South East: EY survey reveals 'The Budget trilemma'

Businesses are urging the chancellor to provide additional support to those impacted by the pandemic, while at the same time consult on steps to balance the significant deficit when he delivers his budget speech on March 3, according to a recent survey of over 800 businesses.

However, one in eight respondents were calling on the chancellor to act now on taxes, in contrast to the one in five that cautioned that he should consult on any tax changes but defer any action until 2022 – in the hope that the economic recovery will be well on its way.

Attracting investment into the UK was top of the budget shopping list for business. One-fifth of respondents said that the chancellor needs to focus on attracting inward investment into the UK.

The Budget trilemma

The survey by EY, which canvassed the views of businesses to gauge what they want from the Budget, reflects the same trilemma facing the chancellor – the need to support businesses and citizens, to be fiscally responsible, while at the same time attracting investment into the UK to drive the economy forward in a post-brexit world.

Gareth Anderson, head of tax at EY in the south, commented: “The views of UK businesses very much reflect the challenge facing the chancellor in his second budget: what level of additional support does he announce for citizens and businesses hit by the pandemic; when and how does he start to address the elephant in the room – the UK’s budget deficit – while at the same time laying the building blocks to encourage inward investment following the UK’s departure from the EU.”

Putting the UK on the map for global investors

When asked for their views on what steps could be taken by the chancellor to increase investment into the UK, the two areas that garnered the greatest share of responses were certainty over corporate tax rate (36%) and targeted tax incentives (39%). Changes to employment taxes and enterprise zones came much further down the list, 15% and 10% respectively.

Anderson adds: “Significantly, over a third of respondents said certainty over the long-term level of corporation tax would encourage investment. Certainty is the key word here and offers a significant distinction from keeping the rate low. This suggests that, whatever the chancellor does with the rate, it will be important to ensure that the long-term target is transparent – as long as both UK and overseas businesses have certainty that the rate will be consistent, over the long-term, short-term changes may not undermine investment. This is a clear indication that businesses want a tax system that offers certainty and stability, providing inward and domestic investors the peace of mind they need to make large-scale investments.

“For targeted tax incentives, it may be that businesses want reliefs for particular sectors rather than for particular areas (explaining why enterprise zones were less attractive). The chancellor, however, will want to deliver on the Government's 'levelling up’ promise. Whatever tax incentives and reliefs he chooses to promote, the challenge will be in monitoring their effectiveness and the impact they have on the economy. This is an area that has been identified as needing improvement by the public accounts committee.”

Favourable tax environment?

When asked about how the tax environment in the UK impacts investment, nearly 40% of respondents said that they view the tax environment as being a positive reason to invest in the UK while 41% think it doesn’t have any impact. Only 20% believe it has a negative impact and acts as a deterrent.

With nearly 80% of businesses viewing the UK’s tax environment as having a positive or neutral impact on investment, the chancellor has a strong base from which to build in making the UK a natural destination for investment.

To tax or not to tax?

Concluding, Anderson says: “In all of the discussions on the future and how this will impact the announcements made on March 3, the “elephant in the room” remains – how the chancellor will respond to the increasing level of government debt as a percentage of GDP. This is adversely affected by both the increase in debt and the drop in GDP, with many headlines and high watermarks being hit. Faced with this conundrum, the chancellor faces the decision of whether to raise taxes to reduce the debt level or to provide greater stimulus to increase GDP.

“The chancellor could embrace the current low interest rates and put off balancing the books, for now, to invest in the future. This would be in line with the suggestion of Janet Yellen, US treasury secretary, that the US needs to “go big” to help the economy back on its feet. Will the chancellor synchronise his approach with Yellen and develop the UK/US special relationship?

“In practice, the answer is unlikely to be either one extreme or the other, with the chancellor looking to boost the economy but at the same time raise taxes in areas of the economy that he thinks can bear it.”