But what can we expect when the Chancellor delivers his speech? Theresa May’s recent promise of the end of austerity has prompted a fresh wave of optimism concerning what Philip Hammond may announce in the Budget, but the Chancellor has hinted that tax increases may be required.
Craig Walker, tax specialist at Hawsons, gazes into his crystal ball.
The Budget presents a tough challenge for the Chancellor. There is pressure for the Chancellor to increase tax revenues with Brexit on the horizon and to produce the promised extra £20 billion for the NHS. Mr Hammond is seemingly also determined to reduce the UK’s borrowing, mindful of the Conservative party manifesto commitment to eliminate the deficit. But he will not want to portray this as another austerity Budget – he will instead seek to create positive headlines and optimism, and give a clear message that the UK remains ‘open for business’.
Being a minority government makes it difficult for Hammond to introduce any controversial tax changes, and Brexit related uncertainty seems likely to limit the amount of changes Hammond will make. Rather than increasing headline rates of tax we could see the Chancellor raise revenue through reducing the value of reliefs, freezing tax thresholds or introducing targeted tax increases for the few rather than the many.
The Conservative party pledged to raise the tax-free personal allowance to £12,500 and the 40% rate of tax to £50,000. We have seen these thresholds increase each year but the Chancellor could seek to delay or scrap further rises, potentially saving billions.
A raid on tax relief for pension contributions?
We could see some changes to the pensions tax regime. Although unpopular with high earners, it would not be surprising to see tax relief for pension contributions given only at the basic rate of income tax.
Entrepreneurs’ Relief (“ER”) allows individuals exiting a business to achieve a 10% tax rate on gains of up to £10 million and is one of the most generous tax reliefs currently available. However there are calls for the relief to be watered down or even abolished in view of the high cost to the Treasury (it will cost the Treasury around £2.7 billion in 2018). I would be surprised if ER were to be abolished completely, but there could well be some changes to the existing rules. For example, the 12 month ownership requirement could be extended to encourage more long term investment or the £10 million lifetime limit could be reduced.
It is important to seek advice on the availability of Entrepreneurs’ Relief well in advance of a sale to ensure that the relevant requirements will be met.
The Chancellor will wish to further encourage R&D, perhaps by increasing grant funding and tax incentives for innovative businesses.
An overhaul of the tax system for the self-employed?
The Chancellor believes the taxation of the self-employed needs a rethink and tried to make changes in 2017. However the proposals went down like a lead balloon and he was forced to make an immediate U turn, and more recently Mr Hammond cancelled the government’s pledge to abolish Class 2 national insurance contributions. I would not expect any changes this year – businesses need a period of stability and support, not a tightened tax landscape – but future changes in this area appear likely.
Delaying ‘Making Tax Digital’?
This relates to HMRC’s controversial project to move to a fully digital tax system. You can find more information on MTD here.
The project is being phased in from April 2019. Initially this will only be for VAT purposes, with the wider roll out delayed until at least 2020. From 1 April 2019, all VAT registered businesses with a turnover above the VAT threshold (currently £85,000) will be required to keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.
Such fundamental change to the tax system requires thorough consideration, testing and consultation with affected businesses. The scheduled start date of 1 April 2019 is fast approaching and the Chancellor may choose to delay the introduction in order to provide businesses with more time to prepare.
Changes to VAT?
Currently businesses only have to charge VAT if their taxable turnover exceeds £85,000 a year. The government are considering reducing this threshold, which could see thousands more small businesses join the VAT system. Although this would offer the Chancellor a boost in revenue, I would not expect the Chancellor to introduce such a significant change at this time.
The Chancellor will be keen to send a strong signal that the UK remains a good place to do business following Brexit. Corporation tax is therefore expected to remain at the current level of 19% and remain set to fall to 17% in 2020.
Capital Gains Tax (CGT) & Stamp Duty
Previous tax policies have attempted to penalise and discourage buy-to-let investors – see https://www.hawsons.co.uk/buy-to-let-tax-changes/. The government could seek to incentivise landlords to sell off buy-to-let properties in order to increase property availability for first time buyers, by reducing the CGT rate to perhaps 20% (currently the main rate of CGT on residential properties is 28%).
The government has previously announced that in future CGT will need to be paid within 30 days of the sale (rather than by the 31 January following the end of the tax year).
Higher stamp duty?
The Chancellor is expected to announce higher rates of SDLT for foreign buyers of UK property – overseas buyers have been blamed for pushing up property prices and limiting housing availability.
There is strong concern that the Chancellor may ask private sector engagers to follow the public sector in assessing whether or not PAYE should be operated on personal service companies. This would represent a highly complex and controversial change and the Chancellor would risk a severe backlash from the very businesses he has pledged to support. There is a fear that any such increased regulation could bring down businesses and damage the country’s flexible economy.
The Budget is expected to confirm that the changes will be rolled out to the private sector and provide an indication of the date that this will apply from (April 2019 or April 2020 seem likely).
The Chancellor announced at the recent Conservative party conference that the Apprenticeship scheme would be reformed with increased ability to use funds across the supply chain.
The Chancellor is expected to further delay the rollout of flagship welfare reform Universal Credit. The Prime Minister has said “we are listening to concerns” and “taking a test and learn approach”. A “slow and measured” roll-out is expected to start in 2019.
The Chancellor could introduce legislative changes to extend and strengthen HMRC’s powers to investigate offshore tax matters. We have already seen tough legislation imposed under the ‘Requirement To Correct’, with those who fail to disclose offshore discrepancies facing very harsh penalties.
There remains strong political pressure to further increase taxes for large technology companies in the face of perceived tax avoidance and changing shopping habits. This follows the relatively recent introduction of ‘Google tax’ – a levy on profits diverted overseas.
The Chancellor has indicated that he is considering introducing a special retail tax on online businesses, if necessary without full international co-operation. We can expect the Chancellor to sound tough but probably only make small changes before the OECD finalises new global standards. The Chancellor has hinted that he is willing to look at temporary tax measures until an international agreement can be sought.
The Prime Minister has confirmed that fuel duty rates will remain unchanged for the ninth year in a row. This is of course good news for motorists and it is estimated that the average motorist has gained around £1,000 in total from all the freezes.
There is a widespread acceptance that the UK’s tax rules are overly complex and continue to become even more so. Businesses would welcome simplification of the rules and the Budget provides the Chancellor with an opportunity to take action in this area. Perhaps we could see a closer alignment of income tax and NIC rules.
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