Transcript for: Talking Tax - Episode 6: The last Chancellor's Budget before Brexit - what will we see?

Episode 6: The last Chancellor's Budget before Brexit - what will we see?

19/10/2018

The Chancellor has a called an early Autumn Budget this year, in theory the last one before Brexit. What new measures and changes might we see? Stella Amiss, Tax Partner discusses with Anna Wallace, Director of Political Relations and Iain McCluskey, Tax Partner.

Listen on: iTunes SoundCloud Acast Spotify

Stella Amiss

Hello, my name is Stella Amiss, I am a tax partner at PwC, and welcome to the latest episode of our ‘Talking Tax podcast.’

Now, we have come to that time of the year, when we are dusting off our crystal balls and we start to look forward to the Budget. This is the major tax event of the year, when we get to see the state of the finances and what new measures we are going to have to contend with. This year, the Chancellor has announced a Budget, in theory his last before Brexit, to take place on Monday, the 29th of October, and for me that ‘B’ word is a critical backdrop to this year’s financial review.

The move to hold the Autumn Budget on a Monday, the first time since 1962 no less, and in October, took a few people by surprise. So, why do we have a Budget nearly a month earlier than we have become accustomed to? Anna, your thoughts on that.

Anna Wallace

Yeah, of course Stella.

As you rightly said, it has been brought forward and is to avoid that ‘B’ word that you mentioned, Brexit, and in particular the political, sort of, machinations and football that we can expect in parliament, in the remaining six months of the article 50 process. Of course, that’s not just about any legislation arising from a deal, which we still see as more likely than not, but also the Brexit legislation that’s already working its way through Parliament, things like the trade bill, the agriculture bill, etc.

I would probably say that the Chancellor is rather optimistic in thinking that by bringing forward the Budget, he is going to miss all of that political football. We’ve already seen the DUP talking about being prepared to vote down the Budget if the deal doesn’t satisfy their needs in terms of the Republic of Ireland and Northern Ireland border. I was up in Glasgow, at the SNP conference, a couple of weeks ago, and I think one of the great unwritten stories from Ian Blackford’s speech there, he is the SNP leader in Westminster, was that they were going to cause, and I quote, ‘we will not hesitate to cause maximum disruption to the Tory agenda if needed.’

So, again, you can see, we were talking this time last year about the political rock and a hard place that the Chancellor finds himself in with the parliamentary minority, I think that’s even more acute this year coming as we do into the final furlongs of Brexit.

Stella Amiss

Something obviously the Chancellor will be more than wise to. So, he has got a very difficult political landscape to deal with, and not the easiest economic landscape that he is trying to plan and budget around.

Iain, with that backdrop, what can he do on the tax front?

Iain McCluskey

Well certainly, first of all on spending, the Prime Minister has stolen the thunder somewhat by already announcing obviously an extra £20 billion a year for the NHS, freezing fuel duty, and of course an end to austerity. Now, there are some pretty big IOUs that the Prime Minister has written that the Chancellor needs to work out, how to repay, but of course the politics of raising tax has been quite difficult so far in this parliament.

Stella Amiss

Iain, does it feel like that the Chancellor has actually got one of his arms tied behind his back with what he is going to do on tax measures?

Iain McCluskey

Well, I think so, because there is no majority in Parliament as we know. So, Parliament is on a knife edge when it comes to any policy at the moment, and of course he had to row back from the class 4 National Insurance rise in a previous Budget. So, I think any tax rises are always going to be controversial and always going to be difficult to get through Parliament, but I do think we will probably see a little bit of tinkering around the edges.

Anna Wallace

Yeah, I think the challenge, you are absolutely right to allude back to April or March, whenever it was, pre-2017 election and the challenges you had around NICs. It also reminds me in some ways of Osborne’s budget in 2016 pre-referendum, where Brexiteers within his own party voted down a number of measures, not necessarily because they disagreed with the economic intent or the policy intent, but actually because it was part of a broader political discourse around discrediting certain members of the House and what it was that they stood for, not in a Budget context, but in a Brexit context.

