The Government’s apparent U-turn on increasing Capital Gains Tax (CGT) rates in the upcoming Autumn Budget could be a sign that UK tax rates have reached the point where further increases risk reducing rather than raising revenue, according to leading UK accountancy firm Price Bailey.
Price Bailey says the move could be the clearest indication yet that the UK is approaching the top of the “Laffer Curve”, the point at which increasing tax rates can become counterproductive as taxpayers change their behaviour in response.
Richard Grimster, Partner and Head of Tax at Price Bailey, says: “For weeks, the expectation has been that the Chancellor would look to capital and wealth as a means of raising additional revenue. The fact that CGT rate increases now appear to have been ruled out is therefore significant. It could be the clearest indication yet that we are perched at the top of the Laffer Curve and that pushing rates higher would not necessarily deliver the additional revenue the Treasury needs.”
Price Bailey says uncertainty around potential tax changes has already influenced some taxpayers to make significant decisions, ahead of the Budget.
Richard continues: “Over the last few months, we have seen clients take action to reduce their exposure to potential tax changes, bringing forward sales and making gifts, for example. Higher rates force people to rethink their financial plans or, in some cases, whether they want to remain in the UK at all.”
The Chancellor now faces the challenge of finding alternative ways to raise the revenue the Government needs.
Richard adds: “Ruling out an increase in CGT rates does not make the fiscal challenges disappear, but it does leave the Chancellor with fewer obvious options.
“If there is limited scope to increase headline rates further, we may instead see the Chancellor look at existing tax reliefs. Another possibility could be a new levy linked to a particular spending commitment, such as the Government’s plans for social care.
“None of those options are straightforward, and we will have to wait until the Budget to see where the Chancellor chooses to act. What is clear is that significant sums still need to be found and, with the overall tax burden already historically high, it may be that the Government is reaching the limit of what can be achieved and what British businesses can take, by simply pushing existing rates higher”
