Predictions for a ‘quiet’ Budget
Ahead of Monday afternoon’s Budget, the first to be held under the new schedule, the Chancellor faces a tough challenge given the need to fund both the government’s pledge of an end to austerity and a £20bn boost for the NHS
26 Oct 2018
Speculation about the content of the Budget is wide-ranging, with experts predicting that, although Brexit and the end of austerity will dominate matters, Chancellor Philip Hammond may take the opportunity to look at issues such as pensions tax relief and changes to the tax regime for digital-only companies.
Ian Stewart, chief economist with Deloitte, said: ‘This year’s Budget is likely to be a curtain raiser for far bigger decisions on spending, tax and borrowing which will come after the UK’s probable departure from the EU next March.
‘What is clear, is that it will be hard to end austerity and hit the government’s deficit target without raising taxes.’
However, Melissa Geiger, head of international tax at KPMG UK, said: ‘The Office for Budget Responsibility’s upward revision of tax receipts takes some heat out of the need for tax increases. This could give the Chancellor the option of delivering a light touch Budget, leaving his powder dry on tax changes until Brexit terms are clearer.’
Despite this, Geiger pointed out that a change to the tax model for digital companies is likely, saying that while acknowledging the optimal solution lies in international consensus, the Chancellor has been increasingly bullish about going it alone on this.
‘A tax on digital sales would be well-received by the public but they need to be careful what they wish for. Any tax that is closely linked to revenue may well be passed on to consumers,’ Geiger pointed out.
Other potential business tax changes could include reforms to business rates and potential changes to the VAT threshold, although most commentators argue both moves would bring too much disruption if implemented close to the Brexit date.
There is also unlikely to be much change to corporation tax. Stella Amiss, head of tax policy at PwC, said: ‘All signs point towards the government sticking with its pledge to reduce corporation tax to 17% by April 2020.
‘We have seen calls both to reduce this further and to postpone the decrease.
‘While any further changes to corporation tax would be a headline grabber, in the long-run the attractiveness of the UK is more likely to benefit from a proper look at the existing tax base - which is currently full of complexity that all taxpayers have to navigate.’
One potential area of focus for the Chancellor is likely to be the self-employed, despite his failure to drive through changes to National Insurance contribution rates in a previous Budget.
Nigel Morris, tax director at MHA MacIntyre Hudson, said: ‘Reform of the IR35 rules that govern self-employment status is seen as a less politically controversial way to raise money for the Treasury, in the absence of Parliamentary support for an increase in NICs from the self-employed.
‘HMRC estimates a third of people working through their own company should be taxed as employees, yet only 10% currently pay the right tax, costing Treasury £700m in 2017/18.’
Despite the pressure to act on this issue, Chris Sanger, head of tax policy at EY, suggested the Chancellor may hold back from immediate action.
‘Although we would normally expect the Budget speech to reveal the government response to the Taylor review and contain measures to change the taxation of the self- employed or change the tax treatment of those businesses engaging gig workers, given the current attention demanded by Brexit, it looks likely that anything definitive will be deferred to another Budget,’ he said.
While the Chancellor may find it hard to increase tax rates, he may take the opportunity to address apparent anomalies within certain reliefs.
Tom Evennett, private client services partner at EY, said: ‘There has been significant speculation that, following a report by the Resolution Foundation setting out the cost of entrepreneurs’ relief (ER) and querying whether ER was achieving the aim of incentivising individuals to establish and grow businesses in the UK, the Chancellor might take this opportunity to reduce the level of lifetime gains that an individual can claim ER on from its current level of £10m.’
‘It would be surprising, given the choppy waters faced by the UK economy and the outcry from entrepreneurs that would be caused, for the Chancellor to significantly reduce the benefits of this relief.’
Equally the Chancellor may also consider an increase in the annual investment allowance (from £200,000 per annum) for qualifying capital expenditure in order to send a positive message to smaller businesses and encourage them to continue to invest
There has been widespread speculation that the Chancellor will make additional changes to the tax regime for pension contributions, given that relief costs £38.6bn a year.
Andy Timpson, partner at Blick Rothenberg argued this would not necessarily impact on pension savings, as tax relief does not automatically get contributed into pension pots - merely a reimbursement of tax in an individuals' hand.
‘What the Chancellor may find though is a sudden increase in the number of retrospective tax relief claims, as many higher rate and additional rate taxpayers do not claim the tax relief owed to them each year,’ he said.
Patricia Mock, Deloitte tax director, said it is possible that some restrictions on relief might be introduced to raise revenue, either by restricting the annual limit or reducing the amount of relief due.
‘Restricting tax relief to basic rate would be hugely complex, particularly for employer schemes, and a reduction in the annual allowance might be more likely if changes are thought necessary.
‘Generally we may also see some tightening of reliefs to more closely focus these to their stated objectives,’ she predicted.
The Conservative party conference has already highlighted a number of announcements that will be included in this year’s Budget. These are the freeze in fuel duty for a consecutive ninth year; the promise of an end to austerity if a good Brexit deal is reached; lifting the council borrowing cap to fund council house building; and introducing a new stamp duty surcharge of up to 3% on buyers of UK property who do not pay tax in Britain.
The Budget is scheduled for 3:30pm on Monday 29 October. For updates on the Budget as it is announced, visit accountancydaily.co/budget
Report by Pat Sweet