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Budget 2018: what will the Chancellor look to change?

Our partners predict the likely direction of travel

24/10/2018
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On 29 October, the Chancellor Philip Hammond is set to announce the 2018 Budget. With Britain set to leave the EU in early in 2019, the 2018 Budget offers a unique opportunity for the UK to set out how its economy might prosper post-Brexit.
The economy

Nigel BostockNigel Bostock
Chief Executive, comments:

The forthcoming Budget presents a key question for the Chancellor; in times of uncertainty what can be done to help provide long-term value to business, individuals and society?

It is difficult to predict how bold the Chancellor may be. What is clear from what I hear in my day to day work is that our clients, be they businesses, individuals, charities, professional practices or pension schemes are unified in wanting a Budget that provides a sense of stability at a time of Brexit insecurity; a Budget that does not present them with even more challenges and uncertainties.

A Budget that encourages investment, technological advancement, entrepreneurial behaviour, innovation and developing talent would be a welcome move to shape the future direction for the UK’s role as a key global player. We need an economy that creates wealth for tomorrow, as well as dealing with the pressing issues of today.

We need a Budget that supports or increases the level of household income and consumer spending; a Budget that values and celebrates UK business and its ability to create real value; a Budget that protects the interests of key elements of our economy (including manufacturing, retail, property, financial, tech, media and our service sectors), but not at the cost of stunting the growth of the businesses of tomorrow.

Irrespective of the deal the UK will achieve from Brexit, we need to position the country to move forward optimistically.

Now is perhaps not the time to be too radical with tax cuts and big promises, rather focused measures to provide simplification, stability, certainty and encouragement to mitigate against the risks of economic downturn in the light of our exit from the EU.

This Budget is the first time we will get to see the Chancellor's vision for the post Brexit economy. It is possible we will have a further Budget sooner than next Autumn given the complexities around leaving the EU, as well as political uncertainty and potential instability that we may see in coming months. 

Manufacturing
This year’s Budget represents an opportunity for the Chancellor to assess and address the challenges the manufacturing industry faces.

Johnathan Dudley

Johnathan Dudley
Partner, Head of Manufacturing comments:

 

The 2018 Budget will be unique opportunity for the Chancellor to provide UK manufacturers, who represent a vital part of the economy, with a boost, during this uncertain period, where there is still much that needs to be decided across the economy as a whole, but especially in the manufacturing sector. The Chancellor has already stated that he needs to raise money for the promised additional NHS funding and he will need to balance this against providing a post Brexit ‘stimulus’ to both domestic and international commercial markets.

One area to where the Chancellor may look for more funds is closer harmonisation of dividend taxes with National Insurance Contributions (NICs). While this measure may be unpopular with ‘owner managers’ who make up the backbone of manufacturing supply chains, this might be seen as being ‘politically justifiable’.

Additionally, the Chancellor may also look at the wider issue of self-employment and how individuals operating as one-person operations are taxed. This would ultimately change the dynamics of how many microbusinesses are rewarded and would bring taxation policy into line with those who are ‘traditionally’ employed. It could also herald further regulation for businesses using the services of contractors too.

The Chancellor has been widely reported as reviewing the ‘expensive relief’ provided to high earners on pension contributions. Though there are obvious benefits in encouraging individuals to save towards retirement, the current marginal tax rate relief provided on personal and corporate contributions has been progressively restricted in recent years for the highest earners. This could be extended without presenting too much of an adverse effect on the majority of the working population. Where schemes are administered through owner managed businesses, they have often presented flexibility for legitimate tax planning and efficient profit extraction. We could now see this tool being further blunted. Manufacturing businesses represent some of the most-frequent users of Research & Development (R&D) tax reliefs, which provide an incentive for innovation. If the Chancellor really wanted to help businesses across the sector, he could look to increase the rate of credit for innovation expenditure for R&D, which could help to attract and retain companies who want to innovate, to the UK after Britain leaves the European Union.

