'Handcuffed' Chancellor needs to box clever-PwC Budget briefing and predictions

Nov 10, 2017

PwC Budget Briefing and Predictions

 

The forthcoming budget will be the first official one to take place in Autumn for more than 20 years. If the Chancellor keeps his promise to stick to one major fiscal event a year, it will also be the penultimate budget before Brexit. That means just two bites of the cherry to ensure we have a ‘Brexit fit’ tax system and to set out a fiscal vision for the future outside of the EU.

A post-election budget might normally be considered the time to raise taxes, with giveaways kept back until closer to the public next going to the polls. But the Chancellor faces the challenges of an impending Brexit and a minority Government. While our recent polling suggests that people would be prepared to pay more tax for key public services, the Chancellor will be mindful of the failure and fallout from the recent attempt to increase reform around National Insurance contributions for the self-employed at the last budget.

While significant new legislation is unlikely, there is nothing to stop the Chancellor giving more clarity using road maps to set out a proposed direction of travel to address issues such as the productivity gap, intergenerational inequalities and housing.  

So what can we expect?

 

Personal Tax

Iain McCluskey, partner at PwC, said:

“The Chancellor appears to be somewhat handcuffed by both the politics of Parliament and the lack of money to play with, so he will need to box clever to make an impact.  Targeted, low cost, simple but popular tax changes are the nirvana he will be shooting for.  If only it was that easy. However, there are a few areas he may look to focus on.

 

“Intergenerational fairness continues to be a concern  for the Government, and the Chancellor will be seeking out ways to help younger taxpayers. A stamp duty holiday for first-time buyers of homes costing up to a certain amount, say £450,000, would be seen as a much-needed concession for young people.

 

“Of the course the Chancellor will also be looking to raise money and it wouldn’t be a surprise to see the annual allowance for relief on pension savings cut from £40,000 to £35,000. The lifetime allowance for pension savings could also drop from £1 million to £900,000.

 

“The possibility of a freeze on increases to the tax free allowance (currently £11,500 and due to raise by £12,500 by 2020) and higher rate tax threshold lingers.  In particular, he may decide to freeze the rise of the higher rate threshold (currently £45,000 and set to rise to £50,000) in return for an increase in the lower earnings limit for national insurance.

 

“Tax breaks for the young, funded by cuts to pension tax relief have been mooted, but perhaps more likely are some amendments to the Lifetime ISA which was launched in April aimed at people under 40. Boosting the amount that can be saved each year, and allowing savers to make withdrawals without incurring harsh penalties would make the product more appealing to young savers while those looking to get on the housing ladder may benefit from increasing the age for eligibility to up  to 50.

 

“Further restrictions to salary sacrifice arrangements might also be on the cards.  Could  National Insurance contribution savings for those who pay into their pension through salary sacrifice now also be under threat?

 

“Student loans may also feature and we may see a softening of tuition fees or, to make a real difference, even a transition away from the current debt system towards a progressive graduate tax.”

 

Corporate Tax

The Government has been committed to reducing corporation tax to 17% by April 2020 (it currently stands at 19% - the lowest in the G20). However, speculation abounded when HM Treasury did not dismiss out of hand a recent OECD suggestion to reverse the planned cut and target the additional funds on solving the UK’s productivity puzzle.

 

Stella Amiss, head of tax policy  at PwC, said:

“At a time when it’s crucial that the UK remains attractive to investors, it seems unlikely that the Government will veer off its chosen path to reduce corporation tax to 17%  by April 2020. We therefore expect the Chancellor to stick to the planned reduction. If this was to be reversed it risks signalling that the Government is not committed to supporting business taking a longer term view.

 

“The tax rules for off payroll workers (IR35) in the public sector have recently been reformed, and the Chancellor could extend these to the private sector.  This could tie in with the recent Taylor Review of modern employment practices, which suggested there should be no tax difference for different employment types.  Given the Government has ruled out raising NIC on self employment, extending the IR35 rules seems a possible nod in this direction.”

 

Indirect Taxes

Martin Blanche, head of indirect tax at PwC, said:

“A reduction of the VAT registration threshold (currently £85,000) cannot be ruled out given the comments of the Office of Tax Simplification (OTS) in its recent report on VAT, which highlighted the potentially distortive effects on business of the higher threshold. However, any move to reduce the threshold would be met with a backlash from the small business community both from the perspective of cost (particularly service heavy businesses with little in the way of taxable inputs) and the additional compliance burden it imposes. It could also further stretch HMRC’s resources.  

 

“Elsewhere, a restructuring of alcohol excise duty rates to correspond with alcohol strength could be on the cards and the Government may look to place a higher rate on some high-strength products.

 

“Other potential measures include the introduction of a VAT ‘split payment’, where VAT is paid directly to HMRC rather than to the supplier, to help reduce the risk of fraud. The Government is also likely to report back on  its consultation on extending the scope of landfill tax to materials disposed at illegal waste sites.”

