Election notebook: Nightmare on Downing Street
John Stokdyk gets in shape for the Friday morning post-election hangover with a few thoughts on what to expect on the tax and accounting front.
With campaigning interrupted by the recent terrorist attacks, the election has taken a surreal, nightmarish turn that washed away many of the certainties that prevailed when the Prime Minister announced the vote in late April.
A Tory landslide at the expense of Labour can no longer be automatically assumed. Politicians and commentators are now openly day-dreaming about alternative outcomes.
Uncertainty is anathema for businesses and their advisers. Instead of planning in a stable (yes, that word) environment, any investments or other spending decisions need to be considered against a variety of circumstances that will depend on the new government’s direction and the outcome of Brexit negotiations.
To help smooth this process, AccountingWEB consulted a range of sources to compile this catalogue of potential post-election scenarios. Feel free to share your own predictions for the future by commenting below.
Scenario 1: Same as it ever was
Maybe the 2017 election was just like a bad dream, and we’ll wake up on Friday morning with a political line-up much as it was when Parliament was dissolved seven weeks ago.
If the Tories are returned with a smallish majority, this no-change scenario would see Spreadsheet Phil back in post to continue his “Austerity lite” path as Chancellor, focusing more on Brexit priorities than major tax reforms.
The Tory manifesto raised the prospect of increased investment in health (£8bn) and education (£4bn), but economic conditions and the impact of the UK’s departure from the EU could constrain the new government’s spending commitments.
Nevertheless, those restraints should not hamper the Conservative plan to reduce the corporation tax rate to 17% and raise the personal income tax allowance to £12,500 by 2020 or thereabouts.
If he picks up where he left off, the Chancellor could reintroduce his plan to equalise NIC rates for employed and self-employed individuals. Hammond has seen the memos and consultation responses from the Office of Tax Simplification and the accounting profession and could bolster his urge to equalise tax treatments by merging income tax and NICs.
However, the Tories alienated well-off pensioners during the campaign by suggesting a £100,000 means test on free social care, from which Theresa May subsequently backpedalled. Any move on income tax and NICs would have the same effect on pensioners liable for a bit of extra tax on their pensions income. Shareholders - another core constituency for the government - would also suffer.
While the markets would take comfort at this result, the no-change scenario would probably see the Chancellor bringing back leftovers from the truncated Finance Bill, including the legislative framework for Making Tax Digital. This upsetting prospect for the accountancy profession might be softened by an extra 12-month in the timetable to accommodate the extra delay caused by the election.
Scenario 2: Theresa’s dream comes true
But is it safe to assume that Philip Hammond will still be Chancellor this time next week? Emboldened by a beefed up majority, Theresa May could replace Philip Hammond with someone more sympathetic to her cause, such as her new favourite, Amber Rudd.
Whitehall whispers suggest that Hammond is not quite on the same wavelength as the Prime Minister, with reports that industrial language is occasionally dished out between their collective teams.
If May does install a new resident at 11 Downing Street, the novice Chancellor would need to learn the ropes before bringing a new set of policy proposals to Parliament. So don’t expect a quick summer Budget in this scenario. Assuming the government sticks with Hammond’s new-fangled Autumn Budget timetable, which hasn’t got off the ground yet, all eyes would turn to November.
Major changes at Cabinet level would open the door to more of those “one nation” spending commitments in the Tory manifesto. But it would definitely extend the legislative delay on the controversial Making Tax Digital reforms.
A strong mandate would allow the Chancellor to do what they wanted with HMRC’s grand digital project, but much depends on whether the new incumbent buys into the whole digital transformation idea, or has the previous First Secretary of the Treasury and MTD champion David Gauke around to stiffen their resolve.
For businesses and the markets, however, the timetable for tax simplification and digitisation will be dwarfed by concerns over the progress and outcome of Brexit negotiations. Ironically, a big majority would give Theresa May the confidence to talk tough at the negotiating table, which could rebound on her if the other EU countries adopt a similar hard line in response.