Stella Amiss

But all that said, all the indicators are there that some tax may need to be raised. So, again with that backdrop what do you think he could do Iain?

Iain McCluskey

I don’t think we will see any big rate rises necessarily, but I think there will be a number of smaller measures that will bring in one or two billion each. Really targeted at, what I think, are the very wealthy. So, certainly pensions, tax relief, for those earning over £150,000, I think, will be further cut. Also, potentially a challenge to the Capital Gains Tax annual exemption for the wealthy as well. There is tax to be raised there by reducing those numbers.

The other thing he could do is to freeze the increase in the personal allowance and also freeze the increase in the high rate threshold to £50,000. That of course creates a fiscal drag effect, so more 20% tax payers go into the 40% band, and people who aren’t paying tax at the moment, would go into the 20% band. So, not really a tax rate rise, but more people paying tax at a higher level.

But, I do think the focus will be on the highest earners in terms of bearing the biggest tax rises. As, I think the Chancellor will tack somewhat towards the centre ground politically again to maybe keep some of the Brexiteers off his back.

Anna Wallace

Just the other thing I would say on that of course is the £20 billion that the Prime Minister already mentioned, but she also talked at conference about ending austerity, all while trying to keep the deficit reduction targets on track. He is even more in an unenviable position this year than he probably was last year.

Stella Amiss

Yeah, and the deadline of 2025 I think that he needs to meet, as well as having his hands tied behind his back that Iain talked about.

Iain we have seen a lot of talk in the press about IR35, is that something do you think the Chancellor will talk about?

Iain McCluskey

Almost certainly. So, the IR35 rules that apply to off-payroll workers, there has already been a change in the public sector, which effectively put the burden of tax status on to the public sector rather than the worker themselves. So, it is a relatively easy move now to extend that to the private sector, that legislation is effectively already written. There was a consultation this Summer, which I think will now result in legislation coming in either April 2019 or April 2020.

A really big change actually for some private sector employers, and we might see actually that drive behavioural change, and we will see more people becoming employed rather than contracting, just so the private sector can be sure of tax status and manage the tax risk on that area. So, there is potentially some revenue to be raised there, so almost certainly I think that will come in.

Stella, you are the corporate tax expert here, I am reading a lot still about digital business, and internet companies, and the tax status of those, so I guess is that another big tax rise coming?

Stella Amiss

Yeah and you are right. Thanks for the nice segue into what happens in the world of corporate tax. It is again another area that we keep reading about in the newspapers, and it is something that the Chancellor is under pressure about. He has kept his options open with his statement to say that he might go ahead with the pack and introduce a digital services tax before the rest of Europe and other parts of the world do. I think he’s between a rock and a hard place, my favourite term when we have these conversations.

On one hand he is under pressure to do something, on the other hand if he does something, does that send a signal to say that the UK isn’t necessarily open for business, or it’s actually a high tax government that we’ve got here, clearly not something he’d want to do. On balance, I think he may well go early and do something, but he would give himself a wiggle room by leaving an introduction date of sometime next year, that leaves us a bit more breathing space to get through Brexit, and to allow the international community to catch up, because we are all expecting to see something from the EU in December.

Anna Wallace

A microcosm really for where the government finds itself in terms of being in a bit of a holding pattern while they wait for international agreement.

Stella Amiss

Yeah, and I think that in this Budget actually, there might be a lot of that in this Budget discussion. So, given all of that and under the political landscape, the economic landscape, do you think that this is going to be the only Budget we are going to see in the next few months?

Iain McCluskey

To be honest, I do think there is a possibility that there will be a Budget next spring. When the Chancellor announced that the Budget timetable was for one fiscal event a year, he did put a caveat in there of course, which is the Government retains the option to make changes to fiscal policy in the spring statement, if economic circumstances require it. With Brexit coming, who knows whether that test will be met, but my bet will be that the Spring Statement will be effectively a budget in all but name again. Do you agree Anna?

Anna Wallace

Obviously, making predictions in politics is very difficult.

Iain McCluskey

I get it wrong all the time by the way, I should say I have called every election wrong for the last four.