 

Taxing tech

The approach to taxing the digital economy is currently under review by the OECD, UN and EU. HMT is actively participating in these discussions and has indicated that the UK will consider amending its taxation framework to address growing digital activity within the UK economy, particularly in relation to UK taxable presence and VAT.

Alenka Turnsek, partner at PwC, said:

“The UK is expected to align domestic legislation with proposals from the OECD and EU. However, these are not due to be released until Spring 2018 so it’s unlikely that we will see any significant changes to taxation of tech companies in the forthcoming budget. Due to the global nature of many of these companies, for any changes to be effective, they would require more international agreement and likely changes to the OECD model double tax treaty.

 

“The Treasury may consider relaxing the rules that prevent tax relief for goodwill, customer relationships and data - all three of which are recognised as creating value in the digital economy. These rules could well be revisited and reconsidered as part of the wider digital taxation legislation package.”

 

Supporting SMEs

Rebecca Reading, tax director at PwC, said:

“The Chancellor may consider reforming the long-standing Enterprise Investment Scheme (EIS) relief, which until very recently has been the preserve of sophisticated business angel and professional investors.  However, crowdfunding has made it much more accessible and while recent data shows its popularity is growing, it is not a relief for the faint-hearted.  Whilst it’s benefits are  generous - for example, a nil capital gains tax rate can be achieved -  its conditions are complex, so more flexibility could be introduced.  

 

“While HMRC will give a growing company an advance assurance regarding its EIS status, this does not guarantee that the investor will achieve all the benefits.  While it’s a positive that more people are getting involved in funding ambitious growing SMEs, EIS itself may be due for a reform.  There was a consultation in this area earlier in the year and we may see some announcements introducing greater flexibility.”

 

Business Rates

Phil Vernon, head of rating at PwC, said:

“Annual business rates for 2018/19 will be adjusted according to this September's Retail Prices Index (RPI) and so with confirmation that RPI will be 3.9%, large increases are again on the horizon. The Chancellor may very well look to limit next April's increase to business rates, as happened previously in 2015/16.

 

“There may also be some extension of small business rate relief to help small businesses affected by the so-called staircase tax. It’s also possible that the Chancellor might introduce time limits on business rate appeals. There is pressure to look again at charitable relief, particularly with regards to schools but equally there are concerns about the disproportionate effect that charity relief has on the high street.

 

“Longer term, the Government is committed to more frequent valuations but it is difficult to see how the Valuation Office Agency could deliver this given its current level of resourcing. The Government is still considering how this can be solved. We may see a formal response to the last business rates review - it appears that introducing a self assessment business rates system is the favoured solution.

 

“The Chancellor may look to help SMEs. One approach would be to make a further distinction between the rate of tax applied to big and small businesses, although this could complicate the tax system further. And with a £430m package of business rates reliefs put in place at the spring budget, any short-term changes to the current business rates system seem unlikely.”

 

Financial Services

Peter Maybrey, financial services tax partner at PwC, said:

“Competitiveness is more important than ever for the UK financial services industry, particularly against the backdrop of regulatory reform post the financial crisis. The Budget offers a key opportunity for the Chancellor to support competitiveness in a sector that is critical to the economy.

 

“A roadmap for taxation in the sector to provide greater stability and predictability which in turn supports competitiveness would be welcome, as would early engagement on tax issues arising from business changes to accommodate Brexit.

 

“Building on the rescoping of the bank levy for 2021, now would also appear to be an appropriate time to review the overall tax burden on the sector to ensure it is proportionate in the current environment.”

 

Pensions

With the cost of tax relief on pensions running to tens of billions a year, there is always the potential for it to be revisited in the Budget. The recent release by the House of Commons library of a briefing paper on "reform of pension tax relief" also suggests the issue could be back on the agenda.

 

However, when David Gauke moved from the Treasury shortly after the election to become Work and Pensions Secretary, he said that he didn't expect to see any fundamental change in the system in the near future.  

 

Against this background, further tweaking of tax relief on pensions is perhaps the most likely outcome from this Budget, although this could be combined with greater signalling of the future direction of travel.

 

The £4,000 money purchase annual allowance for those who have accessed their pension flexibly was brought back in the post-election Finance Bill, and the Lifetime Allowance now stands at £1m (down from the original £1.8m), so the Annual Allowance may be the clearest candidate for further change.  Reducing the level for all, and further restricting it for the highest earners, are both possible.

 

Steven Dicker, pensions partner at PwC, said:

“Total tax relief on pension contributions is still very substantial and auto-enrolment is expected to continue to increase pensions savings as the minimum contributions ramp up. Reducing the Annual Allowance could be seen as a way to restrict relief for higher earners, to help offset this and potentially increase tax revenues for other purposes. The annual allowance 'taper' for those earning over £150,000 may also be a target - if so, taking the chance to simplify the incredibly complex rules around this would be helpful.”

