The Treasury is rumoured to be considering an ‘Amazon tax’ on big tech to recoup some of the UK government’s significant extra spend during the Covid-19 pandemic. But as the spring budget approaches, we look at some other areas under threat from the ‘tax man’.
As a sector, technology – and particularly online retail – has benefited from restrictions in place during rolling lockdowns over the past year, which continue to limit the public’s ability to visit physical stores.
As an isolated example, Amazon saw net profits almost double in 2020 to $21.3bn, up from $11.6bn in 2019.
This came against a backdrop of crisis (and in some cases closure) for many other household names, including Debenhams and the brands owned by Philip Green’s Arcadia Group: Topshop, Dorothy Perkins, Burton and Miss Selfridge.
At the same time, in an attempt to support individuals, businesses and the wider economy, Prime Minister Boris Johnson’s Government, spearheaded by his Chancellor Rishi Sunak, rolled out small business grants, a furlough scheme and a plan for jobs. According to estimates from the Office for Budget Responsibility, the Government’s borrowing will hit £394bn this fiscal year (April 2020 to April 2021). This compares with forecasts for borrowing of £55bn prior to the pandemic and would be the highest peacetime spending ever recorded.
While an online shopping tax and/or excessive profits tax – both being considered by the Treasury apparently – could help to correct the balance for bricks-and-mortar retail, and provide a much needed boost to the Government’s coffers, it is unlikely to be sufficient on its own.
Wise up on taxes
Whatever Sunak says, there are likely to be some changes to our tax system to aid the Government in clawing back some of its surge in spending. Nothing concrete has been announced, although investors should stay alert for any early ‘leaks’ from the Treasury, if previous years are anything to go by.
In the meantime, it would be wise to review exposure to some obvious reform candidates and maximise this year’s allowances where possible.
Capital Gains Tax – The Office for Tax Simplification has recommended an overhaul of Capital Gains Tax on property, which includes reducing the capital gains tax-free allowance and bringing Capital Gains Tax in line with income tax rates. While nothing has been announced just yet, this could make selling your investment property more expensive in the future. This would also impact owners of direct stock investments. Gains on investments should be actively managed to ensure that the annual CGT allowance is utilised each year to keep gains in check and mitigate exposure to the tax if you need to make drawdowns in future. You do not want to find yourself hampered by huge gains that make liquidating funds inefficient with gains being eroded by punitive tax bills down the line.
Income Tax – Possible increases to the higher and basic rates of Income Tax, and reductions in the thresholds. Income Tax exposure can be reduced by maximising the use of ISAs and pension contributions.
Inheritance Tax (IHT) – The simplest way for the Chancellor to remodel would be to decrease the Nil Rate Band (NRB), which allows a person to pass on up to £500,000 worth of assets untaxed (including £175,000 allowance on their main residence), and/or increase the rate at which IHT is payable, currently 40% over the NRB. To mitigate possible rises individuals should address succession planning sooner rather than later.
Pensions Higher-rate and additional-rate taxpayers may have something to fear in the coming budget given speculation that this might be the one when the axe finally falls on the top two rates of tax relief on pension contributions. These reliefs are valuable. If the top rate of relief is taken away and limited to basic rate, then the cost to an additional rate pension saver will rise from £55 to £80 for every £100 of personal contribution made. It makes sense therefore to use this year’s full allowance if you can, and to consider boosting contributions through ‘carry forward’ if that option is available to you. Carry forward allows you to make pension contributions in excess of the annual allowance by utilising any unused contribution allowances during the three previous tax years, provided you were a member of a registered pension scheme. Total contributions, cannot exceed your net relevant earnings in the current tax year.
Church House Investment Management is not authorised to provide tax advice. The above contents are for information only and do not constitute advice. Before taking any actions relating to your personal tax arrangements you should seek the advice of an authorised professional. As authorised investment advisers we can work in tandem with your tax advisers to help maximise the tax efficiency of your investments. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future. performance.