Budget 2018: What are we Likely to See?
Ahead of the Budget Announcement on Monday 29 October 2018, our tax specialists share their thoughts and predictions with Brexit in mind.
What do we Know?
The Government have committed to giving £20bn to the NHS and someone needs to pay for that. Additionally, Fuel Duty will be frozen again. Whilst this isn’t a “cost”, it isn’t going to pay for the £20bn for the NHS either.
What do the Public (and Businesses) Want?
People want clarity on what the actual impact of Brexit will be on goods and services (availability and cost). What will encourage overseas owned businesses to stay in the UK or to invest further? I.e. what will deliver all the upside of Brexit which we have been told will come?
What Might Raise the Additional Taxes that the Government Need?
A “Digital Services Tax” on the “FANGS – Facebook.Amazon.Netflix.Google.Starbucks” sounds good for the economy. However, it will take years to implement in practice. It will require a lot of consultation to make sure that it’s not impacting UK businesses in an unintended manner.
What Will the Government Really do to Fill the Gap?
They could implement the “IR35” approach for private companies. This means that the use of “false self employed” labour to reduce NIC costs in the private sector will become significantly harder. Politically, this is an easy win, as the public sector have trialled the approach. Why should the public sector have to apply this but not the private sector?
Reducing the annual allowance for pension contributions from a maximum of £40,000 a year to a lower level is an easy step. Few voters will complain about the treatment of those who can afford to put £40,000 a year in a pension!
Delaying the increase to £50,000 of the threshold where a person pays income tax at 40% was a manifesto pledge. However, there are indications that this could be delayed to fund tax increases. Philip Hammond has confirmed that tax increases may be a necessity and this would spread the burden to a small increase for a lot of people.
Removing the Employment Allowance for larger businesses (this is a NIC exemption for all businesses each year) would be an easy way to raise taxes by limiting the exemption to small, or SME, businesses.
The government could limit Entrepreneurs’ Relief to disposals of business assets relating to SME businesses. It is widely acknowledged that Entrepreneurs’ Relief is costing a lot more than the Treasury expected as it is poorly targeted. It would be easy to make the relief apply to only disposals of, for example, businesses with less than 250 employees and with turnover limits, which are criteria used widely in a lot of other reliefs.
Will Personal Taxes Rise?
There’s been speculation this will be the budget where the government rolls back on its much publicised 2015 election pledge for ‘no VAT, income tax or national insurance increases’.
But big tax rises are not the Conservatives’ style and the chancellor will be hoping for increased economic growth to achieve the required increase in revenue. If they want to stay true to the mantra of ‘work hard and you’ll be rewarded’, that comes down to not taxing people too much.
Instead of headline tax rate rises, some have predicted personal income tax allowances could be frozen. The government had pledged to increase this allowance to £12,500 for lower rate tax payers and £50,000 for higher rate tax payers by 2020, though a freeze could save up to £2bn a year.
Are we set for a Raid on Pensions Tax Reliefs?
There’s talk the chancellor will reduce pension tax reliefs, the funding of which currently costs almost £40bn.
Essentially, pension tax relief is a bonus paid by the government to incentivise people to save into a pension. Basic rate tax payers get a 20% top up on what they save, higher rate tax payers get 40%, and additional rate tax payers can claim 45%.
The cost of funding these tax reliefs has increased significantly due to auto-enrolment pension legislation and is expected to hit £41bn in 2017-18. It is possible then the chancellor may be looking at pension tax relief as an area where savings could be made.
What Other Personal Tax Changes are Possible?
When Mr Hammond last proposed an increase in National Insurance Contributions for self-employed workers, it was met with a stiff backlash, so I can’t see the chancellor going there again.
However, one area where he may act is where people claim self-employed status as a ‘personal service company’, but in fact they may be in full employment. This so-called ‘masked employment’ is estimated to cost the Treasury millions of pounds a year.
Therefore, the chancellor may look to tighten up the IR35 legislation to ensure people being employed as private contractors pay the right amount of tax. HMRC estimates a similar move in the public sector has raised an additional £410m in taxes since 2016, so there’s a clear incentive.
What Might Budget 2018 Mean for Corporate Tax Rates?
