In an autumn Budget preview commentary, several EY spokespeople, including Manchester-based Partner Noam Handler and North Market Leader Hilary Heap, discuss fiscal devolution and its potential to support regional economic prospects.

Devolution – Noam Handler

Noam Handler, Partner and Regional Markets Tax Leader at EY, said: “Fiscal devolution will be judged not simply by the value of revenue transferred from central to local funds, but what it enables local leaders to deliver. Retaining a share of locally generated tax receipts increases the benefit of regional development and may provide greater predictability of income. This could help regions better coordinate transport, housing, skills and regeneration, and provide businesses with greater confidence that investment plans will be sustained.

“Fiscal devolution localises the revenue base and, therefore, without any compensating action will reduce the redistribution that is implicit in a central system. Areas start from very different tax bases, so any roadmap unveiled at the Budget will need to clearly set out how plans will reward growth without leaving less prosperous places behind or exposing local services to revenue volatility.

“The anticipated visitor levy appears to be a first step towards devolving tax-raising powers rather than just revenues. Devolution of these powers will require local authorities to carefully consider the design, rate and impact of any new taxes, including the impact on individuals and local businesses.

“Devolution of this nature will also impose obligations on local government that currently sit with HM Treasury, such as economic and fiscal impact assessments. How such policy evaluations are undertaken across the country will need a consistent and effective framework for decision making.”

Devolution – Hilary Heap

Hilary Heap, North Market Leader at EY, said: “The challenging fiscal environment for the Chancellor means that generating stronger growth remains the key to greater fiscal flexibility and funding additional spending measures going forward. Every region has a part to play in delivering growth and as the Government continues to set out its devolution agenda, there’s an opportunity to rethink how different parts of the UK can help to turn growth ambitions into delivery.

“The Fiscal Devolution Roadmap, due to be published at the Autumn Budget, offers the chance to set out how mayors and local leaders across the North can take on an even more strategic role. Aligning local decisions on infrastructure, skills and housing to provide a consistent and clear strategy for growth could be key for attracting inward investment, unlocking private capital and helping the Government achieve its ambition of growth in every postcode.”

Budget tax policy considerations – Chris Sanger

Chris Sanger, EY Partner and UK Tax Policy Leader, said: “The middle Budget of a five-year Parliament is normally a turning point, when governments move from raising taxes to preparing the ground for the next election. But this Budget is the first under a new leadership who will need to balance any spending increases with ongoing fiscal pressures.

“Manifesto commitments mean the Government is unable to raise the rate of taxes that contribute to more than 70% of the UK’s annual receipts, so we could instead see targeted changes, either to non-protected taxes or to the tax bases – the combined economic activity, income, property or assets that the Government is allowed to tax – of the protected measures.

“Capital gains tax (CGT) is not protected by pre-election pledges and its base has already narrowed now that carried interest is taxed as income. However, any further changes, such as increasing the rate by a few percentage points, would need to carefully consider the impact on business asset disposals.

“The UK benefits when successful entrepreneurs exit their companies but remain in the country to re-invest their proceeds into new businesses. Should the Chancellor look to increase the rates of CGT, this would therefore likely need to come with an enhancement of Business Asset Disposal Relief to ensure it remains effective, particularly for the most successful entrepreneurs, as well as the reintroduction of indexation for inflation. Increases without these twin improvements could risk impacting the UK’s attractiveness to successful entrepreneurs.

“The Chancellor may also be tempted to lower the VAT threshold – currently the highest in Europe – closer to the level of the personal allowance. This would bring many more businesses into the VAT system but would also remove the £90,000 revenue threshold that can deter some businesses from growing.”

Infrastructure – Kate Jenner

Kate Jenner, International Tax and Transactions Partner at EY, said: “Strategic authorities now have a broader and more empowered role in transport and wider local infrastructure. With bus franchising powers extended to all English local transport authorities, there is an opportunity to build on the success seen in Greater Manchester across other parts of the country. However, the question facing the Chancellor is whether proposed funding arrangements will give regional leaders enough certainty and confidence to join up local transport decisions with competing housing, skills and regeneration needs.

“The Government’s plans require significant funding for UK infrastructure, from both the public and the private sectors. To support this, the UK tax system needs to be seen as stable and predictable over the 25 years or more that infrastructure projects typically last. The recent Supreme Court Orsted case has introduced uncertainty over the tax relief available for early-stage infrastructure investment, however the Government could move to ensure that all business-related costs are ultimately deductible when computing taxable profits. This could help to remove a significant source of uncertainty for investors and give businesses greater confidence to commit the long-term private capital needed to deliver the UK’s infrastructure ambitions.”

UK tax digitalisation – Jamie Ratcliffe

Jamie Ratcliffe, Partner and Global Indirect Tax Leader at EY, said: “The digital transformation of tax administration has the potential to be one of the most significant long-lasting changes the UK tax system has experienced. The anticipated publication of the UK’s e-invoicing roadmap at the Budget will be central to that, and a major milestone in the UK e-invoicing journey, providing businesses with greater clarity on the speed needed to meet mandatory requirements from April 2029.

“Initiatives like e-invoicing will also support HMRC’s Tax Administration strategy, which includes its ambition for 90% of customer interactions by 2030 to be digital. This target signals HMRC’s clear shift towards a more automated, data-driven approach to compliance, underpinned by AI, real-time information and greater data sharing.

“As tax authorities increasingly rely on technology and data to identify risk and reduce the tax gap, companies will need to focus on improving data quality at source, as well as their governance and automation. Businesses that invest in accurate and connected reporting should benefit from a simpler compliance experience and the operational efficiency gains that e-invoicing can offer.”