David Brookes, tax partner at BDO LLP, looks at some of the key announcements in the Budget including plans to increase NICs and the impact on partners in accounting firms, dividend tax allowance cuts and longer term fiscal strategy
Philip Hammond wants to build a ‘stronger, fairer, better’ Britain, and it was the ‘fairer’ notion that stood out in his Budget speech. However, the challenge for any Chancellor wanting to achieve fairness is that getting there will always result in winners and losers.
The disparity between the tax rates paid by the self-employed and employees has been ‘undermining the fairness of our tax system’ said the Chancellor.
He made clear that the tax consequences should not be the main reason for choosing whether to be employed or self-employed.
Given the exponential growth of the gig economy in recent years, and its cost to the Exchequer, it is not surprising that workers who are self-employed have been hit with a tax rise.
The Chancellor cut the tax-free dividend allowance from £5,000 to £2,000 which will hit self-employed people who pay themselves through dividends and tackle what he called the ‘proliferation of incorporation’ and he also announced a phased 2% increase in Class 4 NIC for the self-employed.
Partners in legal and accountancy partnerships will be hit by the NIC changes with a 2% increase from 9% to 11% by 2019 on earnings between £8,060 and £43,000.
This will result in a maximum NIC increase of around £700 per annum by 2019.
Although bad news for those individuals affected, it does help level the playing field for workers (albeit levelling it upwards rather than down).
However, the NIC increase has already led to criticism that Hammond has broken the manifesto ‘triple tax lock’ promise.
Squeezed middle, squeezed out
Small businesses have come out on top. The Government often describes small businesses as being the lifeblood of the UK economy, and this time the Chancellor supported them with business rate reliefs and a delay to digital quarterly reporting for those under the VAT threshold.
Although welcomed by start-ups and small business owners, it is frustrating that mid-sized businesses, those that grew faster and created more jobs than small or big firms last year, were once again largely ignored by policymakers.
Productivity and infrastructure
According to the Office for National Statistics, in the time it takes a British worker to make £1, a German worker makes £1.35, a US worker £1.30 and a French worker £1.27.
This has been a big issue for the UK economy for many, many years. When we polled businesses prior to the Budget, almost half (43%) said that they believe investment in infrastructure would boost productivity and help put the UK in its strongest position for Brexit.
There had been concern has to how the government was planning to spend the £23bn productivity fund that was announced in the Autumn Statement.
However, Hammond made it clear in his speech where and how the money would be allocated (although more detail around the ‘when’ would be welcomed).
Investment in smart, connected infrastructure is about getting from A to B, both physically and digitally, in both production and automation, in the most efficient way possible.
For every £1 invested in infrastructure, there’s a reported £3 return for the economy. You can see why this has been seen as a good place for Hammond to put his money.
Hammond’s long-term strategy
There weren’t many giveaways or surprises in this ‘last’ Spring Budget. Hammond wants to keep his powder dry for when the UK starts to feel the Brexit tremors as EU negotiations commence.
However, he did give us some insights into what the future may hold. Innovation, fairness and an economy ‘that works for all’ were his fail-safe messages. I believe this has given us some clues as to what the Chancellor’s long-term fiscal strategy could look like, and they are:
Digital real estate tax
Business rates have caused a major headache for the Chancellor and businesses alike. He’ll be glad when the revaluation saga is over but hinted that the bigger problem has yet to be solved. His next job will be to tackle the unfair tax disparity of traditional and online retailers; an issue that is adding to the huge pressure already faced by high street retailers. I wouldn’t be surprised if the Government introduced some form of additional new tax on the ‘digital real estate’ of large online retailers.
Annual Investment Allowance
Hammond remained focused in his speech on creating a system that supports innovation and productivity. Money is being set aside for Brexit jitters but once negotiations are over, say in Budget 2019, the Chancellor may look towards increasing the Annual Investment Allowance (AIA) to help increase productivity and unleash our manufacturing might. An increase to £5m over a five year period would be a game-changer. It would provide a significant incentive for businesses to invest in capital assets, such as plant and machinery, that will drive future growth and automation, and give businesses the confidence to plan ahead.
It is surprising the forthcoming clampdown on public sector employers using non-payroll labour has not been extended to the private sector. As the changes within IR35 take effect next month, there are reports that contractors are already moving away from public sector contracts. If the private sector was subject to the same regime, it would limit the public sector’s ‘brain drain’ concerns while addressing another tax imbalance. It is likely this will be on his future list of things to do.
About the author
David Brookes is a tax partner at accountancy and business advisory firm BDO LLP.