Hammond is about to deliver his first budget statement at a time when tax uncertainty looms on every business as a result of the Brexit vote, but what could his budget look like?
Some analysts have described the Autumn Statement as a “golden ticket” opportunity to overhaul the UK’s complex tax system, reset a number of tax policies and reinvent the wheel.
“An overhaul of the tax system must be high on the Chancellor’s agenda,” said Stacy Eden, head of property and construction at Crowe Clark Whitehill. “We have a real opportunity at the moment,” added Anita Monteith, tax manager at the ICAEW, during a recent Women in Tax conference. “This is a moment for the government to act decisively to make it easier for firms to expand and find more opportunities,” said Simon Walker, director general of the Institute of Directors (IoD).
The Institute of Economic Affairs (IEA), a think tank, has suggested radical change, calling for 20 taxes to be abolished in a recent report, including corporation tax, national insurance, capital gains tax, inheritance tax, council tax and business rates, among others. In addition, it suggests cutting the VAT rate from 20% to 12.5% and removing most exemptions.
No matter what policies Hammond announces on November 23, Kevin Nicholson, head of tax at PwC said that “this is going to be a landmark Autumn Statement”.
“Regardless of whether the Chancellor resets policy, or plays it steady, the Autumn Statement will indicate the UK's fiscal stance for the years to come,” Nicholson said.
A budget of hints and winks?
However, some tax practitioners believe Hammond will not make any striking changes or deliver on the long wish list of tax changes.
The Autumn Statement will “see neither major tax reductions nor spending increases,” according to Bill Dodwell, head of tax policy at Deloitte.
“As Philip Hammond has suggested that he wants to move away from the Autumn Statement being a kind of second budget, it may be that we will not get a significant number of new announcements,” said Catherine Robins, partner at Pinsent Masons. “At this point we think small changes are more likely and that anything more substantial will come (if at all) in the Spring Budget.”
Chris Sanger, head of tax policy at EY, added that following the Brexit vote, Hammond “may look to ready many of the measures used during past times of economic shock but may opt to defer unleashing them until the 2017 Budget. This points to an Autumn Statement of hints, winks and suggestions, but with the real action to follow in the spring”.
“I’d expect this Autumn Statement to be short on the eye-catching surprises beloved of Mr Hammond’s predecessor, with the watchwords of dependability and consistency in times of uncertainty,” said Ian Stewart, chief UK economist at Deloitte. “This will set the theme for the long haul of Brexit that lies ahead.”
A ‘spring clean’ on tax incentives
An area that several practitioners and organisations are keen to see change is on tax incentives, with many needing to be removed or revised
“There are currently around 1,000 tax reliefs in the system. Some are antiquated, others are not fit for purpose and some, in the Chancellor’s view, are too expensive,” noted David Kilshaw, private client services partner at EY. “The Chancellor could start this term with a ‘spring clean’ that would enable him to make many reliefs less generous while improving others.”
Dame Margaret Hodge, an MP who also chairs the All-Party Parliamentary group on responsible tax, said she would like to see all tax reliefs have a sunset clause so that the government can come back to it at a future time to review it.
In recent months, comments from Prime Minister Theresa May and the former chancellor George Osborne have suggested that a cut in the corporate tax rate could be announced when Hammond delivers his Autumn Statement.
After the Brexit referendum vote on June 23, Osborne suggested reducing the 20% rate to below 15%, while May has reportedly said that corporation tax could fall to as low as 10%, but Hammond has not given many clues about what he is likely to announce.
Some practitioners expect Hammond to continue with plans to cut the corporation tax rate to 17% by 2020, but not reduce it further as suggested by Osborne or May.
“The Chancellor seems ready to step away from the deficit reduction targets of his predecessor, which may give some wiggle room to cut the corporation tax rate further. But the rate is unlikely to be cut below the 17% target already set out, said Mike Cooper, international tax partner at PwC. “While going further would send a signal to the outside world that the UK is well and truly open for business, it would not play well with the public. For this reason, our research suggests businesses are apathetic about further cuts to corporation tax, despite the benefit it could have for inward investment.”
Like other NGOs, the IoD has suggested that the government needs to consider replacing corporation tax, which it said “is becoming increasingly poorly-suited to taxing global businesses”.
Speaking to International Tax Review, practitioners have also provided some insight into what additional business tax measures they expect from Hammond’s speech, or which may be announced later during his term as Chancellor, including:
- Looking into various tax measures to boost infrastructure investment, such as increasing investment allowances and undertaking a comprehensive review of incentives to create more investment;
- Announcing the final shape of the new regime on restrictions on the deductibility of corporate interest expense, or announcing a delay in introducing the measure;
- Announcing the final shape of new corporate loss relief rules;
- Increasing funding for HMRC so that it can increase its tax administration resources for dealing with large taxpayers and strengthening the Customer Relationship Manager programme;
- Reducing the employment tax burden by reducing the rate of employer National Insurance contributions to offset the increase in the apprenticeship levy; and
- Redesigning the business investment relief to encourage more UK residents living abroad to bring money into the UK without an immediate tax charge if it is invested in a trading company.