Scenario 3: A hung parliament
This is the ultimate nightmare on Downing Street. With no party able to command a majority in the House of Commons, we could face the prospect of yet another election campaign. And everyone wants that, right?
Theresa May would find her “leave it to me” stance on Brexit fatally undermined. If she was able to put together a minority government, the need to keep the Lib Dems and nationalist parties onside would mean that another referendum to endorse any exit deal would be likely. Assuming, of course, that she was able to stay on as Tory leader.
For this scenario to come about Labour, the Lib Dems and Greens would all have to surpass expectations, raising the prospect of a progressive alliance. As the left and centre parties came together to explore their common ground, who would emerge as Chancellor and what direction would they take?
With so much confusion and uncertainty in the air, any tax changes would need to simple and symbolic. The most obvious option would be to drop the Tories’ proposed CT rate cut. Labour and the Greens want to increase it and the SNP has voiced its opposition to any further cuts. The Lib Dems, meanwhile, want to draw the line at 20%. So pick a number between that and 28% and you’ve got a concrete proposal for the Queen’s speech.
The VAT rate is another one of those “lockdown” items that would be ripe for review. In the past week, Labour highlighted the anti-progressive nature of high indirect tax rates, while the SNP and Plaid Cymru are both sympathetic to targeted cuts in VAT to support the tourism and hospitality sectors.
The international markets would not take kindly to a hung Parliament and the ensuing uncertainty, leading to yet more pressure on the pound and inflation, sending the economy and government deficit projections spiralling further into the abyss. Confusion would extend to Brexit negotiations and the possibility of some kind of review or a second referendum to see whether the voters really meant it in 2016.
One corollary of all this horse-trading and chaos would be that the last thing anyone was thinking about would be MTD. The SNP is in favour, but would phase in quarterly reporting over five years, while Labour promised to exclude small businesses from MTD.
So for some accountants, maybe this wouldn’t be such a bad scenario after all…
Scenario 4: Labour shock win
Let us enter the realm of fantasy and imagine Jeremy Corbyn as Prime Minister and John McDonnell as Chancellor. Unlikely, yes, but we’ve seen a lot of improbable election results in recent years.
Labour rhetoric in this campaign has matched the “soak the rich” slogan of Dennis Healey’s heydey, but “target the few” may have resonated with younger, dispossessed voters.
Those earning £80,000 or more a year can expect tax increases under Labour, with lower threshold for the 45p additional rate and a return of the 50p rate on earnings above £123,000. A new excessive pay levy has been suggested that would slap a 2.5% charge on earnings above £330,000 and 5% on more than £500,000.
The Labour manifesto included proposals to raise £4.7bn a year through a financial transaction tax, along with an end to “tax giveaways” on capital gains tax and inheritance tax. The party would also extend stamp duty reserve tax to derivatives and review corporate tax reliefs.
As well as floating the idea of a VAT rate reduction, Labour said during the campaign that it would also impose VAT on private school fees.
Jeremy Corbyn was one of the only party leaders to acknowledge the existence of MTD when he said small companies would be exempted, but it is moot whether he will have much time to devote to this issue while pressing ahead with plans to renationalise the railways and other public services such as Royal Mail and utility companies.
Investors will obviously not be keen on this election outcome, so we could expect a serious buffeting of any and all UK assets to further complicate the economic outlook.
And did someone mention Brexit? Labour members, it seems, are just as ambivalent as previous Conservative administrations. The UK electorate will obviously have warmed to Corbyn’s straight-talking style for him to move into Number 10, but will the Eurocrats buy it? And what would his negotiating stance be?
This article was written as a planning aid rather than from a political agenda and started out with four fairly obvious potential scenarios. Even at this level of detail, the permutations are endless.
What factors are likely to have the most impact on businesses and accountants - and what post-election predictions are you willing to advance ahead of the actual result?
There is plenty of room for further analysis in the comments section below… If you can't get enough of political discussion and debate, be sure to join us on Thursday evening after the polls close for our overnight election live blog and chat.
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