Accountants give their views on how to fill the £22bn gap

The government must raise money, but does it have to come from taxes?

Labour spent much of the election campaign promising the public they would not raise taxes on ‘working people’, including income tax, national insurance and VAT. But shortly after forming a government, the new chancellor Rachel Reeves announced they’d discovered a £22bn gap in the UK’s public finances, so would have to look at tax increases after all.

The announcement made just three weeks after the election created alarm in the business community and among the general public. Since then, speculation has been rife as to how the government are likely to address the £22bn shortfall and which taxes they could target.

The Autumn Budget is not expected until the end of October, but PM Keir Starmer has repeatedly made it clear that ‘tough decisions’ will need to be made.

Independent thinktank The Resolution Foundation recently told The Guardian that tax rises are often increased in the first budget of a new government, although these increases will need to go further to address the deficit. The thinktank has put forward its own recommendations such as raising capital gains tax and inheritance tax as well as national insurance.

The tax areas the chancellor is likely to look at could include:

• Capital Gains Tax.
• Inheritence tax.
• Business rates.
• Stamp duty.
• Business Asset Disposal Relief (formerly Entrepreneur’s Relief)

So what do accountants think? We asked three accountants which fiscal areas they believe the government should target – if any – to help raise revenue.

Target tax avoidance schemes and the unregulated umbrella companies market to recoup

Paul Newsham, Chartered Accountant, CEO, Payroll Compliance Authority (PCA)

Based on what has not been ruled out in previous pledges, it seems probable that Capital Gains Tax and inheritance tax might be targeted, as well lump sum pensions. Entrepreneurs’ Relief could be another victim.

Aside from the difficult and unpopular move of increasing taxes, Reeves should take a harder stance on tax avoidance to recoup money that should rightfully already be in the pot. For example, cleaning up the umbrella company market.

A lack or regulation of payroll firms operating within the assignment-based contractor supply chain, known as umbrella companies, has led to widespread non-compliance in the sector with a significant number of these companies operating tax avoidance schemes. As well as cheating HMRC out of taxes owed, it’s the workers across a range of sectors, including education and healthcare, who are then at risk. They could find themselves in receipt of an unpaid tax bill that they cannot pay.

Cracking down on illegal activity through regulation is the obvious solution. It would protect workers, which fits with government pledges, and it would recoup some of the glaring public funding shortfall. A form of regulation via a due diligence regime was mooted by the previous government and I expect is still in the pipeline, but we have not had any update on this since Labour came into power.

Verdict: Take a harder stance on tax avoidance schemes such as the umbrella company market.

Preferential rates for entrepreneurs are essential

Stephen Gibbens, Director, Accountech Solutions

The Labour Government is saying their number one priority is growth. To achieve this, they need to encourage technological progress and innovation.That means increasing R&D expenditure and encouraging more people to become entrepreneurs, inventors and scientists and create tech startups.

Ways to do this would include:

• Preserving or improving existing incentives such as EMI options and R&D tax credit relief.
• Protecting the SEIS and EIS tax incentives that encourage investors to invest in tech start-ups.

It seems inevitable that Capital Gains Tax will increase but if it does, there needs to be relief like the current Business Asset Disposal Relief (once called Entrepreneurs’ Relief) which gives a preferential rate for entrepreneurs selling their businesses. To do otherwise, would change the risk-reward balance for entrepreneurs and risk causing the opposite effect to what is intended.

I’m fairly neutral about which other taxes the government increase as they will just divide the “economic pie” in a different way.  Just don’t increase taxes that discourage innovation and shrink the pie!

Verdict: Increasing taxes will discourage innovation and will only shrink the ‘economic pie’, so reliefs for entrepreneurs are essential.

There are likely to be increases in inheritance tax, capital gains tax and an introduction of a wealth tax

Rebecca Jones, Corporate Tax Director, Dains Accountants

The government has said it won’t touch income tax, VAT and NICs while the Resolution Foundation have said the government should increase capital gains tax. If this happens, capital gains tax could rise to levels of income tax rates.

We also predict inheritance tax reliefs such as business property relief could be reduced or restricted and stamp duty may also be targeted. A wealth tax has been rumoured, too. However the implementation of this would be a huge change and could come with a number of variations, for example, who would it target? What would the rate be?

Given that we expect capital gains tax to be the main driver of tax increases, there may also be a focus on addressing the shortfall through other reciprocal schemes, such as increases in reliefs for business owners. An example of this is business asset disposal relief, which was previously set at £10m (when it was known as entrepreneurs’ relief), but it now stands at £1m. These business incentives can help to encourage investment in the UK and create favourable conditions for businesses and entrepreneurs to stay.

Verdict: There could be increases in inheritance tax, capital gains tax and an introduction of a wealth tax.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected].

Annie Makoff is a freelance journalist and editor.