When Frank Sinatra first uttered the words “the best is yet to come”, the UK’s fiscal strategy probably couldn’t have been further from his mind. But the words ring true after a spring statement that did little to make life any easier for those of us who make a living trying to read the Chancellor’s mind.
The short-term focus was, of course, the cost of living. After weeks of looking like he would stand firm, pressure to soften the blow of rising inflation, energy prices and national insurance was too great to ignore completely. But as for the Chancellor’s longer-term strategy, the hints were few and far between.
The ears of tax advisors across the country pricked up when Sunak announced that he had a new “tax plan” but we were left with a relatively scant but nicely branded document that did little to help us read the tea leaves, and a set of HMRC proposals on some quite specific changes to capital allowances and R&D incentives that wouldn’t quite meet the ambition of a tax plan.
We heard nothing about addressing the various cliff edges that thresholds create in our tax system – in inheritance tax, stamp duty or indeed the Organisation for Economic Co-operation and Development’s (OECD) proposed global minimum tax. The imbalance between how we tax employment income compared to those that receive a pension or rental income also went unaddressed. In fact, raising the threshold for national insurance while not lowering the lowest income tax band until 2024 will widen this gap.
The Chancellor left few breadcrumbs behind for us to follow, aside from maybe a very early picture of how he wants to tax businesses. We didn’t get a complete vision – far from it – but there were some indicators as to how the “Brand Rishi” corporate tax system could take shape.
With that in mind, the references to the US tax system in the speech were far from throwaway comments. Sunak’s preference seems to be for a high headline rate, keeping the hike in corporation tax to 25 per cent next year, but compensating for this by narrowing the tax base.
Just like the longstanding tax policies used on the other side of the Atlantic, the Chancellor’s approach is to deploy very targeted reliefs to reduce the otherwise quite high tax burden on those businesses or sectors that he perceives deserve or need it. This was consistent with the targeted relief and additional funding doled out in the last year’s Autumn Budget.
It’s hard to say for certain whether this foreshadows the Chancellor’s plans to redesign the tax system as a whole, but this approach of picking winners is certainly not new for this government.
It’s reminiscent of other areas of the strategy as well – designating a select group of new freeports or naming specific towns for special attention in the Levelling Up White Paper, for example.
It’s an approach that has stood the test of time in America, but one that adds huge amounts of complexity – if you think our tax system is complicated, wait until you see (and weigh) the global deforestation threat that is the US tax code.
The advantage it could have is to give the Chancellor the flexibility to manoeuvre his fiscal levers in ways that help achieve the Conservative Party’s political objectives. An election is not that far away, and the Government will want examples of Levelling Up in action and Brexit benefits to demonstrate to its newly acquired voters – both of which have facets that could be accelerated through smart allocation of tax carrots and sticks.
Overall, the tax changes introduced in this Spring Statement were necessarily reactive and, as such, it is difficult to put a finger on any kind of unifying philosophy behind the tinkering the Chancellor has engaged in so far. We know that Sunak wants to be a “low tax” Chancellor, but exactly how he plans to do that is far from clear.
Perhaps his moves to emulate the American system are a stop-gap approach until the Office for Budget Responsibility’s forecasts start giving him the confidence to materially lower taxes. Or perhaps this penchant for “picking and choosing” is itself the green shoots of his long-term strategy.
Given the current political and economic climate, both at home and internationally, it’s not surprising that a lot of difficult decisions around tax have been deferred until the autumn. The likely onslaught of government consultations arriving over the next few months will give us a better inkling of what’s in the Chancellor’s mind.