Chancellor Philip Hammond faces a hard task in next week’s Budget. On his unenviable list of goals is to prepare the UK economy for the biggest legislative upheaval in living memory in the form of Brexit, and radically reform a creaking taxation system to address a shrinking tax base.
If the rumours swirling around Westminster prove to be true and this is to be Hammond’s last Budget, will he choose to go down in a blaze of legislative glory, enacting bold changes such as the reduction in the VAT threshold or merging income tax and NI, or will spreadsheet Phil play it safe and opt for a ‘only necessary changes’ approach?
This watching brief is a summary of changes that may or may not be announced on Wednesday:
As previously announced, the merger of Classes 2 and 4 NIC (with the abolition of the former) has been delayed by a year to 6 April 2019. But uncertainty remains around what the rate for the new Class 4 NIC will be.
The last time the Chancellor dabbled with national insurance he received a swift rebuke from his Downing Street neighbour, so any prospect of this being revisited should be treated with caution.
Commenting ahead of the Budget, RSM’s tax partner George Bull said that while the underlying discrepancies in NI contributions between the employed and self-employed may be reduced by increases in Class 4 NIC from April 2018 and April 2019, some are saying that this does not go far enough, especially in light of the Taylor Review.
In a bid to help young employees there could be a reduction in contributions for those under a certain age, but this seems a stretch for a government under fiscal pressure.
Tax avoidance and evasion
While a raft of anti-evasion and avoidance measures are still bedding in, including the GAAR and the new corporate criminal offence of failing to prevent the facilitation of tax evasion, the recent Paradise Papers news splash will ratchet up the pressure on the Chancellor to talk tough on the perceived injustices of the system.
The use of disguised remuneration schemes has already been addressed by measures such as a new charge on disguised remuneration loans which remain outstanding on 5 April 2019. RSM’s George Bull told AccountingWEB that he hoped the Chancellor would use the Budget to clarify exactly how the loan change will be collected, and in particular on what basis on the liability for payment may be transferred from employers to employees.
One change the government may enact is the reduction of tax breaks offered by the Enterprise Investment Scheme (EIS), possibly by reversing the increase in 2011 of the income tax relief from 30% to 20%. Alternatively, the range of trades which can qualify for EIS may be reduced once more to exclude less risky enterprises, such as TV productions and property-holding businesses such as pubs or restaurants.
Another relief under threat, according to David Kilshaw, private client services partner at EY, is inheritance tax business property relief.
“We may see a cap on the value of that business property relief,” said Kilshaw, “which exempts unquoted trading companies from the inheritance tax charge on death.” This relief has been under scrutiny, and thus at risk for some years now.
MTD consultation papers
The government’s flagship digital taxation programme has been plagued with delays, but with Making Tax Digital for VAT due to start in 2019, it is highly likely that the government will publish further draft VAT regulations to support MTD implementation.
According to RSM’s tax director Andrew Hubbard, this secondary legislation is likely to make provisions for the content, form and means by which digital records are to be kept preserved, and identify exemptions from MTD for VAT.
Hubbard believes that MTD consultations for complex businesses and large partnerships are extremely unlikely to appear in this Budget.
SDLT and ATED
The increasing of these rates or the lowering of thresholds for both SDLT and ATED have been money spinners for the government, and faced with increasingly gloomy economic forecasts may prove too tempting for the government.
In the same area, the Chancellor is also said to be pondering a possible SDLT holiday or reduction for first-time buyers, as he seeks to address the view that young people are increasingly priced out of the housing market.
The release of the OTS simplification of VAT review provided the government with a perfect opportunity to gauge wider opinion on a diverse range of VAT measures, including the most controversial of them all, a reduction in the £85,000 registration threshold.
Other, less divisive measures could include consultations on penalties and appeals, special accounting schemes, simplifying VAT partial exemption, the option to tax and the capital goods scheme. The extent to which supplies which are subject to reduced VAT rates, or are exempt from VAT could be reviewed with greater freedom once the UK has left the EU.
IR35 and the Taylor Review
Given that the legislation is already in place for IR35 in the public sector, it would be relatively straightforward (legislatively speaking) for the government to extend this to the private sector without discussion or consultation - regardless of how controversial this is likely to prove.
Susan Ball, Employment Tax Partner at Crowe Clark Whitehall, believes we could see an announcement in this Budget with a start date of April 2018 or April 2019, as there are so many areas for affected organisations to contend with.
“We are now seven months into the change in the public sector,” commented Ball. “HMRC’s view is that the implementation has gone well, as almost all stakeholders who have been impacted by the changes have reporting problems and ongoing concerns.
“If we do not hear more on this, then we are likely to have a reporting back on the recommendations from the Taylor review and ‘dependent contractor’ status, together with a possible increase in NIC for the self-employed.”
Benefits in kind: a further tightening of conditions
Due to be published in the Spring Budget 2017, the call for evidence on how benefits in kind are valued for tax purposes has yet to be issued. RSM’s George Bull expects this to appear, along with the outcome of the call for evidence on the use of income tax relief for employees’ business expenses.
Pensions tax relief in the firing line
Previous Budgets brought with them radical changes to pensions, and Jason Whyte, associate partner, pensions at EY, believes there won’t be any fundamental alterations this time around.
However, pensions tax relief could be in the firing line, which is currently worth just under £40bn per year to savers. A further reduction in the annual allowance has been mooted, but the more likely target is to bring down the threshold for annual allowance taper from adjusted earnings of £150,000 pa to £120,000 pa.
Insurance Premium Tax
Another potential target for a revenue-hungry government could be Insurance Premium Tax. However, given that this has doubled from 6% to 12% in the last two years, with the most recent hike in June 2017, both insurers and customers will be hoping for a quiet Budget this time around.
Road fuel duty
Since the formation of the coalition government in 2010 the fuel duty stabiliser hasn’t been used. An increase in fuel duty by RPI at 3.9% would be expected to cost just over £1bn in 2018-19, according to ONS figures. With a government looking for quick cash and the recent diesel revelations this may be an easy way to fill a fiscal hole.
Effect on devolved taxes
Further devolvement of tax-raising powers could be announced. Speaking to AccountingWEB, RSM’s George Bull raised the potential devolvement of separate national insurance thresholds for Scottish taxpayers to allow for alignment with Scottish rate of income tax bands. As it is the class 1 NI threshold in Scotland is out of line with the 40% band, and the four alternatives for Scottish income tax could create even more confusion.
What would you like to see Philip Hammond propose next Wednesday? And what do you think will actually happen?
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About Tom Herbert
Tom is acting editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.