Likewise, given that neighboring EU states, like Ireland, for example have corporate tax rates of just 12%, there may be opportunity to provide a post Brexit stimulus and also drive clear blue political policy water with Labour, but further cutting the headline corporate tax rate from its proposed future headline rate of 17% to maintain the UK’s international competiveness.

Property and Construction

It is likely that the property industry will, once again, come under close scrutiny by the government.

Stacy Eden

Stacy Eden
Head of Property comments:

Stamp Duty Land Tax (SDLT) has consistently been perceived by the industry as the biggest tax barrier to real estate businesses. This is particularly the case in the residential market where reductions at the top-end would be widely welcomed. This would free-up liquidity in the market, which will ultimately increase housing transactions and sales. We may even find that it raises more money in the longer-term. Two thirds of respondents to our recent property and construction survey stated the government’s fiscal policies were bad for the real estate industry, with SDLT being the biggest concern over 80%.

Additionally, it will be interesting to see the Chancellor’s approach to simplifying the planning process for property development. Philip Hammond could reinvigorate UK house-building by freeing up more areas of green belt land. Investing in planning departments to try and get closer to house-building targets is of great importance. We are currently well short of annual housebuilding targets and this is contributing to higher house prices in certain areas. Again, the vast majority (77%) of respondents to our survey agreed that this approach would be an effective solution to meet these demands.

Paul FayPaul Fay
Property
Tax Partner comments:

A stable and competitive tax system is vital. There have been too many changes in recent years and these have negatively affected the market. We need a period of tax stability. The UK tax system for the property sector has become increasingly complex in recent years and any simplification would be welcome.

Additionally, an exclusion of the 3% second home surcharge from affordable private rental housing would encourage the provision of affordable housing for lower paid workers.

Tax

It is highly likely that the government will, once again, look at reviewing its tax policy in key areas.

Laurence Field

Laurence Field
Partner, Corporate Tax, comments:

When Teresa May declared the end of austerity at the Conservative party conference, she also appeared to be signalling a move towards a looser tax and spend policy although subsequent statements suggest there may be some dispute in government about the best way forward.

The demand for more spending on public services must be matched by increased spending, or borrowing, or both. The default position of many is that they are in favour of increased tax but it is better that it is paid by others. So the political ground is prepared for taxing entities that few people will lose sleep about paying more tax. These include:

  • the possible introduction of an internet sales tax aimed at tech giants, perhaps delayed in the hope that there will be international agreement on how to implement it
  • deferring the introduction of a 17% corporate tax rate, due in 2020
  • increasing investment allowances to encourage investment in productivity enhancing technology
  • increasing innovation tax credits to encourage cutting edge research to be located in the UK
  • increasing resources for HMRC to focus on the affairs of large international corporations to enable it to utilise the considerable amount of information that is now exchanged between tax authorities and provided by multinationals on their tax returns.
Employment tax

With a number of high-profile cases hitting the press in the last few months, it is widely anticipated that tax rules surrounding self-employment are to be looked at, specifically around IR35 and ‘off-payroll’ working, which current uncertainty HMRC estimates could cost the Treasury around £1.2 billion a year by 2023.

Susan Ball

Susan Ball
Head of Employers Advisory Services, comments:

Off-payroll — In April 2017, the government reformed the rules for engagements in the public sector and early indications are that this has resulted in an increase in compliance within the public sector. Six months later, in the 2017 Autumn Budget, the government additionally announced it would consult on how to tackle non-compliance with the off-payroll working rules in the private sector. This consultation closed on 10 August this year and it is anticipated that the findings from the consultation will be revealed as part of the Budget. It is likely that the preferred option of HMRC will be to extend the existing public sector rules to apply to the private sector from as early as April 2019. Although, given the time constraints, April 2020 may be more realistic. Whether the rules will be welcomed by the private sector is open to speculation, but given the short time frames, there is a risk that implementation might be subject to some difficulty.

Work-related training — The Autumn Budget in 2017 also announced that the government would consult on how it could extend the existing tax relief available for self-funded work-related training by employees and the self-employed. The consultation closed on 8 June 2018.

