Rebecca Cave has consulted her crystal ball to predict what might be in the Autumn Statement on 25 November.
George Osborne had his sums all tied up; he would bring the country’s accounts back into surplus by 2019/20 by making £12bn worth of social security savings. This plan was flagged up before the election, but the detail was not revealed until the Summer Budget, when it became clear that £4.4bn of the social security savings would come from cutting tax credits paid to low income households.
The alteration in tax credits rates and thresholds would be made by an affirmative statutory instrument (SI). This is a form of legislation which is not normally subject to detailed debate in the House of Commons, and is often waived through. However, both Houses of Parliament must approve it, and this is where George’s plans came unstuck; as the House of Lords refused to approve the SI which contained the tax credits cuts.
If the changes to tax credits had been presented in a separate Financial Bill the House of Lords wouldn’t have had the power to block the legislation, due to the Commons Financial Privilege.
As a result of the Lords’ action George Osborne must now find an additional £4.4bn of expenditure cuts from other sources, or reign-in his target of a £10bn surplus in 2019/20 by borrowing more and perhaps phasing-in the tax credits cuts over five years. A third option is to raise taxes or duties, but the pesky tax lock (Finance Bill 2015-16 cl 1& 2) has limited his action in that direction.
So what can he do to raise funds? Three taxes which are not covered by the tax lock are CGT, IHT and SDLT, all of which are stuffed with reliefs and exemptions ripe for culling.
Entrepreneurs’ relief received some significantly body-blows in last year’s Autumn Statement on 3 December 2014, and in the Budget on 18 March 2015. I suspect the Chancellor has more attacks planned for this year, such as a removal of the relief when:
transferring shares to family members to trigger a material disposal; or
incorporating a property letting businesses.
Another very generous CGT relief is the exemption for gains made on shares taken by employees in return for giving up a bunch of employment rights (employee shareholder shares). The first £2,000 worth of shares are free of tax and NI on acquisition, but up to £50,000 of shares (measured on acquisition value), are also free from CGT on disposal – whatever the size of the gain. That is a glorious relief for private equity investors, as explained in Jolyon Maugham’s blog, and is ripe for reform.
Business property relief (BPR) and agricultural property relief (APR) provide 100% exemption from IHT when passing on a business or farmland. There have been rumours for years that BPR may be cut from the current 100% rate, or restricted in scope.
The value of quality English farmland has doubled over the last five years, and the price of farmland in other parts of the UK is similarly buoyant, which encourages investors. To have such a valuable asset protected from IHT by 100% APR, and be subject to 10% CGT under ER (in many circumstances) may be too tempting for George. Expect some tweaking, if not a wholesale reduction of IHT and CGT reliefs in that area.
Commercial property values have not increased in line with residential property, but the number of non-residential property transactions is steadily increasing, according to the latest quarterly HMRC report. When SDLT was reformed in December 2014 only residential properties were affected. Now there are two different methods of calculating SDLT for residential and non-residential property transactions, and two methods of calculating the commercial land tax charges north and south of the Scottish border. This confused picture is ripe for “simplification”, which may well subtly increase the yields.
Currently there is a relief from SDLT where a family partnership incorporates, and that too could be vulnerable to be closed as a “loop-hole”.
The government appears determined to deter tax-incentivised incorporation. The dividend tax is one line of attack, another is the restriction of travel and subsistence expenses for contractors working through intermediaries. Both changes are due to take effect from 6 April 2016. On top of those there is a rumour of further tweaking of the IR35 rules to force contractors on to their engager’s payroll where the engagement lasts for a set period – possibly as little as 12 months.
The Autumn Statement promises to be exciting – but possibly not in a good way for small businesses.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.