Here we pick our most relevant announcements from the Chancellor of the Exchequer’s 2024 Autumn Budget...
With Boris Johnson ousted, the Conservative party were tasked with finding a new leader, whittling it down to two candidates: Rishi Sunak and Liz Truss.
With a track record which included a stint as Chancellor, Rishi Sunak was the early favourite. Initially expected to be the clear winner, the differences in policy between Sunk and Liz Truss eventually saw the female candidate emerge victorious.
But where does Liz Truss stand on tax? And how do her policies differ from what the ex-Chancellor was prepared to offer? We examine what the UK’s taxes will look like under Liz Truss’ leadership.
A Country in Crisis
Liz Truss takes the reins at a time which is critical for Britain. With the cost of living crisis threatening many homes around the country, the government’s position on tax will be pivotal.
The global pandemic and Brexit offered a difficult backdrop, but the Russian invasion of Ukraine brought about the perfect storm.
With a need to stimulate growth while protecting against inflation, Liz Truss must walk a careful balancing line that offers relief now while also guarding the fiscal future.
Sunak’s Tax Policy
As the ex-Chancellor, Rishi Sunak was expected to have an advantage over Liz Truss. Their ideas for tax certainly varied, with some suggesting that Sunak’s stance was the more realistic of the two.
Sunak was responsible for a rise in National Insurance Contributions (NICs), a tax which applies to employers, employees and investment income. NICs are often overlooked when taxation is discussed, but they make up around 20% of all UK tax revenue.
In addition to the NICs hike, Sunak suggested an increase to corporation tax from 19% to 25%, effective from April 2023.
Pushing up corporation tax so substantially is a controversial policy, and it is one which is rarely seen in developed countries. There have been rare instances, such as France temporarily raising a surcharge by 10% in 2016 and 2017, before dropping back to 25.83% (2022 figure). Greece also pushed up its corporation tax by 6% to 26% in 2013, whilst in the middle of its economic crisis. The 2022 rate for corporation tax in Greece has since been slashed to 22%.
Given the current economic crisis, some argue it is simply not feasible to increase corporation tax by such a large degree. Most experts agree that should a rise go ahead, it would need to be reversed within a short time frame.
Other taxation pledges made by Sunak include VAT on fuel and income tax. The ex-Chancellor said he would remove VAT on domestic fuel bills to 0% and by 2029 would cut a further 3p from income tax. These measures would cost the government £23.3 billion to implement.
However, the OBR said that if Sunak’s measures went ahead, by 2026/2027 the tax burden in the UK would be at its highest level since the 1940s.
The IFS also calculated that Rishi Sunak’s giveaways would still mean that the net tax rise would be twice as large as the amount of reductions.
Truss’ Position on Tax
The high taxation position of Rishi Sunak gave Liz Truss the opportunity to put forward policies which would be more popular with both party members and the wider electorate.
Truss’ starting position was to announce she would scrap the planned corporation tax rise, and also reverse the NICs increase. These two measures alone are estimated to cost £30 billion.
As an additional step, Truss said she would suspend green levies on energy bills temporarily. The new PM believes this will save households roughly £150 each, but will cost around £8.5 billion to implement.
Although cancelling the corporation tax increase is calculated to cost £17 billion, the IFS believes the actual cost may be substantially less. This is because lowering taxes could mean that companies invest more, one of the key aims for any PM.
Liz Truss is confident that the measures will be affordable due to the headroom in the budget. However, the IFS says the figure that Truss is using is several months out of date and now very inaccurate.
The director of the IFS has suggested that the sweeping tax cuts which Truss is advocating will not avoid a recession and could instead lead to an even larger, deferred recession instead by stimulating inflation.
But not everyone believes that Truss’ approach is wrong. By backing companies and workers during times of economic hardship by virtue of reducing taxes, Truss’ supporters are confident that the crisis will be milder and shorter.
Other Taxation Issues
Truss has been clear about her desire to strip back taxes as much as possible, and has suggested pulling out of the global tax deal which holds corporate tax at a minimum of 15%.
But if she is committed to reducing taxes, there is much more work to do, as shown by the International Tax Competitiveness Index (ITCI). In 2021, the UK stood at a lowly 21st, pushed lower by its tax base rather than the tax rates.
More specifically, taxation in the UK is problematic because of the structure of certain corporates while property taxes punish and disincentivise investment.
Although corporate tax is still a very healthy 19%, anyone seeking to invest in factories or machinery will find this cost is significantly inflated. And it is this so-called “factory tax” which is causing such a problem for companies in the UK.
The property tax base and consumption tax base both also present difficulties that need to be managed more efficiently.
Council taxes are based on 1991 property values with a banding system which is widely viewed as obstructive. In particular changes should be made which enables commercial property to be improved without business owners being slapped with a higher tax bill.
Consumption tax has the potential for offering excellent tax efficiencies, but due to a convoluted system of exemptions and alterations, the UK lies in last place for VAT in the ITCI. By creating a broader VAT base, the overall rate for VAT could be lowered to under 20%.
All of these issues and more need to be proactively addressed and managed by the new PM, Liz Truss. With a population and business community facing difficult economic times, it has never been more vital to get taxation properly balanced. We eagerly await Kwasi Kwarteng’s mini Budget on Friday 23rd September 2022.
