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‘Nothing is off the table’ in UK budget

22 October 2018

Josh White

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Brexit negotiations will likely take precedence over all other factors when UK Chancellor Philip Hammond presents his autumn budget, a tax director at a major energy company told ITR, but the situation is very open-ended for tax policy.

British businesses are weighing up the chances of a sudden increase in taxes in the budget statement due on October 29. Hammond has reportedly told Treasury officials that “nothing is off the table” in his search for an extra £26 billion ($34 billion) to fund the National Health Service (NHS), but he is considering a series of tax changes.

The chancellor pulled budget day forward in a bid to settle the nerves of financial markets as the UK enters the final days of Brexit negotiations, but the Treasury also has to find extra funds to achieve Prime Minister Theresa May’s promise to “end austerity”.

The options on the table include everything from dropping planned corporate tax cuts, levying a digital services tax (DST) and extending the VAT threshold to raising income tax thresholds and cutting tax relief on pensions.

The problem for Hammond is that the budget will have to satisfy opposing demands: the financial sector wants austerity to continue and taxes to remain low, while the electorate wants to see the pressure on public services being eased-up.

“The list of options is wide open,” the tax director said. “So, the usual attempts to forecast the budget based on conference speeches is likely to be off the mark,” he added, referring to the political party conferences that have taken place over the UK over the past month.

Dropping the corporate tax cuts

The UK is set to cut its corporate tax rate to 17% in 2020, but there has been consistent talk of this policy being too costly to uphold. The UK tax base shrinking and there is less support among businesses for the tax cuts.

Tax experts have also expressed doubts over the need for more cuts. Bill Dodwell, senior advisor at the Office of Tax Simplification (OTS), has long argued for dropping the 17% tax cut. It could save as much as £5 billion a year after 2021.

“Removing the corporation tax cut to 17% and reinvesting some of that money in supporting business investment would still leave the UK as the most competitive G20 economy, whilst raising some much-needed cash,” Dodwell said.

“Investing in better tax relief for intangible assets, where the UK has the least generous regime in the EU, would make sense to boost investment in the high-tech economy,” he said.

Nevertheless, the British government remains officially committed to the 17% rate – for now. May reaffirmed this commitment to ever-lower corporate taxes in a speech in New York on September 25.

“Whatever your business, investing in a post-Brexit Britain will give you the lowest rate of corporation tax in the 20,” May told business leaders.

Giles Parsons, who was a tax director at Caterpillar for 20 years, told ITR that the chancellor may prefer to not to show his hand on corporate tax in the upcoming budget.

“It would not look good to announce that it will not go ahead this month, and then implement it immediately next year, so maybe it will stay,” Parsons said. “But there could be some base broadening to raise more tax and be seen to address the low level of effective taxes highlighted in the media.”

If the UK does abandon its lower tax rate, the country might become one of the few exceptions to the worldwide trend of falling rates.

Creating a digital tax

The UK could join the growing list of countries taking unilateral action on tech multinationals. The idea of an ‘Amazon tax’ has made headlines this year, and the chancellor talked up the possibility of such a measure at the Conservative Party conference.

“The best way to tax international companies is through international agreements but the time for talking is coming to an end and the stalling has to stop,” Hammond told conference attendees. “If we cannot reach agreement, the UK will go it alone with a digital services tax.”

Mel Stride, financial secretary to the treasury, has also stated similar action to The Guardian in August. “We have a strong preference for moving multilaterally”, but “in the event that that doesn’t move fast enough for us then this is something we could consider doing unilaterally, or perhaps with a smaller group of other tax authorities,” he said.

Heather Self, partner at Blick Rothenberg, suggested such a tax proposal would be unworkable and that the OECD is the best policy forum for dealing with digital tax.

“Any attempt to levy a new tax on major digital businesses will be fraught with difficulty,” Self said. “The chancellor should resist the political pressure and continue to work on an international basis to achieve longer-lasting solutions.”

“The chancellor has his work cut out to retain the confidence of businesses in the lead up to Brexit,” she added. “[Hammond] needs to keep a steady hand on the tiller and not spring any surprises which could further damage key relationships.”

At the same time, there are good reasons to doubt that the Treasury would opt for such a dramatic policy change any time soon. It would be a change on the scale of the diverted profits tax (DPT) with a vast ripple effect for the British economy.

“While the UK is taking a lead role in the Task Force on the Digital Economy, taking immediate unilateral action would be a bit surprising,” Parsons said. “But the DPT was announced during the BEPS project, so there is a precedent.”

“I expect there to be continued commitment to an international solution, but perhaps an additional commitment to unilateral action in 2020 if the OECD does not reach a consensus,” he added.

Reforming VAT

The UK may be overdue reforming its VAT threshold to bring its regime in line with global standards. The country has the highest VAT threshold in the European Union, where the minimum threshold is at €10,000 ($11,560) and the average is €22,000.

This leaves a steep ‘cliff-edge’ for British companies. Many businesses try to find creative ways to lower turnover in a bid to avoid VAT.

The OTS has estimated that the UK could increase tax revenue by as much as £2 billion a year if the VAT threshold was reduced from £85,000 to £43,000. However, even some of its advocates are sceptical it will happen any time soon because it would affect at least one million self-employed businesses.

This option also has its drawbacks.

“A low threshold encourages fraud via ‘splitting’ sales invoices between VAT registrations,” Richard Asquith, global VP of indirect tax at Avalara, told ITR. “And politically it would be a negative as it drags a lot of core Conservative supporting sole traders into the tax net.”

At the same time, many tax professionals are calling for the Treasury to limit the potential damage of Brexit through VAT policy. A deferral on import VAT would go a long way to putting taxpayers at ease.

“This would allow all importers to offset the import VAT currently paid up front at the point goods arrival in the UK,” said Alan Pearce, partner at Blick Rothenberg.

“It should apply to goods arriving from outside the EU and, in the event of a no-deal Brexit, on goods arriving from the EU,” Pearce said. “This would put the UK on the same footing as other EU countries, notably France and the Netherlands, who currently have a commercial advantage over the UK.”

As sensible as it may be, some observers still find it unlikely that the government would undertake such a policy right now.

“Confirmation on a future import VAT deferral would be good to see, and it would give some certainty, but as the bigger issue is customs and trade, and that depends on the EU, I expect the uncertainty to continue,” Parsons said.

Cutting tax relief

One way to raise funds without an increase in headline rates is to reduce the amount of tax relief available to individuals and businesses. This might even allow the government to stick to the aim of making the UK the most competitive tax jurisdiction in the G20.

The capital gains tax threshold could be cut, thereby limiting entrepreneurs’ relief. The threshold stands at £10 million and a slight reduction would expand the reach of the capital gains rate.

However, this would go against the government’s “unequivocally pro-business” agenda. A safer option for the Treasury may be to cut tax reliefs for pensions. This could save up to £38 billion a year, more than enough to fund the NHS.

The options are vast, but the political environment surrounding it make the decisions difficult. Not only is the Conservative Party divided over Brexit, its coalition partner, the Democratic Unionist Party (DUP), has made it clear that it will veto the budget if its position on the Irish border isn’t respected.

This situation may leave Hammond trying to rock the boat without really rocking it. A difficult task for a risk-averse chancellor in an increasingly unpredictable world.






International Correspondents