Jeremy Hunt’s forthcoming Spring Budget, in sharp contrast to his predecessor Kwasi Kwarteng’s September 2022 statement, is widely tipped to be relatively unremarkable.
Hunt’s primary task, amid rising inflation and poor growth, is to kickstart economic growth in the UK. Consequently, expectations for generous public spending appear to be low.
However, with the Institute for Fiscal Studies estimating that the Chancellor could have £30bn of wriggle room to play with, speculation is building among market participants as to what could feature.
Stimulating economic growth
Prospects for the UK economy have improved since Hunt’s inaugural budget in November 2022. The country appears to have narrowly escaped a recession, and the OBR is expected to revise up its GDP growth forecasts for 2023 as a result.
In addition, the fall in wholesale energy prices means the energy price guarantee scheme has cost roughly half as much as expected. This could have saved the Chancellor as much as £30bn, according to some reports.
But professional services firm RSM has predicted a vigilant approach from the government, arguing that “expectations for giveaways have rarely been lower”.
“While there may be some economic headroom, the Chancellor will be mindful of the risks posed by inflation and the prospect of sluggish growth in the next few years,” said partner Chris Etherington during a live webinar.
“The Spring Budget will be about shoring up the decisions made in the Autumn Statement and plotting the course ahead. An economic misstep now could prove to be politically fatal.”
The firm’s lead economist, Thomas Pugh, also predicted a relatively prudent Spring Budget. While positive that borrowing is due to be revised down this year, the far more important success metric is whether debt as a proportion of GDP is falling in five years’ time, he said.
“We think he’s probably going to come out roughly in line with what he had back in November. There is scope for some temporary giveaways but things which incur more permanent costs, such as big pay rises for the public sector, are going to be much more limited.”
But for some, aiding business growth is the most sensible and effective long-term strategy for stimulating the economy, and should be front of mind for Hunt as the budget approaches.
According to Lynne Blakey, advisory consulting director at Evelyn Partners, addressing the uncertainty that businesses face is a key component of this.
“Uncertainty is a crippling factor for business growth. Certainty and a road map to the future is required to inspire confidence and encourage companies and individuals to remain, invest and expand.”
Blakey went on to add that, while a reversal of the planned increase of corporation tax to 25% is unfeasible, a five-year road map for reduction would “make investing in the UK an attractive proposition”.
According to Sheena McGuinness, corporate tax partner at RSM, the planned rise means that some form of compromise for UK businesses, such as a boost to the capital allowances regime, is “a very strong possibility”.
“Currently investment allowances are among the least generous in the developed world, so coupled with a higher-than-average rate of corporation tax versus the other OECD countries, this could really impact the attractiveness for investment into the UK,” she said.
McGuiness also argued that “changes are afoot” for the R&D regime, arguing that recent proposals to merge the RDEC and SME schemes would make the claiming process “more labour intensive and onerous” and “put some companies off making the claims”.
She also alluded to figures included in HMRC’s annual report in December, which found that around 5% of all claims made in 2022 were incorrect.
This was echoed by Evelyn Partners’ Blakey, who called for clarity around the proposed reforms, and a “simpler system” to help “drive innovation” across all sectors.
Similarly, Marvin Rust, managing director at Alvarez & Marsal, argued that imminent changes to the R&D regime (an increase in reliefs for larger businesses and reduction for SMEs) are “incongruent” with the ambition to bolstering the UK’s attractiveness as a business destination.
Rust also pointed to Alvarez & Marsal research showing that the planned reforms will see the UK lose its position as the most generous country for tax. This must be addressed by the Chancellor, he argued.
“The R&D tax relief is often an incredibly important early source of funding for start-ups in areas such as the life sciences and technology sectors. While the increase in R&D tax relief for large businesses is welcome, the chancellor should reconsider his plans for SMEs as it threatens the viability of innovative businesses.”
Finally, dialogue around the UK’s controversial off-payroll work legislation has gathered significant pace in in the run-up to the Spring Budget.
Dave Chaplin, a prominent critic and CEO of IR35 Shield and Contractor Calculator, has been particularly vocal, having recently launched a campaign urging the government to “fix or ditch” the regime.
More: Dave Chaplin: ‘IR35 is a growth issue for the Tories’
In a nutshell, Chaplin argues that, while a full repeal of the 2017 and 2021 off-payroll rules is unlikely, the government can use the Budget to signal its intent to fix key issues within the legislation.
For Chaplin, the flaw of double taxation is the “primary issue” facing the contracting industry today, the eradication of which would be a “quick fix” for the government.
“We need that flexibility in the workforce, but at the moment we have this legislative sludge that needs to be removed. They need to introduce a statutory instrument so that this issue is resolved.”
This was echoed by Seb Maley, CEO of specialist IR35 consultancy firm Qdos, who argued that “it’s a case of now or never for this government”.
“The Chancellor has a clear choice. Hit the self-employed with another round of dangerous tax hikes or protect independent workers.”
Maley also stressed the economic value of the UK’s self-employed workforce, arguing that this must factor into the government’s handling of the issue. While scrapping the proposed corporation tax rise would be the most direct acknowledgment of this, the government must tackle the “deeply flawed” IR35 legislation at the very least, he said.
“The smallest businesses hold the key to economic growth, yet it’s these enterprises that continue to bear the brunt of an increasingly hostile tax landscape.”