Anna Wallace

And that’s the point isn’t it, question mark about whether we have any other electoral event between now and when a Spring Budget might take place, but assuming not, and assuming that we do leave the Article 50 negotiations with the deal, which we as a firm do believe is still more likely than not, in spite of the showmanship that we will undoubtedly see in the coming weeks. He could arguably say in the Spring that actually we still don’t know the contours of the trade deal between us and the EU, because we often forget that coming out of Article 50 we will have the exit agreement and maybe some high level ambitions around the future trade relationship.

The reality is we won’t know that detail until beyond Article 50 and beyond May next year. So, he could argue that I still need to wait, and I still need to wait until I see the contours of negotiations before I make any big policy decisions. I hope that that wouldn’t be the case, because that would mean kicking some of these long-burn issues further down the grass how we create a sustainable footing for public finances, how we tax the modern economy, and I’d simply think that we as economy can’t really afford to wait to tackle those important problems.

Iain McCluskey

I guess there is another option, maybe, it’s a halfway house, between our two positions, Anna, which is of announcing some stuff in the Budget in a couple of weeks, time, but actually that stuff is going to be implemented in maybe two or three years. So, it builds in the cost and revenue, but actually the implementation is after 2019. That might give him some wiggle room, it addresses some of the challenges without too much immediate disruption. So, maybe we will see that, more consultations announced and things like that rather than big firm policies, which come in from next April.

Anna Wallace

I think that’s a good shout.

Stella Amiss

So, it wouldn’t be a budget podcast without asking that killer question. I am going to put you on the spot, and usually it’s me on the other side of the table, so if you had one thing that you want the Chancellor to really do, not necessarily he will do, but he really ought to do, what would it be?

Anna Wallace

Really sad to say, I am still looking for what I was looking for this time last year, which is a strategic roadmap for where we want the economy to be in five years’ time, or even a few years’ time, not just in the context of Brexit, but in the context of technology, which we know will be at least as big a disruptor to the way that we all live and work.

Iain McCluskey

I think for me, I would certainly echo those comments on broader reform, but obviously with the politics now, I appreciate it made it difficult for the Chancellor.

I guess, two smaller things that I’d like to see, firstly sort out the Lifetime ISA, which could potentially be a great product, but I see young people aren’t using, because of some of the penalties in that. So, I think, if we’ve sorted it out, that will be a really good thing for young tax payers. Also, tackle the approved share option regime, it’s very popular, employees owning shares in their employer, but again the rules are a bit complicated. So, I think he could tackle that, reform that, without spending too much money.

So, those two simple things would be what I want on the Chancellor’s desk pre-budget.

Anna Wallace

Of course the latter one on that would at least go some way to meeting the challenge set by Labour at their conference around employee ownership, and I think a commentator said of the Major government in the 1990s that if you want to know what the conservatives are going to do, then look at Labour and halve it. So, then it might be a good example of that.

Iain McCluskey

Yeah absolutely and I think that’s the reason why it may well be in the Budget in a couple of weeks’ time.

Stella Amiss

It’s interesting, I think, your first comments demonstrates really, actually coming back in the Spring might be a good idea, because once the dust has settled a little bit, I appreciate and are not entirely fully, and because we are a long way to go on a post-Brexit settlement, but once the dust have settled a little bit, he might then have a bit more room to actually try and be a bit braver, to start treating the parliamentary cycle as you would normally, and actually make some bolder moves to reform in some of the key areas.

It is definitely going to be an interesting couple of weeks as we warm up towards budget, and the Chancellor really does have to navigate a tightrope. Please do keep checking back to Budget output.

Anna, Iain thank you so much again for your insight. Let’s hope when we are back here again next year, we have got a different kind of picture to paint.

For updates on the day follow us on: pwc.co.uk/budget

Contact us

Marissa Thomas

Marissa Thomas

Head of Tax, PwC United Kingdom

Stuart Higgins

Stuart Higgins

UK Tax Clients and Markets Leader, PwC United Kingdom

Tel: +44 (0)7725 828833

Follow us