Autumn Statement: This roadmap needs to be clearer
On 23 November, Chancellor Philip Hammond delivered his Autumn Statement which, at 64 pages, is among the slimmest ever. It is also one of the most crucial, given the uncertainties for the British economy after the Brexit vote.
Hammond displayed welcome pragmatism by announcing that in future an Autumn Budget and Spring Statement would replace the existing Autumn Statement and Spring Budget. This isn’t as daft as it first sounds. In his brave new world, Autumn Budgets will announce policies to be implemented the following spring, while Spring Statements will be lesser affairs, primarily to update parliament on Office for Budget Responsibility forecasts.
ICAS Chief Executive Anton Colella welcomed the move, having previously called for fewer big fiscal events in the UK calendar. The new approach goes some way towards a suggestion he made in March, to restrict any government to two major budget statements across a five-year term, reducing the uncertainties for business.
If the government announces major tax changes only once a year, on a timetable which allows several months’ consultation between the budget and the new financial year, there will be better opportunities for scrutiny of proposed new measures – not only by external bodies such as ICAS, but also by MPs.
Businesses want certainty and stability; they dislike change. It should, therefore, have been a relief when Hammond confirmed that the government would stick to its existing business tax roadmap.
Unfortunately that “roadmap”, published in March, was barely more than a note of short-term proposals previously announced. Since then the vote for Brexit and the appointment of Theresa May’s new administration have shattered all previous expectations. What is urgently needed now is a forward-looking five-year plan, along the lines of the comprehensive corporate tax roadmap published in 2010.
Central to the government’s current plan are George Osborne’s phased reductions in the corporation tax rate to 17% by April 2020. Reportedly, this is as low as the new Chancellor wants to go, while the prime minister has suggested a further cut to 15%. Many large companies already see the 19% rate from April 2017 as highly competitive. For example, even if Donald Trump’s new administration lowers the US federal tax rate from 35% to 15%, most US companies would pay at least 20% in federal and state taxes combined.
UK companies are concerned that ever-lower corporation tax rates will be accompanied by a broadening of the tax base and reduced reliefs. Examples are forthcoming restrictions on interest deductions and changes to loss relief rules.
As the corporation tax rate falls and diverges more widely from income tax rates, we can also expect new, tougher anti-avoidance legislation. This may create new issues for smaller companies, with the government planning to consult on the impact of incorporation and on fairness between differing business structures.
On a more positive note, R&D reliefs for companies are to be reviewed to make the UK more competitive. However, more could be done to encourage smaller companies and start-ups to claim R&D reliefs, and to encourage exploitation of UK inventions here rather than abroad.
Also well received by companies are proposals to change the patent box rules to facilitate collaborative R&D by two or more companies, and steps to simplify the substantial shareholdings exemption.
Pensioners and savers
Given the government’s straitened finances, it was a surprise that Hammond decided to continue honouring the pension “triple lock”. This began in 2010 and guarantees that, until 2020, state pensions rise annually by the highest of three measures – inflation, average earnings and 2.5%.
MPs and pension professionals have warned that the triple lock is unsustainable. It will have to be replaced, perhaps by a double lock linking state pensions with the higher of either inflation or average earnings. On this the Chancellor said: “As we look ahead to the next parliament, we will need to ensure we tackle the challenges of rising longevity and fiscal sustainability.”
Hard-pressed savers, struggling to earn even paltry returns on their funds, may have noted that a new National Savings bond will become available in April 2017. It will offer an annual return of around 2.2% over three years on maximum savings of £3,000. This seems scarcely worthwhile, with average inflation over the next four years estimated at 2.25% and, of course, the risk of early withdrawal penalties.
The income tax personal allowance will increase to £11,500 from April 2017, when the higher rate threshold will rise from £43,000 to £45,000. Different limits may apply for Scottish taxpayers, if Holyrood flexes its muscles by using the new, wider powers devolved under the Scotland Act 2016.
At the time of writing, publication of the draft Scottish Budget on 15 December is awaited. Therefore, it remains to be seen whether the SNP administration will raise the personal allowance for Scots by means of a nil rate band, and whether the higher rate threshold will be £43,387 as proposed.
The Chancellor is also tidying up some loose ends on income tax, as a result of which some individuals will suffer increased tax liabilities.
As previously announced by Osborne, off-payroll working rules in the public sector will change from April 2017. Responsibility for operating them and paying the correct tax will pass to the body paying the worker’s company. Thus, public sector organisations (or agencies supplying the workers) will determine the IR35 status of engagements and then, if they are deemed within IR35, apply taxes as they would for employees.
In a blow particularly harsh for some, the tax advantages of salary sacrifice arrangements will be phased out on grounds of fairness. Subject to limited transitional relief for certain arrangements, income tax and employer National Insurance advantages of such schemes will be removed from April 2017 – except for those relating to pensions, pensions advice, childcare, “cycle to work” and ultra-low emissions cars.
Benefits in kind are also in the spotlight. The government will consult on employer-provided living accommodation and how other benefits are valued for tax purposes. It will also examine the use of the existing income tax relief for employees’ business expenses, including those that are not reimbursed by employers.
Employee shareholder status was Osborne’s brainchild, introduced into law in 2013 and criticised from the outset. Its use for tax planning by high-earning individuals serves as a lesson on making laws too complex. The tax advantages will be abolished for arrangements made from 1 December, and the status itself closed to new arrangements at the next legislative opportunity.
Given HMRC’s past service record, it was good to learn that they are to publish more detailed performance data. This will include monthly digital, telephony and postal performance data, as well as new complaints data.
Finally, the government will respond in January to a deluge of more than 1,800 consultation responses on Making Tax Digital (MTD). Draft legislation will follow, with (and I quote) an “updated” impact assessment – a bit rich since no genuine attempt at an impact assessment has been published to date.
Hammond gave no hint of delaying the implementation of MTD or increasing exemptions from digital record keeping – both of which are desperately needed.
This article appears in the December/January edition of CA magazine.