Touchbutton 85 – Time to trust in Truss?

Now that Liz Truss, the until recently dutiful exponent of the Government line, has been unchained, what will she do? Of particular interest to investors and their advisers is whether she will be able to keep to her promises on taxation.

We already know some of Ms Truss’s plans for tax – she has announced c.£40 billion of tax cuts to be implemented straight away.

“Could Ms Truss… steal her predecessor Boris Johnson’s (never realised) plan to raise the basic rate threshold to £80,000?”

Income tax will be cut – we can be fairly sure that Ms Truss will act to support middle earners, perhaps by re-linking income tax allowances and bands to inflation, thereby reversing ex-Chancellor Rishi Sunak’s ‘stealth’ move in his last Budget announcement. Could Ms Truss go further and steal her predecessor Boris Johnson’s (never realised) plan to raise the basic rate threshold to £80,000? In any case, such changes would most likely be introduced with effect from April 2023.

Additionally, it is expected that the National Insurance (‘NI’) rise that came into force in April will be reversed; however, there are administrative challenges to changing tax rates part way through a tax year. Is it a ‘good look’ to be increasing the burden on businesses of administering changes in PAYE as well as having employees’ monthly salaries fluctuating because of such changes? And will employers also see their NI rise reversed too particularly as there has been no specific confirmation of that from the Truss camp?

“…it seems inconceivable that the planned increase to Corporation Tax from 19% to 25%… will go ahead.”

Given the immediate economic outlook it seems inconceivable that the planned increase to Corporation Tax from 19% to 25%, earmarked to come into force in April 2023, will go ahead. To further help businesses, Ms Truss has said that she will reform business rates, albeit that nothing specific has been floated yet.

In 2008, the then Chancellor Alastair Darling cut Value Added Tax (‘VAT’) in response to the financial crisis – this move was applauded at the time. Ms Truss is apparently considering a radical reduction to VAT by 5%. Such a move could stoke inflation and would probably not hugely benefit middle earners. Furthermore, a VAT cut, particularly when combined with suspension of the Green Levy, could be very costly for the Treasury.

Interestingly, Ms Truss has also said that she will review Inheritance Tax (‘IHT’) as part of the general review of the tax system. Indeed, she may be tempted to abolish IHT altogether, perhaps replacing it with a Wealth Tax. However, such a move may well require some consultation for which there may not be enough time, with the next General Election having to be held by early 2024.

“…it could be seen as an easy low-cost win to abolish IHT altogether, replacing it with a more targeted tax.”

Having said that, seasoned watchers will recall that there have been plenty such consultations over the decades since IHT was introduced; moreover, IHT accounts for c.0.63% of the overall tax take. So, it could be seen as an easy low-cost win to abolish IHT altogether, replacing it with a more targeted tax.

There is no doubt that Ms Truss and her team intend to tack against what they see as the deadening hand of Treasury orthodoxy with a series of tax cutting, supply-side reforms, all of which will play well to a specific audience. However, will the perceived ‘laws of economics’, to paraphrase Philip Hammond (another former Chancellor), bend to the reputed will of this new ‘Iron Lady’?

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