This years’ Autumn Budget will set out the next stage of the Government’s plan to “Build Back Better” and is rumoured to be a “technical budget”, which the Chancellor has said will aim to “continue to invest in public services and drive growth, whilst keeping public finances on a stable path”.
We already know that the Government will be implementing a new Health & Social Care Levy, which was announced in September. What could this Autumn Budget and Spending Review bring?
In this exclusive article, our experts give their views on the UK’s economic outlook, some of the changes expected to be announced in key sectors, and their potential impact on rebuilding the economy in a post-Brexit, and post-pandemic environment.
VAT & Energy Bills
The Treasury confirms no VAT cut on energy bills: The right decision but we should still cut VAT on hospitality.
It was announced today (26 October) that there will be no reduction in VAT on household energy bills in his Autumn Budget tomorrow. This was the right decision by the Treasury, however, a permanent VAT cut for the travel and hospitality sector would still be a much-needed move.
Cutting VAT on energy bills was not the best approach. The recent increase in domestic fuel bills will be best dealt with targeted subsidies rather than a VAT rate cut, as the government notes. In addition, if the Chancellor had cut VAT on energy, that would have been a bad message to send to the world’s leaders who will soon be arriving in the UK for COP26. We need policies that will reduce energy use not encourage it.
However, that doesn’t mean VAT should stay as it is. The tourism and hospitality industry ought to get a VAT reduction in the upcoming Autumn budget. The sector benefitted from a reduction in VAT over the last 15 months but is now seeing that advantage eroded, with the rate of 12.5% imposed from 1 October 2021, and a return to 20% from 1 April 2022. Lower VAT costs for hotels, restaurants and tourist centres encourage people to holiday in their own country instead of going abroad, boosting income across the whole nation and cutting down emissions from air travel.
Hospitality and Tourism - VAT needs to be reduced permanently
The Chancellor should reduce the VAT rate for the hospitality and tourism sector permanently and call off the return to 20% VAT from April 2022. Retaining a lower VAT rate is vital to the industry and would be a massive boost for the UK economy if we can encourage British people to continue to holiday at home. Retaining the 12.5% VAT rate can help to achieve just that. What’s more, many European countries already have a permanent reduced VAT rate for hotel accommodation, so this would further put the UK in line with peers.
Restaurants and pubs have already indicated that they will have to increase prices in order to pay for the VAT rise. The increased cost of importing food into the UK post-Brexit and the shortage of staff also means that firms have had to pay more to attract new employees and retain existing ones. Commitment from the Government to help solve the staffing shortages, would be welcome, for example, in the form of incentives to encourage businesses to recruit and train young people alongside a temporary amendment to immigration policy to help address shortages while the new workforce is developed.
With so much at stake, the time has come for a bold move to help the industry not only as it finds its feet post-Covid-19, but for its long-term future.
Read the full comment here.
Manufacturing – a challenging time ahead but there are measures that could help
What would be of benefit is a pause from increasing costs on businesses to let the current changes settle in so that businesses can get a true idea of what the changes are doing to their ability to compete both in domestic and international markets. The Government should also be aiming to tackle shortages in labour supply in certain sectors and go beyond temporary measures. An increase in targeted tax reliefs could offset some of the tax burden being placed on manufacturers. The Government should seek to resolve the trading issues which exist between Great Britain and Northern Ireland.
Read the full comment here.
Green Energy & Sustainability – there is scope for change
The Chancellor’s Budget is taking place a few weeks before COP26 and it would be very surprising if there was no mention of green initiatives. There are traditionally three ways in which Government tries to change behaviour:
- Taxation
- Regulation
- Incentives.
The tax take from green taxes such as climate change levy, as a proportion of total taxes paid in the UK, is lower now than it was a decade ago. Several green incentives have been either limited in their scope or withdrawn entirely, for example the Green Homes Grant designed to cut greenhouse gasses from older housing stock.
