The forecast is for no major tax changes aside from changes to business rates as the UK tries to give stability to the economy for the upcoming Brexit discussions.
Leading up to his speech, most businesses are relatively relaxed because Hammond’s Autumn Statement contained several changes to the tax system including an increase to the insurance premium tax rates, restrictions on relief for interest and changes to the loss rules to prepare the UK for a post-Brexit Britain.
Hammond has moved to get rid of the Spring Statement permanently precisely because he feels too much fine-tuning is unhelpful for businesses. In addition, official figures show that UK’s levels of borrowing are also slightly lower than expected, giving the Chancellor more room to manoeuvre to avoid deep cuts to public services and higher taxes.
“Despite the rumours of higher than expected tax receipts, there appears to be no let up to austerity and the expectation is that Hammond will look to new measures to increase revenue,” Chris Groves, partner at Withers’ private client and tax team, said.
However, Michelle Quest, head of tax at KPMG in the UK, is expecting a “boring budget” with no major structural changes and no relaxing of the government’s fiscal stance.
Bill Dodwell, head of tax policy at Deloitte, also hopes for limited changes. “We are in the middle of very substantial changes to the tax system, from Making Tax Digital, changes to employment taxes and changes driven by the G20/OECD Base Erosion and Profit Shifting project,” Dodwell said. “The move to a single, autumn Budget is welcome – which means that this Budget should not contain too many changes.”
Simplifying the UK’s tax system is high on many wish lists. However, business rates scrutiny may force the Chancellor’s hand despite hopes for a low-key budget. The UK’s present business rates system has been under criticism because of increases by many ratepayers.
"If the Chancellor wants to help ratepayers facing large increases, the fastest and most effective method is to adjust the thresholds of the Transition Scheme that protects ratepayers from large rises,” Phil Vernon, head of rating at PwC, said. “However, he will have to wrestle with the mechanics of the scheme as this would need to be financed by restricting reductions from other ratepayers who are expecting a much-needed decrease in their bills.”
Richard Godmon, tax partner at Menzies, believes the Chancellor has a rare opportunity to deliver tax cuts and simplify the tax system for businesses because of the surge in monthly tax receipts, which was announced on February 21.
The government had hoped and planned that its first two budgets in 2017 would be a low-key affair, in light of the triggering of Article 50 to ensure a smooth transition. “These best-laid plans could be frustrated and we may see some significant announcements, not least on the thorny issue of business rates which has been the centre of intense scrutiny in recent weeks,” Chris Sanger, head of tax policy at EY, said. “Elsewhere, with a review of modern employment practices already underway, the taxation of the self-employed is likely to be high on the Chancellor’s agenda.”
Overall, Iain McCluskey, partner at PwC’s people and organisation practice, predicts that this will be a quiet budget. “The Chancellor remains handcuffed by both his party commitment not to raise taxes in his parliament and the need to invest in the economy and fund our public services. It leaves very little room to move,” McCluskey said.
The big tax themes that businesses can expect
For Mark Bevington, partner at Baker McKenzie, the big issues that businesses in the UK are puzzling over are:
- Measures to raise revenue and whether they will harm UK competitiveness;
- Measures to attract technology companies (both start-ups and the global major industry players), and how they will be balanced with the Government's apparent desire to modify the tax system to cope with new digital business models; and
- Further signals on the headline corporation tax rate in light of Brexit and the possibility of US tax reform.
Developing the gig economy will be a major focus for the UK and could feature in the Spring Budget. An increase in the tax burden of the self-employed is possible as the government looks to bring more of the gig economy into the mainstream tax system.
By focusing on the gig economy, which is changing the way businesses work, the government hopes that the UK will be better placed to benefit from the rise of e-commerce and ‘unicorn companies’. The Chancellor will usher in a review of the way the self-employed are taxed to sit alongside the consultation of the gig economy.
Withers’ Groves predicts that inheritance tax will be one of the hottest topics in the budget as the funding of social care in later life is prominent. “Equally, there is pressure for an increase in the nil rate band, which has been frozen at £325,000 ($398,937) since 2009,” Groves added.
In addition, business rate reforms and pressures on social care and funding are expected to be at the forefront of the budget.
The forthcoming rates revaluation has focused on the shifting of burden for business rates from some locales to others.
“However, beyond a shift from one taxpayer to another, the revaluation locks in the significant increase in the burden that has been slowly introduced over time,” Sanger said. “The gradual increase in business rates each year above the rise in property values has led to the burden in aggregate that started at 41.4% of rateable value in 2010 rising to an expected 48% in the latest revaluation.”
Quest feels that tax changes must ultimately prioritise supporting aspects of the tax system that bolster the UK’s international competitiveness. “With the triggering of Article 50 imminent, the Chancellor will need to demonstrate more than ever that the UK is ‘open for businesses and will remain competitive on the global stage,” Quest said.
RSM is confident that the announcements will include a call to open a consultation to decide the case and options for bringing into the UK corporation tax regime all non-resident companies receiving taxable income from the UK, because of an announcement in the Autumn Statement 2016.
No further drop to the corporation tax rate is likely – beyond the scheduled falls to 19% on April 1 2017 and to 17% on April 1 2020 – despite rumours of the UK becoming a tax haven as it looks to attract post-Brexit investment.
“A 19% rate will give the UK the lowest combined (national, state and city) tax rate in the G20 but does come at a time when other countries have been reducing their own rates – at 9%, Hungary’s tax rate has now overtaken Ireland as the lowest in the EU. With the US considering proposals to reduce its national tax rate to 20% or even 15%, this trend will remain at the heart of competition for investment,” Sanger said.
“Despite the upcoming rate cuts, corporation tax receipts are predicted to grow, highlighting the importance of considering the tax base as well as the tax rate,” he added.
For indirect taxation, a few changes are predicted. RSM anticipates supplementary legislation for strengthening the ‘disclosure of tax avoidance schemes – VAT and other indirect taxes’, a potential extension of a VAT group to individuals and general partnerships, policy changes to the VAT recovery by holding companies, and an overall simplification of VAT by recommendations from the Office of Tax Simplification.
In addition, the withdrawal of extra statutory VAT concessions is likely to be addressed. In line with the House of Lords decision in Wilkinson, which decided that HMRC would withdraw the concessions with effect April 2018.
Following previous consultation, RSM expects further details to be announced on measures designed to tackle the hidden economy.
Ian Stewart, chief economist at Deloitte, forecasts good growth for the UK and “better-than-expected” tax revenues to provide Hammond with some good news ahead of this budget.
However, he noted that the long grind of public sector austerity has much further to run. Annual borrowing still accounts for 3.5% of UK GDP even after seven years of deficit reduction. This budget is not likely to see a change in this as the squeeze on public spending will continue to step up.
By the end of this decade, the tax burden is likely to be at a 30 year high, according to Deloitte.
So what does all this mean? George Bull, senior tax partner at RSM, expects to see progress in or finalisation of measures proposed in the earlier budgets. “Never has the prospect of a boring Budget seemed so attractive, although the prospects of that recede as Budget day comes nearer!” he said.