the current regime where clawback begins at £50,000 and is complete where income exceeds £60,000. The controversy will be around the proposal to base the charge on household income from April 2026. This raises issues of principle when the tax system has been based on separate taxation of husband and wife for the last quarter-century and questions of practicality, as HMRC will need to have access to additional information to make this work.
Smaller levers
Some smaller tax levers were also pulled or pushed, including the change to Capital Gains
Tax (CGT) for disposals of residential properties which do not qualify for Principal Private Residence Relief. The upper rate of 28% will change to 24% from 6 April 2024 (though the lower 18% will not change). This applies to individuals, trustees and personal representatives. The 18% and 28% rates applying to carried interest will remain unchanged.
Stamp Duty Land Tax Multiple Dwellings relief (allowing a purchaser of multiple dwellings in a single transaction or linked transactions to calculate the tax based on the average value of the dwellings rather than their aggregate value) will be abolished with effect from 1 June 2024.
Another thing I noted in the small print was the fact that HMRC is modifying the requirements for the VAT DIY Housebuilders Scheme to allow HMRC to request invoices and other information, a need that was apparently overlooked when changes were made to the scheme last year.
In other news
Two other things stood out for me: one as something to be aware of, the other potentially fundamental for the tax profession.
The first was the consultation on the Cryptoasset reporting framework. It is a timely reminder that cryptoasset transactions may have tax implications. The Self-Assessment tax return CGT pages now specifically refer to them and under the reporting framework HMRC will receive third party information, a point clients need to be aware of.
The second thing is, as I have said, potentially fundamental. It is the consultation on raising standards in the tax advice market. It sets out three options for change (the status quo is not one of them):
Mandatory membership of a professional body, with the professional body responsible for maintaining, enforcing and raising standards
A hybrid joint HMRC/professional body model with professional bodies responsible for maintaining and enforcing members’ standards and HMRC responsible for those who are not members of a professional body
Regulation by a government body (effectively a new independent or existing regulator to monitor and enforce standards)
If you give tax advice in the course of a business and engage with HMRC on behalf of clients, I would advise you to read the document and share your views with your professional body or with HMRC. You can find it here.
And finally
Initially it may have seemed like a very low-key Budget speech in terms of tax announcements, but that changed halfway through. Some of the announcements will fundamentally change the UK tax landscape, both for tax professionals and for taxpayers.
