Budget 2015: ICAS reaction

parliament uk
By ICAS Budget Team

8 July 2015

The ICAS Budget Team assesses the key announcements in the Chancellor's July 2015 Budget statement.

In today's Budget, the Chancellor has clearly set out the direction of travel of the UK Government for the next parliament.

Over the next five years we will see a shift in power and responsibility for public services and for economic levers from London to the power houses of Northern England.  Along with the devolution of further powers to Scotland, Wales and Northern Ireland, the agenda appears to be one of de-centralisation.

Another shift is also clear, with a shrinking state and a government focussed on economic growth and individual economic activity, there is a clear expectation that individuals and families must take more responsibility for their own economic wellbeing. 

We have seen some measures to support this shift with further increases in the personal allowance, the introduction of the living wage and the extension of free childcare in England.   The Chancellor's hope must be that economic growth and job creation is sufficiently powerful to support those who will lose out from the Budget through changes to tax credits and housing benefit and the freeze in working age benefits.

Not all fiscal consolidation plans were set out in this Budget and a passing reference to a review in the autumn, likely heralds a comprehensive spending review.

Avoidance measures

Comments by Charlotte Barbour, Director of Taxation

The Chancellor announced that he would continue his attack on tax avoidance. However, there is a danger that continual emphasis on this may taint voluntary compliance in the UK, which is high, and tax compliance may be eroded by constant talk of people avoiding taxes and a failure to crack down on evasion. We therefore welcome the increased government focus on criminal evasion. 

It remains the case that there should be a more informed and serious debate about tax compliance and tax avoidance.  There is clearly a need for a new era of better standards of behaviour all round – from accountants, tax advisors, tax administrations, businesses and individuals.  The law also needs to work properly, with simpler, better legislation, which enacts a clear tax policy and responsibility for this rests with the politicians that propose and enact tax law.

Pensions

Comments by Christine Scott, Assistant Director, Charities & Pensions

ICAS has previously called for a pensions system that will endure for the long term.  This includes having a system which will encourage retirement saving throughout a person's working life.

The publication of the Green Paper "Strengthening the incentive to save: a consultation on pension tax relief", recognises that further work is needed to create an enduring system.  Auto-enrolment was designed to ensure people save and now the UK Government is moving to the next stage which is encouraging people to save enough.

Tax reliefs are a powerful lever to encourage pension saving but on their own are unlikely to be sufficient and we will continue to call for stability around the freedom and choice reforms to encourage providers to develop new pension products which gain the confidence of the public.

There has been a shift in responsibility for retirement saving from the employer to the individual which has taken place over many years: freedom and choice in pensions completes this transition.  With this comes complexity for individuals and as such it is disappointing to see the introduction of more complexity through the tapered reduction in the annual allowance for those earning over £150,000.

Previous reductions to the annual allowance combined with cuts to the lifetime allowance could become a disincentive to pension saving for those on more modest incomes which may act counter to the UK Government's policy on encouraging saving.

Inheritance tax – main residence relief

Comments by Susan Cattell Head of Tax (England & Wales)

The Chancellor confirmed this measure last week so it is no surprise to see it included in the Budget.  It will doubtless be welcomed by many in the South East and London whose main asset is the family home – the value of which now exceeds the current IHT threshold.  We are however concerned that it adds considerable complexity to the IHT rules – it would have been simpler to increase the threshold.

Complexity- the new IHT relief

Comments by Susan Cattell Head of Tax (England & Wales)

The new relief from IHT involves a new transferable main residence allowance of £175,000 per person on top of the normal IHT threshold of £325,000 – where the main residence is left to children or grandchildren. This could give some married couples and civil partners a total IHT threshold of £1 million.  The relief will taper away where the value of the estate is more than £2 million. In order not to deter people from downsizing the relief will be linked to the sale of the original home.

 As with the introduction last year of the transferable marriage allowance, this is a relatively complex measure, which will doubtless require pages of legislation because it seeks to offer a restricted relief. Additional complexity arises from the fact that the £175,000 figure will not be reached until 2020-21.  The allowance will be £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and finally £175,000 in 2020-21. It will then increase in line with CPI from 2021-22 onwards. It is aimed specifically at couples with offspring, which reflects an ongoing move away  from single taxation.  

Corporation tax

Comments by Charlotte Barbour, Director of Taxation

No doubt business will welcome the proposed cuts to corporation tax rates to 19% and then to 18%, although it is interesting to see this being put forward as a compensatory measure for raising the minimum wage to a living wage. It is not necessarily the case that the profits a company generates will equate to the number of people employed and on low wages.

The cut in corporation tax may also be attractive for those businesses that operate via a corporate vehicle but of course this announcement increases the differential between the taxation of company profits and unincorporated business profits, such as partnerships and sole traders. Differentials can lead to some feeling disenchanted; or it may lead to some seeking to be within the lower profit regime. There are mixed messages in relation to tax avoidance – and it is not clear whether tax competition and reducing tax avoidance are compatible.  

Living wage  and charities

Comments by Christine Scott, Assistant Director, Charities & Pensions

The introduction of a living wage for those aged over 25 was preceded by the announcement that corporation tax rates would be reduced to 19% and then to 18%.  However, it was not until the Chancellor pulled the living wage 'rabbit out of the hat' that the reason for the corporation tax change becomes apparent.

However, the reduction in the rate of corporation tax will not benefit employers who are not subject to corporation tax such as charities.  While charities will likely welcome the increase in the employment allowance to £3,000, introducing the living wage will create added cost pressures for the sector.

Reducing employers NIC would have been a measure to benefit all employers, not just companies and, on reflection, this may be something which Chancellor wishes he had considered.

In a recent survey of ICAS members working in the charity sector, very strong support for the living wage emerged which is entirely consistent with the value of the sector.  The survey found 55% of those who responded to questions about the living wage indicated that their charity has adopted it.  After stripping out those charities run purely by volunteers, this equates to 67% of charities covered by the survey.  The key finding, however, was a real willingness by charities that do not currently pay the living wage to do so with only 3% of respondents indicating that their charity does not wish to adopt it.

The living wage is a clear priority for the charity sector and we would welcome some further consideration by the UK Government as how charities can be best supported in this regard.

Personal allowances

Comments by Susan Cattell Head of Tax (England & Wales)

The Conservative manifesto promised that the personal allowance would be increased to £12,500 by 2020/21.  Today's announcements of increases to £11,000 in 2016–17 and £11,200 in 2017-18 are steps in that direction.

This is good news for the lower paid as it will remove them from tax completely.  However it may not help the very lowest paid who no longer pay income tax anyway due to previous increases in the personal allowance – but still pay NIC because the threshold is different.

Dividends

Comments by Charlotte Barbour of Taxation

In practical terms, this is a simplification for most taxpayers with relatively small amounts of dividend income. It may also encourage investment in shareholdings. In terms of tax administration, it is a very welcome step with the forthcoming devolution of income tax. For example, the Scottish Rate of Income Tax will apply to earned income and, hence, removing small amounts of unearned income will ease income tax collection. Overall, however, it does introduce another exception into the tax system and ICAS would prefer a more holistic review of taxation of income and saving.

Topics

  • Tax
  • Pensions
  • Charities
  • Political landscape

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