Businesses are rightly so coming under increasing pressure in their supply chain to demonstrate their green credentials and drive carbon footprint reduction. For many there is a significant cost of engaging consultancy advice and investing to make change. The pay back periods on current equipment costs, added on to initial outlay on fees, is for many a step too far coming off the back of Covid, when many businesses have seen significant challenges to cash and funding. I would love to see the Chancellor offer funding for exploring greener options and loans to acquire equipment that gets paid back in line with the rate of return. Businesses still need their normal ‘lending capacity’ and cash reserves to protect the daily trade. The Super Deduction for capital allowances is great but sadly businesses do not see the cash benefit until 9 months after the year end with a lower tax bill.
The Chancellor has scope to raise existing green taxes or reintroduce green incentives to the UK market, potentially as a way of boosting capital investment.
Employment Tax – what else could be in store?
The Prime Minister has previously said that he does not want to raise taxes, but there is a lot of debt to pay, investment to make and as we go into Winter more potential uncertainty.
With the freeze of allowances and the new levy (NIC), a lot has already been done and so when it comes to taxing employees and employers any increase in taxation is likely to be at the margins and possibly for some point in the future. Benefit in kind taxation on electric cars is set until April 2025 but could then go up dramatically from 2% of list price to 5%, with incremental steps to get it to 15% by April 2030. But that would not raise a significant amount of money.
Rather than increasing taxation, reducing tax relief on pensions might be introduced, having been mentioned so many times in the past, moving to a flat rate of 25% or even 20% would generate potentially significant revenue, without increasing the rate of tax and impacting only the more highly paid. However, this is probably not the time for the Government to mention any ‘replacement’ taxes to combat the reduction in road fund licence and fuel duty from the move away from petrol/diesel cars to electric.
Construction & Real Estate – there are several measures that could benefit this sector
There are several measures that the Chancellor could announce that would help developers, encourage sale of homes, meet the sustainable agenda, reinvigorate town and city centres, and treat more fairly those trapped in unsafe multi-occupational buildings. Savings in the Spending Review may prove hard to come by as the Government has been supporting UK construction with its investment in civil infrastructure, which is popular amongst the regions.
Some of these measures could be:
Read the full comment here.
Consumer sector – the Chancellor needs to build consumer confidence
Despite the pressure to balance the books, it is key that the Chancellor does not dent consumer confidence through tax increases, at a time when people are already struggling with sharp increases utility and food prices. A reduction in disposable income will only lead to a ‘battening down of the hatches’ in respect of consumer spending, which will have a knock-on effect on the economy.
A few areas where the Chancellor could focus:
- Reduce, even on a temporary basis, APD. The argument being that a reduction would stimulate demand and keep more people in jobs. The Chancellor’s response would be that he needs as much tax as possible to pay for the pandemic.
- Extend business rates relief – this doesn’t help homeworkers but will help those with shops and offices whose running costs are higher.
- Continue support for apprenticeships; currently the £3k per person support has been extended from September to January next year but is planned to end at that stage.
- Continue support for the Kickstart scheme for 16-18 year olds.
- Continue support for grants available to SME’s as we slowly recover from 18 months of no business.
Even if only a well needed temporary measure, we will eventually have to pay the piper. The Job Retention Scheme is thought to have cost £69 billion and government borrowing for the fiscal year to 2022 is forecast at over £200 billion. However, even a 12-month reprieve would make a massive difference.
Not for Profit & Education – the Autumn Budget should help these sectors to “level up”
All those in education, whether in schools, colleges or higher education, will be holding their breath regarding sector funding and the results of the Comprehensive Spending Review. With the major government focus on NHS spending, although supported by hypothecated national insurance rises, the concern is education spending could lose out, particular given that the new Secretary of State for Education will have had little time to influence Treasury thinking, since his recent appointment.
But with education and skills so important to the “levelling-up” agenda, and concerns that the “catch-up” funding announced earlier this year for schools was much lower than schools’ experts demanded, the sector will be hoping for at least an inflation-matching deal.
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