The original intention was that this week's Spring Statement was to be a non-event. Rachel Reeves had made it clear that she would do just one fiscal event a year – an autumn budget at which the big decisions on the public finances would be made.
The Office for Budget Responsibility is required to produce an economic and fiscal forecast twice a year, but the spring forecast need not be accompanied by any policy measures. The Chancellor would get to her feet in the House of Commons, announce the OBR's numbers, deliver her economic message and sit down.
It has not quite worked out like that. At her last Budget, Reeves gave herself next to nothing in terms of headroom against her fiscal rules. Unless she was moderately lucky (and she has not been), there was always a good chance that the OBR would declare that her rules were set to be broken. Measures would have to be taken to ensure her rules were complied with. As a consequence, a Labour chancellor is in the uncomfortable (but by no means unprecedented) position of announcing cuts in welfare and departmental spending.
Some will argue that she is too constrained by her rules and that, at the very least, she could wait until the autumn to address the fiscal situation – that the belt tightening is either unnecessary or premature. They point to Germany, where the incoming right of centre Chancellor has relaxed the fiscal rules to allow higher defence spending. If Germany can do it, why can't we, they ask.
Reeves argues that our position is fundamentally different. A large part of our fiscal problem is that we are paying over £100bn a year in debt interest. Increasing the debt and increasing the interest we pay on that debt (a probable consequence of a looser fiscal policy) is not a sustainable way to address our economic problems, she argues. In the context of an aging population and expectations of higher defence spending, the markets would be unforgiving.
This leaves Reeves with the options of increasing taxes or cutting spending. Her choice in October was to increase taxes while providing a substantial (albeit short-lived) increase in spending. This time, she has left taxes untouched while cutting spending in future years, with the details set out in June's spending review.
This is one example of political pain deferred. The bigger point is that Reeves has – once again – left herself very little headroom. Come the Autumn Budget, there is much that might go wrong. The UK might escape US tariffs but only at a cost (£800m in revenue from the Digital Services Tax, for example) and not necessarily for long. There is no shortage of wider geopolitical uncertainty, which may damage growth and accelerate increases in defence spending. And the OBR may well conclude that it has been too optimistic about our productivity, resulting in downgrades for future economic growth.
The nightmare scenario for Reeves is that she must deliver another fiscal event in the autumn in which she has to put the public finances on a more sustainable footing. It is hard to see that she will be able to return to spending again. This leaves taxes. There will be demands for a wealth tax, although Ministers should be worried that the wealthy are already leaving the country. For a country looking to increase economic growth, a wealth tax is highly unlikely. To raise serious sums of money, the broad-based taxes on income and consumption would have to be used, regardless of Labour's manifesto pledges. The political pain would be immense.
The Chancellor's luck may, of course, change. Growth might pick up; the supply side reforms might bring some benefits; tax receipts might improve.
But if not? The Spring Statement was a difficult moment for the Government. But there is a reasonable chance that an even more difficult moment is in store in the autumn.
Below, we summarise some of the key tax considerations.
No tax rises or policy changes for private clients
Although we had been assured that no significant tax announcements for private clients would be made in this week's Spring Statement, there had been concerns in recent weeks that the Chancellor might backtrack on this promise, with rumours ranging from an extension of the tax threshold freeze beyond April 2028 to the introduction of a wealth tax (although the Government had already ruled this out "for the time being").
Yesterday, the Chancellor confirmed that her statement did not include any further tax increases. What it did contain is the Government's commitment to ensuring "that the UK is the best place in the world to start and grow a business". As part of this, the Government is holding a series of roundtables with key stakeholders in April on how policy can support this commitment. In the context of the much-publicised reforms to the non-dom regime, including the introduction of a new four-year, residence-based inpatriate regime with effect from 6 April 2025, the Government confirmed that it "will continue to work with stakeholders to ensure the new regime is internationally competitive and continues to focus on attracting the best talent and investment to the UK". This may imply that the Government is open to making further changes to the new regime, which would increase its attractiveness to new arrivers in the UK. Watch this space for further developments on this topic.
Separately, and building on announcements made in the 2024 Autumn Budget, the Government intends to raise additional revenue (£1bn per year by 2029-30) by implementing a package of measures designed to further close the tax gap (the difference between tax due and tax paid).
The statement notes that, at the end of December 2024, the level of unpaid tax stood at £44bn – more than double the amount five years ago – and commits to reduce this figure by investing in HMRC's debt management capacity and recruiting more HMRC compliance staff. A number of consultations were also published on a range of other proposals to close the tax gap and improve compliance, including options to enable HMRC to make better use of third-party data, as well as strengthening their powers to take action against tax advisors facilitating non-compliance. HMRC's counter-fraud capability is being expanded, and a new reward scheme for informants will be launched later this year. Furthermore, in a bid to encourage timely payment by taxpayers, it was confirmed that harsher late payment penalties for VAT and income tax self-assessment will be introduced from April 2025. Finally, there is also a commitment to allocate additional resource to tackling "offshore tax non-compliance by the wealthy", with HMRC intending to recruit private sector wealth management experts and to use AI to identify those taxpayers who are trying to hide their wealth.
Finally, taxpayers should remember that, although there were no significant tax announcements yesterday, this does not mean that there are no upcoming tax reforms. As we previously reported, the 2024 Autumn Budget included a number of significant announcements for private clients. Key measures which come into force on 6 April 2025 include the following.
- Employers' class 1 national insurance rates are to rise
from 13.8% to 15%, and the threshold for such contributions will
also fall from £9,100 to £5,000 per annum, with such
threshold applying from 6 April 2025 until 5 April 2028 (at which
point the threshold will start to increase again in line with the
Consumer Price Index).
- Following an increase to the main rate of capital gains tax
from 30 October 2024, the existing 28% rate of capital gains tax on
carried interest will be increased to 32% from 6 April 2025 (with
further reforms to be introduced from 6 April 2026).
- The rate of capital gains tax where Business Asset Disposal
Relief or Investors' Relief applies will also be increased from
10% to 14% with effect from 6 April 2025 (and to 18% from 6 April
2026).
- Finally, as mentioned above, the reforms to the non-dom regime, including the introduction of a new inpatriate regime, also take effect from 6 April 2025.
Advanced certainty for major projects
As trailed in the Corporate Tax Roadmap the Government has launched a consultation on a new facility to provide increased tax certainty for major investment projects. The proposal is part of the UK's agenda to boost investment and support business confidence. The design of the service is still in its infancy but the features that the Government are consulting on include the following.
- Eligible entities – the Government proposes the facility
should be provided initially to corporate entities that are or will
be subject to corporation tax.
- Investment threshold – a quantitative threshold for
investments in fixed and intangible assets is being explored.
However, as yet there is no indication at what level this would be
set. The Government acknowledges this may not capture projects of
national or strategic importance or projects that are impactful
within a sector and seeks ideas on how criteria could be set in
this regard.
- Taxes – Corporation Tax is the primary focus of the
service. However, the Government does seek views on whether the
case can be made for other taxes such as VAT, stamp taxes and
employer duties.
- Fees – the Government is open to views on whether this
service should have a fee associated with it or operate as an
unpaid service.
- Process – it is proposed the tax taxpayer would set out
its technical analysis in a clearance submission and HMRC would
agree to provide a scoping meeting with 30 days and issue clearance
within a further 30 days. The duration of the clearance is expected
to last five years.
- Public or private – the Government is consulting on the advantages and disadvantages of publishing an anonymised version of the clearance.
This will be a welcome development for corporates looking to invest in the UK, particularly as providing tax certainty for inbound investment is an area where the UK is currently out of step with other jurisdictions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
