After time was called on the Spring budget and the Chancellor, Phillip Hammond, decided to have only one major fiscal announcement a year in the autumn, businesses were relieved at the prospect of a lessening in complex tax reforms.
However, for many, the March 2017 Finance Bill was one of the most complex and burdensome yet, in part due its sheer length and with reforms adopted under the OECD BEPS initiative and UK loss reform rules.
As the first Autumn budget under the new arrangement looms just days away, and with the added complexities of Brexit and US tax reforms, businesses are braced for ‘spreadsheet Phil’s’ financial plans.
Melissa Geiger, Partner and Head of International Tax at KPMG in the UK, said: “The message for the Chancellor is keep it simple, provide clarity and certainty where possible, and above all, focus on growth.”
Corporation tax rates
When George Osborne was Chancellor, he cut the corporate tax rate from 28% in 2010 to 20% in 2015. He decided to take this even lower and announced in his 2015 and 2016 Budgets that he would reduce corporation tax to 19% in 2017 and 17% in 2020.
Hammond could decide not to go ahead with the move to 17% in 2020, which would boost the country’s coffers to about £5billion a year, however, most commentators agree this is unlikely.
The Chancellor is expected to stick to the current plans to reduce the corporation tax rates, in a bid to attract investment and competition as Brexit draws closer. The planned reduction in the US corporate income tax rate to 20% will increase pressure on the Chancellor to stick to the low rate.
There have also been calls for the Government to protect and even increase R&D tax credits by increasing the SMEs tax uplift, to compensate for the reductions in headlines rates.
After the first revaluation of rates for seven years took place this April, the Chancellor plans to raise business rates by 3.9% in April next year, in line with the retail price index (RPI). The sharp increase will see some firms facing a 45% rise in their tax bill, while some in London and the City will be hit hardest, with rates soaring by over 60%.
In light of this, leading business groups including The British Chambers of Commerce, the Federation of Small Businesses and British Property Federation, have lobbied Hammond to freeze the hike in business rates in the face of Brexit, or face a serious erosion in investment and business confidence.
It is expected that the Chancellor will respond to this backlash and the increasing pressure from the business sector, but it is not known what reforms he will introduce.
The British Retail Consortium (BRC) submitted a series of recommendations to Hammond that include freezing the business rates multiplier in April 2018 and setting business rate rises in line with the Consumer Prices Index (CPI) before the scheduled timetable of 2020. The CPI sets inflation at 3%, rather than using the September retail price index set by the Office for National Statistics (ONS), which would mean a rate rise of 3.9%.
Dafydd Llewellyn, managing director of UK SMB at Concur, said: “The increase in business rates in April was the biggest in many years. Despite the economy performing better than expected so far in 2017, this is against a backdrop of uncertainty driven by Brexit and potential interest rate rises. SMB companies need additional support to build resilience into their businesses for what promises to be a roller coaster ride in 2018.
“The best way that the chancellor could help and show his commitment to small and medium-sized businesses would be to reverse the big rises in business rates we saw earlier this year – or delay them.”
After a massive backlash to the proposed hike in self-employed National Insurance contributions, which saw Hammond make an embarrassing U-turn, his sights have now turned to the VAT threshold.
It is expected that Hammond will lower the threshold above which businesses have to register – which currently stands at £83,000.
Significantly higher than the EU average of £20,000 the Office of Tax Simplification (OTS) pointed out the potential benefits of lowering the the threshold, and estimated that a drop to £43,000 would generate between £1 billion – £1.5 billion.
David McDonnell, VAT director at accountancy firm MHA MacIntyre Hudson, commented: “HMRC could be on the verge of making far reaching changes to the VAT system. The UK has far and away the highest VAT registration threshold of all EU Member States at £85,000. This is more than four times the EU average of £20,000 and a stark contrast to countries like Italy, Spain and Sweden where there’s no threshold whatsoever and VAT registration is effectively compulsory…
“Which way will the Government jump? In the challenging pre-Brexit environment they may decide to keep the status quo, for now at least. But the issue is now firmly on the agenda and we shouldn’t be surprised if the Chancellor acts quickly to shake things up.”
Hammond is expected to announce a package of anti-avoidance measures, especially in the wake of the recently released Paradise Papers, which detailed offshore tax avoidance and evasion by high-profile members of society.
Jon Thompson, chief executive of HM Revenue & Customs, said: “With more powers, more people, more intervention and more data, you can continue to reduce the tax gap, and indeed there is a whole range of measures in the pipeline now and I guess there will be further measures in the upcoming autumn Budget.”
Lacking a parliamentary majority gives the Chancellor little room to manoeuvre, so anti-avoidance measures are a politically safe way to raise funds without ruffling too many feathers.
Derek Scott, head of tax investigations at KPMG, said: “HMRC’s drive to stamp out non-compliance involving offshore issues has just significantly intensified. Requirement to Correct is now in legislation and creates an obligation for any taxpayer who has undeclared UK liabilities that involve offshore issues (relating to Income Tax, Capital Gains Tax and Inheritance Tax) to correct their position on or before 30 September 2018.
“This is the final chance for those with offshore interests to check their affairs and get them in order, otherwise they could face unprecedented minimum penalties of 100 per cent and up to 200 per cent of tax liabilities. In addition, for more serious cases there are asset based penalties and public ‘naming and shaming’. After the September 2018 deadline, HMRC will have access to financial data from more than 100 jurisdictions that it will be able to review, assess and use to launch its own investigations.
Pensions are a usual feature in the budget and previous governments have cut tax reliefs on pensions, limited the annual qualifying amount to £40,000 and dropped the lifetime allowance to £1million from £1.8million in 2010.
But after Gordon’s Brown ‘raid’ on pensions, it is unlikely that further cuts will be made or that pension tax relief will be flattened.
State pensions will see the triple lock remain until 2020, guaranteeing that the state pension will rise every year by 2.5%, the rate of inflation, or average earnings growth, whichever is largest.
Because the September CPI rate reached 3%, Hammond will announce a 3% rise in the state pension, which is the biggest seen since 2012.
After Hammond caused outrage with his proposed NI reforms in the last Budget, and his subsequent U-turn, it is expected he will still attempt to create an equal balance between the self-employed and the employed.
After IR 35 reforms were introduced to contractors that operate in the public sector, many expect this to be applied to the private sector.
Simon Warne, Tax Partner at leading accountancy firm, Crowe Clark Whitehill, commented:
“We are in need of comprehensive reform… A unification of income tax and national insurance into a single tax will remove the personal tax incentive to move between employed and self-employed status, although some solution will need to be found for the national insurance burden, which falls on employers and represents an employment tax.”
With less than a week to go before Chancellor Philip Hammond announces his Autumn Budget, Genevieve Moore, Head of Corporate Tax at accountancy firm, Blick Rothenberg, said: “With Brexit in the background, businesses of all sizes are facing a period of uncertainty and challenge, and it is up to the UK Government to calm the waters. This should start now with a reassuring and simple budget.”