 

Property taxes

A recent PwC survey found that 43% of people consider the implications of stamp duty before buying a property. Despite the recent removal of the ‘slab system’, which cut stamp duty for those buying homes under £900,000, further changes could be on the cards.

 

Rob Walker, head of real estate tax at PwC, said:

“While, in theory, 95% of buyers were winners from the removal of the slab system, the increase in stamp duty for homes above this threshold appears to have contributed to an overall slowdown in the property market. High stamp duty rates are dissuading people from upsizing and downsizing - affecting both ends of the market.

 

“The Government has indicated that it will focus on affordable housing but the entire market is linked through chains. Impeding homeowners’ ability to move negatively impacts a flexible labour market. The Government will need to weigh up whether the rates of stamp duty have now exceeded the tipping point which results in transaction volumes falling to such an extent that revenues actually decline. The market has cooled considerably in the last six months.

 

“The 3% stamp duty surcharge on second homes is also potentially affecting the availability of rental stock, likely resulting in pressure on rent and the cost of living for a significant proportion of people living in rented accommodation. The Chancellor may be tempted to listen to calls for the introduction of reliefs from this surcharge, particularly for the build to rent sector.

 

“Simplification of the over-complicated taxation of residential property would be a welcome move.

 

“We also expect a detailed response to the consultation launched a year ago to bring non-UK resident companies, which are currently charged income tax on their UK rental income and non-resident capital gains tax on certain gains, within the scope of UK corporation tax.”

 

Housebuilding

With the Government exploring ways to free up space and encourage the building of new homes, the Chancellor may consider a number of measures.

Rob Walker added:

“It has been mooted that some less verdant green belt land could be released for development but a stronger possibility might be reforming compulsory purchase order powers to support local authorities to assemble land.  Other options include relaxing the  borrowing cap for local authorities, allowing them to invest in quality existing stock and deliver new social housing stock.

 

“The budget may be seen as the ideal opportunity to flesh out proposals for locally accountable new town development corporations.

 

“We also expect a detailed response to the consultation launched a year ago to bring non-UK resident companies, which are currently charged income tax on their UK rental income and non-resident capital gains tax on certain gains, within the scope of UK corporation tax.”

 

Jane Forbes, Partner at PwC, added:

“Housing is perhaps the most important non-Brexit issue and with the recent NAO report highlighting rising homelessness, it is now clearly on the Government's agenda to address this issue.

 

"There is speculation that stamp duty reforms may be started given that it is a tax on mobility (either geographically to job opportunities or downsizing to release housing stock to better use). There may also be more to help first time buyers, though this will only stoke demand rather than solving under-supply.

 

"There will be great interest regarding which of the proposals contained in February's Housing White Paper are taken forward now the consultation is complete. The White Paper, 'Fixing Our Broken Housing Market', attracted some criticism at the time for lacking sufficiently strong proposals on issues like reform of the Green Belt or allowing Housing Associations and Local Authorities greater scope to borrow to build.

 

"Finally, with the Homes and Community Agency (HCA) rebranding as Homes England, there is a need to see further detail on its role in terms of finance, powers and delivery capability."

 

Government and public services

Tina Hallett, Government and Public Services leader said:

"The Budget will need to demonstrate the importance of building capacity and capability to deliver Brexit. Therefore any 'new' (or re-directed) money will come with a Brexit hallmark, for example, on new systems for customs and borders and related infrastructure.

 

"With the Industrial Strategy being launched imminently, there will be a focus on providing strong commercial foundations in a post-Brexit context, with a re-prioritisation of spend to support delivery of the industrial strategy, for example, support for exporters (which tend to have higher productivity). Also in support of the Industrial Strategy, and its pillars around regional re-balancing, there may be some relevant devolution announcements (or re-announcements), for example, on infrastructure in the North and Midlands, plus skills.

 

"The need to increase productivity in the public sector is likely to attract attention, especially the impact of new technology in the context of doing better for less, public service reform, and meeting the pressures of increasing demand in areas such as health. This may happen alongside announcements on lifting of pay caps.

 

“With the need to do better with less to improve productivity there will likely be a focus on how the government will fund and prioritise digital advancement and skills. The Chancellor may see the Budget as an opportunity to push the importance of applying the latest technology for example, robotics and AI to the public sector itself.”

 

Technology

Rob McCargow, Artificial Intelligence programme leader at PwC, said:

“Digital technology, including artificial intelligence and robotics, is expected to be an ever-present theme running throughout the forthcoming Industrial Strategy. It will also play a significant role in the Chancellor’s speech and we expect  funding announcements for education, training and possible funding for the development of ‘data trusts’. Further backing for the Turing Institute is also likely.”

 

ENDS

 

 

About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. © 2017 PwC. All rights reserved

Contact us

Media Enquiries
Press office
Tel: +44 (0)20 7213 1768
Email

Follow us