BEPS Action 4
Some announcements are expected on a number of consultations that were held over the summer. One of these were rules based on OECD BEPS Action 4 to introduce restrictions on interest deductibility in April 2017.
“A key focus for business will be whether and in what form the government proposes to introduce restrictions on interest deductibility, which are scheduled to be introduced in April 2017, said Dominic Stuttaford, head of tax for Europe, Middle East, Asia and Brazil, at Norton Rose Fulbright.
However, Robins from Pinsent Masons said she would like to see the proposals postponed. “We do not think this is the right time economically to introduce such a major change and because there are still areas on which the OECD has not made final recommendations, such as how the rules should apply to banks and insurance companies. We think a postponement is unlikely, but we hope for some tweaks to the rules.”
According to Richard Milnes, financial services tax partner at EY, some of the government’s possible implementation methods suggested in the earlier consultation document could hit both banks and insurance companies hard. “It is, therefore, important that the government recognises that existing regulation of the banking and insurance sectors means that, in practice, they cannot use interest deductions to shift profits in any case. Time is now very short to finalise the rules and a definitive announcement is long overdue.”
VAT is an area where Hammond may change the rate to help the economic climate in the UK.
The IEA is calling for a VAT rate of 12.5%, with most exemptions abolished. Although this may seem like a radical suggestion, a cut in the rate could be possible.
“A temporary cut in the rate of VAT to boost growth and spending could prevent prices rising due to higher import costs caused by the weakening of the pound,” EY said in a statement emailed to International Tax Review. “This would repeat the temporary reduction at the height of the financial crisis. However, consumer confidence appears to be solid so the Chancellor may choose to keep this up his sleeve for a later date.”
However, PwC said that even a two percentage point reduction in the VAT rate was “highly unlikely” as consumer spending has not fallen since the Brexit referendum in June. The firm pointed out that a 2% cut would cost the Exchequer close to £11.4 million ($14.3 million) in 2017/18.
Even if no change to the VAT rate is announced, other VAT changes that may be included in Hammond’s speech include:
- Extending the VAT grouping eligibility provisions to include, for example, partnerships;
- Changing the rules on VAT recovery by holding companies that are members of VAT groups; and
- Amending the UK rules on the place of supply for services relating to immovable property to align with EU rules that will enter into force on January 1 2017, which will be based on where the property is situated.
Tax avoidance and evasion
Measures against tax avoidance and evasion will continue to be a theme that runs through Hammond’s term as Chancellor.
“While we have not had any clues as to what the Chancellor plans for his Autumn Statement, we continue to see reoccurring themes from the new government around addressing aggressive tax planning by multinationals and other businesses,” according to Stuttaford.
EY’s Sanger said the government will likely reaffirm its pledge to tackle tax avoidance. “An update on this summer’s proposals to impose penalties on advisors is possible after the consultation on the plans recently closed. We can expect the Chancellor to reiterate the Prime Minister’s pledge that everyone must pay their fair share of tax. Individuals rather than businesses are likely to be the focus.”
On VAT avoidance, RSM said that following the consultation on strengthening the tax avoidance disclosure regimes for indirect taxes and inheritance tax, the VAT disclosure regime (VADR) is likely to be completely redrafted to more closely align the VADR with the direct tax disclosure of tax avoidance schemes (DOTAS) rules for direct taxes.
In addition, RSM said that a new penalty regime for participating in VAT fraud will be introduced that “will enable HMRC to issue a penalty at the same time that its principle decision has been made (rather than awaiting the findings of a tribunal) and will not distinguish between whether a business or individual ‘knew, or should have known, of the connection with VAT fraud’”. A consultation on the measure ended on November 11.
Other possible changes that could be announced in the Autumn Statement include:
- Some stability for financial services that have been subject to increasing taxes in past budgets;
- Incentives to boost the infrastructure investment;
- Measures to encourage growth and stability in the oil and gas sector;
- Some announcements around the government’s Making Tax Digital initiative; and
- Possible changes to the national insurance contributions and personal tax regimes following the recent court case concerning self-employment and Uber.
Whatever is announced in the Autumn Statement, Hammond’s first budget as Chancellor is likely to make a firm mark on the government’s fiscal intentions as the country moves forward with Brexit.
“Commentators and the markets alike are waiting with bated breath for the Chancellor to spell out the direction of the country’s fiscal policy and put in place measures that will help the UK economy to seize the opportunities and cope with the turbulence of Brexit” said Michelle Quest, head of tax at KPMG in the UK.
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