The UK's Tax Environment and the Implications for Businesses Ahead of the Autumn Statement

We are currently living in the mostly highly taxed environment that the UK has experienced since the 1940s*, with tax revenue set to total ~37% of national income by the time of the next general election. This high tax-revenue environment is uncharacteristic of a typical Conservative government; what’s more, HM Treasury believe that the tax take should be even higher.

With a general election looming, the government may consider changes to certain tax rules. However, it is anticipated that any changes they do look to implement ahead of a general election are likely to be in the pursuit of bolstering voter support, and will avoid substantial alterations to the system. It is improbable that any changes would result in a meaningful reduction of taxes at this stage in the parliamentary cycle, bearing in mind the limitations of the Chancellor’s own fiscal rules.

In this article, looking into the UK’s tax environment and the tax gap, Price Bailey’s Head of Tax, Richard Grimster, discusses the latest tax revenue data from HMRC and considers current trends HMRC are employing to bridge the tax gap. In addition, in light of the Autumn Statement upcoming on the 22 November, 2023, he also considers what may be expected announcements on the day.

The latest tax revenue figures – October 2023

HMRC announced on 20 October 2023 that for the time period April 2023 to September 2023, total tax receipts received amounted to £392.5bn; £23.1bn higher than the same period in 2022.

While this data currently remains provisional until the HMRC Annual Reports and Accounts (ARA) is published in the summer of 2024, the significant increase in tax paid in the first half of the current tax year (2023/24) will not come as a surprise to many. The increase in the main rate of corporation tax from 19% to 25% in April of this year, coupled with the effects of fiscal drag and frozen allowances has resulted in a better inflow for the Treasury year on year. This increase in absolute taxation receipts is notably below most measures of inflation for the same period, as falling demand and unemployment affects tax receipts adversely and more immediately than other factors. With well reported low/no growth in UK GDP, and with high government borrowing, there are unlikely to be real net positive changes for the population so far as tax is concerned for the remainder of this parliament unless the chancellor is determined to break with his own fiscal rules.

2021-2022 Tax gap summary – June 2023

Despite a notable rise in tax payments, HMRC’s latest summary (published on June 22, 2023) revealed a consistent 4.8% tax gap for both the 2021/22 and 2020/21 tax years.

Having achieved a reduction from 7.5% in 2005/06 to 4.8% in 2021/22 one could argue there has been good ground covered, but the tax gap remains stubbornly high. In absolute terms, this remaining gap amounts to an estimated £35.8 billion of tax payers’ money not reaching the Treasury (a £5bn increase from 2020/21).

The tax gap reflects the difference between anticipated and actual tax payments to HMRC and stems from filing errors, negligence, criminal attacks, and tax evasion.

In response to this and with a renewed vigour post-pandemic we have seen a surge in HMRC’s tax enquiry and collection measures to tackle non-compliance and further reduce the tax gap.

Some efforts are an increase in existing activities but other new avenues are also being pursued:

• The recruitment of 3,000 compliance enforcement staff since 2021/22
• HMRC’s data agreement with Companies House to explore discrepancies in company accounts
• “Nudge” or “one-to-many” letters relating to several initiatives not limited to:
  • 2021-22 Self-Assessment returns discrepancies
  • Deficient claims of Gift Hold-over Relief in 2021-22 Self-Assessment returns
  • R&D tax relief claims errors
• The introduction of a power to reject R&D tax relief claims under FA 1998 Schedule 18 paragraph 16 to correct “obvious errors” when HMRC has reason to believe claims are incorrect.
• Furthering offshore investigation activity into non-UK domiciled individuals or overseas companies with UK commercial property.

Smaller businesses account for 56% of the estimated tax gap

For owner managers of UK SMEs, the findings in the tax gap summary are worth noting.

In the key findings from this summary it was identified that the HMRC customer group contributing to the largest proportion of the tax gap is small UK businesses, who account for 56% of the gap in 2021-22 (over £20bn). Those defined as Criminals contribute to around £5bn by contrast.

While this is the largest data set, with the average small business having no material issues, there is no doubt that HMRCs increased dedicated resource and ever improving technology and data capabilities will seek to target this large part of the tax gap to see it reducing rather than increasing going forwards.

It is prudent for SME owner-managers to prioritise a comprehensive understanding of their tax obligations, grasp the intricacies of any tax relief or incentive schemes pursued by their company in current or prior tax years, and consider seeking guidance from a specialised tax advisor when needed.

What to expect from the upcoming Autumn Statement 2023 in the current tax environment?

As already noted in this article the chancellor must tread a precarious line between the pressures of his fiscal rules and responsible economic policy, and the likelihood of tax reduction measures for the average voter being an attractive and opportune.

We expect there will be a lot of time dedicated to updates on the government’s key targets such as the reduction in inflation, growth in GDP, and expectations for the economy. There is likely little to no room for tax cuts or increases in public spending, and any new policies will need to be balanced within this ‘wriggle room’ so we do not predict there will be much for business.

While we await the 2023 Autumn Statement, there are various tax matters consulted or speculated upon. Our thoughts and expectations of a few of these are set out below, albeit other leaks (a now common occurrence) before the presentation on the morning of the 22^nd November will be featured in the slide deck:

• Speculation regarding the removal of Inheritance Tax is unlikely to feature as a cliff edge change. This would require serious legislative work, costing a relatively small part of the tax take (£6bn in 2020/21 and expected to be £7bn currently) but with knock on impacts to other provisions. While more people are falling into the IHT net, its abolition is not likely to be a very popular change with only 27,000 estates falling to pay tax within the regime. We anticipate possible increases in the nil rate band which has remained at £325,000 since 2009, and consultations on its abolition only at this stage.
• There are similar soundings for changes to, or abolition of, Stamp Duty Land Tax; again nothing expected beyond consultations.
• It seems likely that the ‘full expensing’ of capital investment by business will be considered for extension beyond 31 March 2026. While this is not a targeted relief it provides business with a certain tax outcome for medium term planning; statements of intent noted from both recent party conferences and this is being lobbied for by various business groups. We don’t expect any firm commitment to this yet given the fiscal challenges, perhaps in 2024.
• There has been a consultation on the prospect of merging the two regimes for the UKs R&D tax credits. While it seems likely that there will be a push to use tax relief and credits as a means to encourage further investment in innovation, we don’t expect detail on the day. It is an area whereby HMRC are finding there are errors, and some firms appear to be making aggressive claims for the reliefs, so there could be friction between policy and collection here.
• Further expected incentives for investing in high-growth innovative UK businesses should follow, with existing schemes perhaps being extended in date or scope, including:
  • EIS/VCT tax reliefs which currently have so called sunset clauses ceasing 6 April 2025, and
  • Despite polar opposite positions on the lifetime allowance for Pension funds, it seems that both major parties would aim to unlock substantial capital from pension schemes for investment into high-growth businesses; given the lack of communication about this in the Kings Speech recently we expect some further details in the Autumn Statement package from the chancellor.

Our specialist tax and business advisors from across Price Bailey will be providing further commentary on the Autumn Statement 2023 and the impacts for owner-managers of any announcements on the day. Subscribe to our mailing list below to receive the latest insights relevant to you and your business.