Last week, the new Chancellor made a decisive speech, confirming the Autumn Budget date for 30th October and addressing the state of the public finances.
Key announcements included the extension of the windfall tax for oil and gas companies, confirmation of VAT on private school fees, and a startling revelation of a £22 billion gap in public finances. It was strongly suggested that tax increases would be necessary to address this shortfall.
VAT on Private School Fees
This was a main pledge in Labour’s manifesto, so it was no surprise that private school fees will now attract 20% VAT from January 2025.
A Labour win at the election saw plenty of parents hedging their bets and prepaying for future terms of school fees in the hope that they could avoid the 20% VAT charge. The announcement put a stop to this. Any fees paid from the date of the speech (29/07/2024) for terms starting on/after January 25 will be subject to VAT.
It remains to be seen whether those who prepaid before this date can avoid VAT. I am sceptical. The date of payment does not equal the tax point date, so be wary of these being challenged.
Parents will understandably be looking for ways to avoid or reclaim VAT on future fees. So, it is inevitable that we accountants will be inundated with queries about whether they can reclaim VAT through their business. The short answer is no. It is not a genuine business expense; it is a personal expense payment and, therefore, is not allowable for VAT. On top of that, it would likely count as a Benefit-In-Kind (BIK) and attract further tax and NI.
Unfortunately, I am sure we will see various schemes and ways to avoid this pop-up. Be extremely wary of these! It is still very early days, but the common sentiment amongst the VAT experts is that there are no legitimate ways around this.
Potential Changes to Capital Gains Tax
Capital gains tax is always talked about in relation to potential tax rises. The media sees it as the way the super-rich avoid paying the highest rate of taxes. Whilst there is some element of truth in that (the rich have assets, and this is how assets are taxed), it is extremely misleading.
We have already seen changes over recent years, the slashing of the CGT allowance and the split rates between residential property and other gains.
It now looks likely that we will see further changes announced in October. We have no facts and no official word from the Government, so this is purely guesswork about what MAY happen (please don’t rush off and take affirmative action on the back of this post!).
Current CGT rates are 10/20% on most gains and 18/24% on residential property (excluding your main residence). Much discussion centres around aligning CGT rates with Income tax rates.
This could mean rates of 20/40/45%. Having the tax you pay on your gains jump from 20% to 45% is a huge increase!
Selling a Business
What might this mean for those entrepreneurs looking to sell their small businesses? Most will currently benefit from something called Business Asset Disposal Relief (BADR) which means the first £1m lifetime qualifying gains are taxed at just 10%, the rest would then be taxed at 20%.
So if you sold your business for £2,003,000, your tax bill might look this:
£3k allowance at 0% = £0
£1m under BADR at 10% = £100k
£1m at 20% = £200k
So a £300k tax bill, netting you £1.7m
If you were selling the same business at a rate of 45% with no BADR, your tax bill would increase to £900k…
It is important to point out that we have no word on if this alignment will happen or what impact that may have on BADR. I hope they would think very strongly about increasing incentives for genuine small entrepreneurs taking huge risks starting and running their businesses, but I won’t hold my breath.
Other Potential Tax Rises
Ms Reeves and the Labour Party have ruled out increasing VAT, Income Tax, or NI for the working people, so this doesn’t leave much wiggle room elsewhere, hence the strong rumours of changes to CGT.
One of the other main areas they would look to for increased tax take would be inheritance tax.
Additionally, they could consider further freezing the tax allowance thresholds and tax relief on pension contributions (although I think this is unlikely).
As always, we will monitor the budget closely in October and share advice once we have more information.
In the meantime, if you have any assets you were thinking of selling and it makes commercial sense, you may want to sell them before October! To avoid a firesale, any changes from CGT could be implemented from midnight of the announcement rather than the traditional following 5th April.
About the author
Luke Desmond
Fractional CFO for Tech, eCommerce & SaaS. CEO @Crisp_Acc provides virtual finance functions. Co-Founder @getvaulta SaaS Startup for accountants.