Spring Statement 2022 – will Sunak need to make a U turn?
Becky Maguire, partner at Azets has shared her predictions for Wednesday’s budget.
The Chancellor Rishi Sunak will deliver his Spring Statement this week. With Covid restrictions now lifted he may have been looking forward to a clear platform to focus on growth, productivity and building back the UK economy for the 21st century. But he has an extremely difficult task in front of him trying to balance the UK’s books as well as address the hit to household real income in light of current high inflation (which could rise to 7% in May) and soaring energy costs. The ongoing Ukraine conflict is also compounding matters with a knock-on impact on food prices and fuel costs and with the US Federal Reserve increasing interest rates for the first time since before Covid, the Bank of England has also followed suit and raised interest rates in the UK by 0.25%. This is in addition to the planned National Insurance increases that are to take place on 6 April. Against this backdrop, will Sunak be forced to make a U-turn?
With Rishi Sunak saying over the weekend that his priority over the rest of the Parliament is to “cut people’s taxes” and the increasing pressure on the government to respond to the current cost of living crisis, it is looking very likely that this Wednesday’s Spring Statement will include some tax cuts or other support for households and businesses.
The Chancellor has a few levers to pull to help deal with spiralling costs – and he may need to do so if, as both the Prime Minister and the Chancellor have said, the planned national insurance increase is to go ahead.
There could be further changes to the universal credit taper relief to allow people to keep more money as earnings increase. He could look again at the personal tax allowance and reverse the freezing of the 0% band to help move those on lower incomes out of the tax net. He could also make the energy bill more generous and there have also been calls for a cut in fuel duty as fuel prices have soared in recent weeks. Other European nations, such as France, Ireland and the Netherlands have cut fuel duty in an attempt to shield households and businesses from these rising costs.
The issue the Chancellor faces is to assess whether any such measures are affordable so quickly after so much support spending on covid.
Focus on growth
In the recent Mais lecture, the Chancellor spoke about “a different vision for our economy, the future economy we must build. An economy where businesses are investing more, where people of all ages are supported to learn and most importantly, where ideas and innovation constantly transform our lives”.
The Chancellor also recognised that we need “to be bold and focused” and adopt a new culture of enterprise. As part of this agenda he highlighted three priorities:
- To encourage a greater level of capital investment by businesses
- To improve the technical skills of staff at work
- To create an innovative economy by driving business investment in research and development
But will the Chancellor be able to act boldly on this vision now given the domestic and international backdrop?
In my view, there are a number of tax areas that the Chancellor could focus on.
Research & Development – As noted above, we need to create an innovative economy and maybe now is the time to improve the R&D tax relief as part of the Government’s ongoing review which would be positive for businesses. Some reforms have already been announced, however, should the relief be extended so we are able to attract more investment from overseas which focuses on new / green technologies in the UK? Any proposals should also make the relief even more attractive for all forms of R&D to be carried out in the UK for all sizes of business.
Capital expenditure tax relief – whilst it was a bold move and one which has certainly benefitted many businesses, the Super Deduction for Plant & Machinery which runs from 1 April 2021 to 31 March 2023 has been criticised as not encouraging businesses to plan for long term capital investment. The government could make this accelerated tax relief permanent or extend it for a much longer period. It could also consider keeping the “super” element being the additional 30% tax relief only for green and sustainable technologies to support the transition to net zero and pivoting existing reliefs like the structures and buildings allowance (currently at 3%) with a higher relief for sustainable buildings.
Supporting green choices – tax policy has supported the move to electric and low emission vehicles in recent years with the zero or low Benefit in Kind charges and accelerated tax relief for businesses for vehicles and associated infrastructure. Again one criticism has been the lack of a long-term plan to support businesses and individuals in making this switch and supporting the phase out of new petrol and diesel vehicles by 2030. Now is the time for a long-term and wide-ranging review of how the tax system can support this transition.
VAT – As we are no longer in the EU the UK government can make changes to indirect taxes to meet short, medium, and long term needs and goals. The reduced rate of VAT for certain supplies in the leisure and hospitality sectors will end in April and it could be extended for an additional period – at least 12 months.
Cost of Living Support – At Azets, we focus on advising SME’s and we are dealing with business that have survived Covid, the significant increase in logistic costs post Brexit, and are now dealing with the ongoing increases in energy costs, – which for some will be the final straw – unless there is further government support. The VAT and duty rate of fuel and power could be reduced for both domestic and commercial supplies of electricity and gas – the same action could be extended to petrol and diesel. This would help to reduce costs incurred by businesses and could help to slow down the rising cost of living in the UK. This would also help to cushion the cost of rising fuel and power costs for individuals.
In my view, the Chancellor needs to be bold to protect households and businesses in the months ahead. But he also needs to be bold in pushing forward on measures to support green growth via capital investment and R&D. Whilst the Chancellor may have been hoping for a quieter domestic and international backdrop to focus on longer term policies, the question is, if not now, when?