Sunak's Speech to the House, November 2020
As hospital doctors what can you expect from Sunak’s address to the House this week? An expectation of increased taxes to pay for the round of public spending announced is my prediction – but not just yet.
We have officially now entered an economic emergency. To counter-act some of the anticipated downturn from Covid and Brexit (the effects of which have not really hit), the government plan for recovery appears to hinge on increased expenditure on infrastructure. They hope this will create jobs for those who have lost them during this unprecedented policy of enforced business closure which has decimated small and medium businesses, although some of the larger concerns have done extremely well. Sunak states they are committed to “creating jobs, growing the economy, increasing pride in the places we call home”.
And then he delivered the costs. This year the amount spent tackling the virus has amounted to £280bn in support through schemes to uphold the economy and keep people in jobs using the furlough and self-employed schemes plus all of the grants and loan facilities made available. Next year they are budgeting for a further £55bn of which an initial £18bn has been allocated for PPE, testing and vaccines.
It is forecast that the economy will contract by 11.3%, the largest fall for more than 300 years, with a slow recovery taking until at least 2025, although the effects of Brexit are still largely unknown. Sunak repeats the devastating news that even if we come out of the lockdown measures early next year “the economic damage is likely to be lasting. Long-term scarring means, in 2025, the economy will be around 3% smaller than expected in the March Budget”.
All of this bad news results in the UK’s forecast for borrowing calculated at £394bn for this year alone, equating to 19% of the GDP. Next year borrowing is predicted at £164 billion next year, £105 billion in 2023, then remains at around £100 billion. In total by 2025 including predicted deficits, the underlying debt will amount to a staggering 97.5% of GDP. Even the government admit that these numbers are huge but they believe “the costs of inaction would have been far higher” albeit providing no comparisons.
Unemployment is also predicted to rise to 7.5% translating into 2.6 million people by next summer although £3bn has been provided to be spent over the next three years on a Restart programme for those who have been out of work for more than a year. Presumably this will include those graduates who lost their jobs before they even started this year – we await the detail. The BBC reported that research by UK-based graduate jobs website Milkround shows just 18% of graduates are securing jobs this year compared to the typical 60% and that salaries will be reduced and work more likely to be part-time or short-term contracts. However this spending plan intends to increase places on offer for further education with £291 million to pay for more young people to go into further education and £375 million for the Prime Minister’s Lifetime Skills Guarantee.
There will be no across-the-board pay-rises for the public sector next year as the disparity between public sector jobs and wages is widening as the private sector is continuing to be badly hit by the effects of the pandemic. Private sector wages fell by 1% overall compared to the public sector’s rise of 4% and the majority of job losses has been sustained by the private sector with reduced hours, furlough scheme claims and redundancies. This has not been the case in the public sector. Doctors and nurses working frontline in the NHS will however be rewarded with pay-rises and the 2.1m public sector workers earning less than £24,000 per annum will receive an increase of at least £250 – after tax and NI net take home pay each month will be £14.17 higher.
The good news is that the devastation to public services caused by austerity may be addressed in part with total departmental spending next year rising in real terms by 3.8% to £540 billion. Sunak announced that this is “the fastest growth rate in 15 years”. The NHS will see their core health budget grow by £6.6 billion, in part to deliver 50,000 more nurses and increases of £2.3bn to planned capital investment. This will facilitate new technologies to improve patient and staff experience; replace ageing diagnostic machines like MRI and CT scanners; and fund the building of 40 new hospitals and upgrading 70 others. With almost £15 billion earmarked for research and development and the introduction of a new immigration system ensuring the “best and brightest from around the world come here to learn, innovate and create”, Sunak announced “We’re making this country a scientific superpower”.
There was a good deal more about spending to increase police on the streets by 4000 and on the defence budget, but woefully the current climate means we are being forced to cut overseas aid from 0.7% of our national income to 0.5% (£10bn) – although this is still in excess of the vast majority of the 29 countries on the OECD’s development assistance committee – who average just 0.38%.
“The incalculable but essential parts of our future… must come from each of us, and be shared freely, because the future, this better country, is a common endeavour” are words which should ring alarm bells. You may be wondering from where all this money is coming and it is in this phrase we shall find the response particularly when on current tax receipts, the OBR revises its forecasts down by £101.9bn. Their indications show that for the UK to start to rebalance its books the size of tax rise (or spending cuts) required will be between 1 and 4% of GDP. This is a substantial adjustment.