The Conservatives may up the ante on corporation tax in this budget and propose further reductions, despite calls from Labour for corporate tax rates to increase.
Reducing corporation tax is one of the few things Mr Hammond could do to give businesses confidence at this uncertain time. f you’re serious about continuing to attract investment from around the world in a post-Brexit era, this would seem logical.
Increasing capital allowances and reducing business rates are two other measures that have long been called for by the business community, but we doubt the chancellor has that much leeway.
Entrepreneurs’ Relief (ER) means that owners of businesses pay capital gains tax (CGT) at 10% on all capital gains up to a lifetime limit of £10 million, when they sell qualifying business assets such as shares in an unquoted trading business. Gains in excess of the £10 million lifetime limit will generally be charged to CGT at the main rate of 20%.
ER was introduced with effect from 6 April 2008 as the successor to Business Asset Taper Relief and part of the wholesale reform of CGT which the Labour government of the time said was designed to deliver a sustainable and straightforward system, which is internationally competitive and provides a focussed tax relief for entrepreneurs. Initially, ER applied to the first £1 million of qualifying gains but that lifetime limit was increased progressively and has been at £10 million since 6 April 2011.
ER may be at risk because the Office of Tax Simplification (OTS) has said they believe the various tax charges and reliefs which apply at various points in the business lifecycle need an overhaul to reduce complexity, make reliefs more accessible and to encourage UK businesses to fulfil their potential. They have said the cost of tax relief on claims to ER is greater than that of any of the other reliefs considered in their review and that the relief does not appear to encourage investment in young or growing businesses or preserve existing businesses from break up in the event of succession, so therefore warrants a closer look.
HMRC estimates that the relief cost £2.7 billion in 2017-18 and it has recently been estimated that the total cost over the first 10 years has been £22 billion. This is significantly more than was forecast. Whilst successive governments have been broadly supportive of ER, the OTS comments and the obvious need to look for additional tax revenues suggests that restrictions to ER might be on the horizon.
In the current climate, where it is imperative that the UK continues to have an attractive business regime, one hopes that careful research and consultation would be commissioned before any drastic changes are made. However, there are some soft spots within the rules which could be altered to restrict the relief in areas where it might be too generous, arguably without affecting the overall policy objective.
These might include:
- The lifetime limit of £10 million could be reduced. HMRC statistics show that in 2015-16 about 12% of ER claimants made claims on gains of over £1 million, but this group accounted for around 69% of the total gains on which ER was claimed. This shows the lifetime limit could be reduced without affecting the majority of potential claimants.
- The qualifying conditions currently include a requirement that the claimant is an employee or director and has a 5% minimum shareholding (with associated voting rights) for at least a year before the disposal. The 5% minimum shareholding could be increased to say 25% or a minimum working time requirement could be introduced to target the relief at those most significantly involved in the business. It should be noted that there are already other reliefs (EIS/SEIS) that encourage passive investment into young and growing businesses.
- There could be a restriction to ER where a business holds significant cash balances. If a business retains cash in excess of normal working capital requirements, unless this is actively invested it should not generally taint the trading status of the company and jeopardise a claim to ER on a sale or a voluntary liquidation following a cessation of the trade.
It is clear that ER and other capital tax reliefs are under review, so it is vital that business owners take advice and plan accordingly. The government will be wary of doing anything to discourage entrepreneurs from setting up businesses in the UK, but there are some areas of ER that could be changed quite easily to reduce the cost of the relief to the Exchequer, whilst still maintaining the policy objective of encouraging entrepreneurial investment.
Will we see any Giveaways?
The prime minister has already announced the freeze on fuel duty will continue. All the indications are that there will be limited room for ‘giveaways’ in this budget, and any nuggets offered will be small and funded by tax rises elsewhere.
The Conservative think tank Onward recently suggested government should reward buy-to-let landlords for selling homes to long-term tenants, the incentive for landlords being they wouldn’t need to pay 28% Capital Gains Tax. Instead the profits of their capital growth would be shared with the tenant to enable them to fund the purchase.
Another idea put forward by the Residents Landlords Association is to refund landlords the additional 3% stamp duty should they sell to a sitting tenant.
For a government that talks frequently about the need to broaden home ownership, these proposals may be something worth looking at, though they are just ideas at this stage.