Hammond said he is “listening to the voice of business” and is committed to keeping the UK globally competitive and attractive post-Brexit. He said the corporation tax cut to 17% by 2020 sends the “clearest possible signal that Britain is open for business”, but some high street companies face higher taxes and more employment costs.
Nevertheless, Hammond did give businesses some respite from the administration burden, promising to make the country attractive for research and development (R&D) investment by reducing the administrative burdens around the R&D tax credit regime.
Dominic Stuttaford, head of tax for Europe, Middle East, Asia and Brazil at Norton Rose Fulbright, said the budget was, for businesses, about communicating a message of a steady ship ready to face the voyage ahead. “In this spirit there were no star giveaways, but there was some relief for small businesses with measures to reduce business rates, which will be a welcome announcement”. Furthermore, the continued focus on a fair tax system turned attention to employment status selection that may impact the gig economy.
However, Michael Wistow, partner in the global tax practice at White & Case described the budget as a “missed opportunity” for failing to remove the complexity in the tax code for businesses.
Nevertheless, several tax measures affecting businesses were announced by the chancellor, including:
- Measures to tackle tax avoidance and evasion through a series of actions;
- Cutting the dividend tax-free allowance for shareholders from £5,000 ($6,000) to £2,000 with effect from April 2018 and, thus, decreasing the tax advantage of incorporation;
- Delaying the introduction of quarterly reporting under the digital tax system plans by one year for businesses with a turnover below the VAT registration threshold;
- Plans to publish a formal discussion paper to boost the North Sea oil and gas sector to address the calls from producers to provide further support for the transfer of late-life asset in a time when tax measures have contributed to less activity;
- Announcing the final rates for the planned soft drinks levy as £0.18 and £0.24 per litre for the main and higher bands, respectively. However, the yield predicted from this tax has fallen as producers introduce beverages with a lower sugar content;
- Freezing the VED rates for hauliers, and freezing the HGV road user levy for a further year;
- Introducing a new minimum excise duty on cigarettes based on a pack price of £7.35; and
- Introducing no changes to previously planned upratings of duties on alcohol and tobacco.
No apology for tax collections
The budget focussed less on tax hikes and more on revenue raising measures to fund spending decisions. In light of this, Hammond targeted tax fairness and “collecting the taxes that are due” from both businesses and individuals.
“Since 2010, we have secured £140 billion in additional tax revenue by taking robust action to tackle avoidance, evasion, and non-compliance. These actions have helped the UK achieve one of the lowest tax gaps in the world, but there is more that we can do,” Hammond said, announcing plans to take action against businesses converting capital losses into trading losses, tackling abuse of foreign pension schemes, and introducing a UK VAT on roaming telecoms services outside the EU in line with international standard practice.
Hammond also noted the measures entering into force from July that will impose a tough new financial penalty on those who enable a tax avoidance arrangement that is later defeated by the UK tax authority, HMRC. Taken together, the government estimates that these measures will raise £820 million in additional revenues.
Although the changes can be described as an easy win, Rob Marchant, VAT partner at Crowe Clark Whitehill, the changes to the penalty regime that will allow HMRC to continue to reduce the tax gap should be welcomed with “cautious optimism” because the detail will be important in understanding how far these powers extend.
Dividends allowance slashed
Hammond’s theme of tax fairness also stretched to individuals – rich and poor – with changes to the tax-free dividend allowance and hikes in the national insurance contributions (NICs) for the self-employed.
“Fairness demands that this discrepancy in treatment is addressed,” the chancellor said, pointing out that he believes the £5,000 tax-free dividend allowance has increased the tax advantage of incorporation. “It allows each director/shareholder to take £5,000 of dividends out of their company tax free, over and above the personal allowance. It is also an extremely generous tax break for investors with substantial share portfolios,” he said.
In an effort to boost revenues and target unfair tax treatment, directors and shareholders will pay more tax on their dividends from April 2018 when the dividend allowance will be reduced from £5,000 to £2,000. About half of the people affected by this measure are directors or shareholders of private companies. The rest are investors in shares with holdings typically worth more than £50,000.
Lynda Finan, legal director in DLA Piper's tax group, said that despite Hammond describing the cut in the dividend allowance as a targeted anti-tax avoidance measure, it is more of a general cost-saving exercise. “The change is aimed at addressing the ‘discrepancy’ and ‘unfairness’ that exists between employees and individuals who operate through their personal companies, but in fact the reduction of the dividend allowance will apply to all shareholders in any company,” she said.