On the horizon for hospital doctors operating private practices it is the review of Capital Gains Tax by the Office of Tax Simplification (OTS) which should cause the most concern. Their remit from government was to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.’ Their consultation revealed a four key areas in which Capital Gains Tax (CGT) distorts behaviours leading to barriers for economic growth and a more equitable society. HMRC revealed that £8.3 billion of Capital Gains Tax was paid reported by 265,000 individual UK taxpayers compared with £180 billion of Income Tax paid in that tax year by 31.2 million individual taxpayers. This equates on average to £32,000 of CGT per taxpayer compared to £6,000 of Income Tax (IT). The four areas are summarised as follows:
Rates and boundaries: The disparity in rates between CGT and IT was found to distort business and family decision-making and to create incentives for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains. This is something on which we advise a balance to create a dividend strategy for distribution, retention of some working capital for such unforeseen circumstances as we are currently facing; and short and long term investment policies to assist the company to grow which may include the stock market and income generating joint ventures.
Business reliefs: Some business relief is available at the point of investment which includes VCT, EIS, and SEIS offered to stimulate business investment and risk-taking but it is where owner-managed businesses are able to control the flow of earnings from trades to avoid large IT liabilities and resulting in the accumulation of retained earnings, which is of real concern to a government looking to raise taxes, equalise the burden and share wealth more equitably (at least at the middle tier levels). This blurring of boundaries between what are legally considered earnings versus capital returns is encouraging the government to consider replacing Business Asset Disposal Relief (BADR) - formerly Entrepreneurs’ relief - with a relief more focused on retirement. The two key areas where the OTS considers the boundary is under pressure are the use of share-based remuneration (for employee share schemes), and in smaller owner-managed companies where business owners are taxed at lower rates if they retain profits arising from their personal labour within their business and the attempt to realise the benefit on sale or on liquidation, compared to withdrawing these profits as dividends. One approach suggested would be to tax some or all of the retained earnings remaining in the business on liquidation or sale at dividend rates. At present HMRC struggle to identify previously profitable businesses which have restricted the payment of dividends over the trading life and used the company as a saving for retirement umbrella. Whilst the anti-avoidance (pheonixing) and commerciality (cash boxing-in) rules should apply, it is difficult to tackle because HMRC no longer have the resources to cope. They do have clearance procedures in place but these are not mandatory and are often ignored with chances being taken through the personal self-assessment returns including the final pay-out from the liquidator as having BADR available (in effect shifting the boundary between CGT and IT). Such action to capture retained earnings upon retirement or sale, could make the treatment of cash taken out of the business during and at the end of its life more neutral.
Annual Exempt Amount: The Annual Exempt Amount (currently at £12,300 each per annum) can distort investment decisions. In the fiscal year 2018, around 50,000 people reported net gains just below the threshold and this has been used effectively to transfer small amounts of assets. Many hospital doctors who are owner-managers wishing to involve their families in the company, will use the annual exemption to manage the passing on of shares, usually by way of sale to dilute the potential effect of the settlements legislation, but nonetheless if this was reduced greater levels of administration would arise in dealing with the transfer of assets. If government policy is to operate as an administrative de minimis removing individuals from the self-assessment regime, it is likely it would consider reducing the level of the AE, however if policy is to encourage individual investment into the stock market, then reducing the AE would be a disincentive to such small scale activity. It would be useful to know the level at which individuals such as hospital doctors who may have some excess funds with which to invest, use the AE to augment their portfolios.
Interaction with lifetime gifts and Inheritance Tax: CGT rules incentivise individuals to transfer business and personal assets to others on death rather than during their lifetime because of the uplift on the values to current upon death. This is unlikely to be good for business, the individuals or families involved, or the wider economy as asset wealth builds up within an aging population and is effectively not being utilised to further stimulate economic growth.
It may be that any tax increases will be suppressed until April 2022, when the current health circumstances are behind us (hopefully) and the focus is purely on the economic recovery and how we share the burden of debt and the fall-out from Brexit. Consideration will also be given to the timing of the next general election in 2024 so that any extreme measures taken will have had a positive effect. Timings may be uncertain but as the old saying goes, tax itself most certainly is not!