What tax changes might John Healey introduce in his Budget on 28 October?

It is early days in the new Burnham administration and we don’t have a clear idea of what tax changes to expect in the Budget on 28 October. Andy Burnham has talked boldly but acted modestly on measures so far. John Healey is an unknown quantity as Chancellor but is talked about as a safe pair of hands.

Parliament has been in recess for Andy Burnham’s premiership so far. Its return may change the pattern set to date but my sense is that the Labour MPs are going to follow Andy Burnham’s lead for now. That suggests that the Budget needs to send the desired political messages, raise some more tax revenue but not scare the horses. The economic background isn’t easy, with weak growth, higher borrowing costs and not much room for manoeuvre.

What could the Budget look like?

I’ve taken a keen interest in Budgets for well over 40 years. It’s probably nearer 50 but my earliest recollection is having to re-price the beer and cigarettes in my parents’ hotel bar by 6pm on Budget Day. Those were different times and they highlight how the focus has changed over the years but what hasn’t changed is that forecasting Budgets is a mug’s game – but here goes.

I don’t think that Andy Burnham’s government will introduce a wealth tax. It is unlikely to raise much reliable money quickly and would be a distraction from other things that he wants to achieve. However, his aim will be to control the political narrative and to satisfy those members of the Labour Party, Reform and the Green Party who are keen on the idea of a wealth tax.

How could that be achieved? A number of tax changes could be introduced which are presented as a better way of taxing wealth than currently without the need to go through a complex process of trying to design and implement a dedicated wealth tax.

These changes could comprise:

• Taxing more capital transactions as income tax rather than to capital gains tax. This could increase tax revenue without increasing the capital gains tax rate. In particular we are concerned about changes to a number of transactions involving business owners and I’ll return to that below.
• Imposing capital gains tax on death to encourage wealth transfers in lifetime and so increase the tax take from that tax. This would make capital gains tax harder to avoid and might satisfy some of the critics. Effectively it amounts to getting rid of the probate cost uplift on death but with hold-over relief available where business assets are concerned.
• Taxing investment income more by pushing up the tax rates on savings and dividends marginally, perhaps by tidying up some of the current complicated tax rates and presenting this as tax simplification.
• Other measures might include putting a cap on the amount that can be treated as gifts out of income for inheritance tax in any given financial year, reducing the cap on tax-free cash from pension schemes, capping the amount of money that can be held in ISAs and further taxes on higher value homes.

Those measures probably don’t raise much hard cash and what they do raise will probably take some time to come through. They might be accompanied by some increase in capital gains tax as well. However the Office for Budget Responsibility is unlikely to attribute much additional tax revenue to an increase in capital gains tax rates. That means that increasing the main capital gains tax rate is not particularly attractive to the government, especially as it would give rise to negative headlines and Andy Burnham is trying to present a more business friendly approach.

What might raise more money then?

The government could look to increase the rate of National Insurance paid by the self-employed and this appears to fit with this government’s priorities. The justification would be to discourage perceived unfair exploitation of workers by encouraging self-employed status over employed status.

More pertinently, a focus might be on partners in LLPs where it is perceived that employment is disguised as self-employment to secure tax advantages. Whilst there have been some anti-avoidance rules on this for over a decade they are not very restrictive. In the last few months the courts have given their verdict on the operation of these tax rules and the government may decide to revisit them.

Tax Policy Associates suggested in July that applying something closer to employer’s National Insurance to professional partnerships could raise £1bn to £2bn. That would get pushback and it is understood that Rachel Reeves looked at this last year and decided against it. It does look like a potentially significant source of tax revenue although behavioural changes would follow including likely restructuring of a number of firms. It would also be close to home for many of us.

Other tax raising possibilities might include increasing the levy on banks, perhaps by reversing earlier reductions in the bank surcharge, and possibly increasing taxes on oil and gas extraction, although how much higher can those taxes go?

I can imagine that Andy Burnham would like to show a symbolic increase in the personal allowance, but this might only be £100 or £200. The Centre for Economic and Business Research has estimated that even a £500 increase in the personal allowance could cost about £5bn a year. That probably explains why the idea may be attractive politically but hard to afford.

Overall, I think it is likely to be a quieter and less showy Budget than some might expect, with a number of technical changes, consultations and roadmaps. I also anticipate John Healey trying to show at least some reduction in government spending, although this may well be modest.

Tax revenues are likely to need to be increased by at least £5bn a year, with perhaps £2bn in tax giveaways and some bearing down on government expenditure in the forecasts. That’s my current ball-park view but I may be way off and the Budget is still two months’ away.

What should owners of family companies worry about?

HMRC is concerned that, based on their figures, too many small and medium-sized companies are not paying as much tax as HMRC expect. Making Tax Digital (MTD) is part of a programme to gain more information on smaller businesses. For companies, there seems to be an HMRC perception that loans are taken from companies instead of taxable income and that compliance with company law is poor.

There are a number of consultations in place by HMRC and other government departments that focus on this, including what is taxed as dividends and how money can be extracted from companies. This is likely to involve tightening a number of existing tax anti-avoidance rules to make them harder to escape from. That also sits alongside a desire to accelerate tax payments.

HMRC is particularly focusing on the following transactions:

• Capital distributions on a members’ voluntary liquidation
• Share buy-backs
• Preference share redemptions

The impact of changing these would be to make succession planning harder for businesses and to mean that money taken out of a close company is always likely to be taxed as income. It will make passing on family businesses harder and encourage more private equity and debt backed exits.

Our message to business owners is not to panic, but not to ignore what’s coming either. I expect the Budget to be more about direction of travel than immediate upheaval. The real risk is that a series of technical changes make it harder to take money from companies, pass ownership on and plan succession in a sensible way. That will mean that it is more important than ever to plan ahead. We are ready to advise.