Michael Devereux, director of the Oxford University Centre for Business Taxation and professor at Oxford Saïd Business School, said that although taxes on dividends do generally remove the tax advantage to incorporation, and more so now, this only happens when profits are distributed. “If you keep the profit in the company then you pay only corporation tax,” he said. “So why was the dividend tax exemption ever introduced? And why not just get rid of it entirely? Maybe that is for next year.”
Employees v the self-employed
Hammond’s idea of a fair system also means similar treatment between individuals doing similar work for similar wages, benefits, and tax, which is why he announced that the Class 2 national insurance contributions (NICs) of £2.80 per week for self-employed individuals will be abolished from April 2018 and the Class 4 NICs for the self-employed will increase by 1% to 10%, with a further 1% increase in April 2019.
The changes are intended to stop individuals opting to become self-employed only for the purposes of gaining a tax advantage over employees who have – until now – paid a much higher tax contribution on the same income. It is also perhaps the first step in the government's approach to adapting the tax system to address the gig economy.
“The recent growth in the number of self-employed individuals has been attributed to a large extent to the tax system as well as to changing employment practices towards the gig economy,” said Ann Casey, partner in the tax and incentives group at Taylor Wessing. “Self-employed individuals cover a wide range of individuals, for example, partners in professional partnerships, who are not necessarily part of the gig economy. The announcement in the budget of an increase in the rate of NICs paid by self-employed individuals is designed to make the tax system fairer as between the self-employed and the employed. Currently a self-employed individual pays 9% NICs on profits between £8,060 and £43,000, an employee pays 12% on the same level of salary. A self-employed individual will pay 10% from 6 April 2018 and 11% from 6 April 2019.”
For most companies, however, these changes do not increase the cost of employment, but for multinationals with a large self-employed workforce, the measure “will lead to a significant increase in cost,” said Kevin Hindley from Alvarez & Marsal’s Taxand team.
Kirsti Laird, senior associate at Charles Russell Speechlys said it “remains to be seen whether these types of actions will ‘squash’ the entrepreneurial spirit of the gig economy”.
The national insurance increase for the self-employed may be unwelcome news for some, but Norton Rose Fulbright’s Stuttaford said it is possible that more change could be afoot with government’s ongoing review of the so-called “gig economy”.
Business rates changes to back British businesses
Separately, to back British businesses that are concerned about the 2017 business rates revaluation, which will see taxes rise for many, Hammond said there is scope to ease the burden.
He announced that businesses losing their small business rate relief will not see their tax bill increase next year by more than £50 a month, and the subsequent increases will be capped at either the transitional relief cap or £50 a month, whichever is higher. Furthermore, pubs will receive a discount on business rates bills in 2017 and local authorities will be provided with a £300 million fund to deliver discretionary relief to those in more hardship.
However, David Jinks, head of consumer research at courier Parcelhero, said the measures are not enough to protect traditional bricks and mortar small companies on Britain’s high streets against multinationals and companies operating online. “The planned changes to business rates threaten many high street retailers with significant rate rises just as they are battling to take on online retailers. The cap of £50 per month for this year for businesses coming out of small business rate relief is welcome; but what happens to those businesses in two years’ time?,” he questioned.
“Some city centres are saying their business rates are rising by around 50% while e-tailers such as Amazon may even see their rates fall on out of town distribution centres,” he continued. “More needs to be done to save the high street and look at the disparity of taxes and rates between online and brick and mortar retailers.”
Hammond did note in his budget that the government does need to “find a better way of taxing the digital part of the economy”.
Overall, as a result of the stable budget, Michelle Quest, head of tax at KPMG in the UK, said that UK businesses “will be relieved to have the breathing space to deal with current changes taking effect during this year”. She said that Hammond demonstrated that the government was listening to businesses.
“The Budget was designed to give the government a fiscal base from which to launch its Brexit negotiations, while minimising dissent at home. The next few months will show whether it has met its objective,” said Laurence Field, corporate tax partner at Crowe Clark Whitehill.
Pictures used for this article were sourced from https://www.gov.uk/government/topical-events/spring-budget-2017.
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