The current tax legislation sets out to discriminate between eligibility of tax relief simply because an employer is prepared to incur the expense of behalf of an employee, or where a sole trader has incurred the expense, yet denies the claim for relief by an employee who has personally incurred the same or similar expense. When the government publishes the outcome as part of this year’s Budget, we have to hope that government’s mantra of fairness and simplification results in improvements for all. This would include allowing relief for employees who pay for their own training, by following the decision in the Revenue & Customs Commissioners vs Dr Piu Banjeree (2010), where the court of appeal accepted that a deduction for training costs incurred by an employee should be allowed if the employee was employed on contact where training was an intrinsic contractual duty of the employment.

Caroline HarwoodCaroline Harwood
Head of Share Plans and Reward, comments:

Simplification of online reporting — Companies which operate employee share plans or otherwise issue shares or other securities by reason of employment, have been required to provide an online annual return to HMRC since April 2014. This process has presented a number of administrative difficulties. Particularly problematic is the requirement that the company itself must register any new plan and close down those no longer in use, rather than being able to delegate these tasks to their agents who may have been completing the annual returns for years in between. Where companies do not have the in-house resources to undertake these processes or where login details have been lost following a corporate transaction, rectifying the situation can be both costly and time consuming.

Enabling agents to register, self-certify and de-register plans would make an onerous process much easier for many companies and would be a welcome change at no tax cost to the public purse.

Tax Relief

The government could use the budget to support innovation among UK businesses and increase levels of outside investment by re-examining their approach to R&D tax reliefs and patent box.

Caroline HuntCaroline Hunt
Director, Corporate Tax comments:

Research & Development (R&D) — The tax legislation relating to R&D is currently both voluminous and difficult for businesses to understand. The Chancellor could provide a real boost to business innovation by reviewing and simplifying the existing R&D tax rules.

Currently the rules do not stipulate what information companies need to submit in order to make a claim. This causes a lot of confusion and results in time-consuming differences of opinion between claimant companies and their advisors, when discussing whether the relief is suitable. Additionally, no definition is provided of what constitutes ‘qualifying research and development’, with businesses being directed to vague guidance from the Department of Business Innovation and Skills (BIS), which was last updated eight years ago. A simplification and codification of the existing legislation would encourage more businesses to claim R&D tax incentives in both the immediate and longer terms.

One improvement could be reducing the number of schemes in operation. There are currently two R&D schemes and tax relief is given in two completely different ways: the 'enhanced tax relief' SME scheme and the 'R&D expenditure credit' large company scheme. Current R&D tax incentives could be simplified by replacing the two schemes by one scheme with a sliding scale of tax benefits, dependent on company size.

HMRC recognises the benefits of R&D to businesses and has committed that the incentive will remain competitive after the UK leaves the EU. Under existing EU legislation R&D tax incentives for small and medium-sized enterprises (SMEs) are limited, and in certain circumstances prevented, where companies receive grant funding. Now that the UK is going to exit the EU, the Chancellor could look at this as an opportunity to review these limits and perhaps remove them.

Providing certainty to businesses has long been a mantra for HMRC. It will be interesting to see whether the Chancellor agrees and reviews this highly-valued and important tax incentive for growing businesses.

Patent Box — The cash benefits for companies taking advantage of the patent box regime (a 10% corporate tax rate compared to the current rate of 19%) have been eroded with the UK being forced to bring its tax benefits in line with EU law. Does the imminent UK-EU divorce provide an opportunity for the UK?

Currently companies have to consider two sets of legislation. These are the computational seven-step approach, that came into force in 2013 and the more recent ‘nexus based’ scheme for any patents granted after June 2016, which adds further computational steps.

The effect of this is that companies seeking to take advantage of the patent box are potentially subject to two sets of complex rules and as a result many have been put off claiming. In fact this is borne out by the fact that in the last year only 1,025 companies claimed under the patent box.

The Budget represents a good opportunity for the government to review and simplify these rules, so that only one set applies to all relevant companies. A more simplistic approach to calculating benefits would also be beneficial, particularly in terms of how income sub streams are categorised.

Fairness is also a key issue for many companies and the Chancellor might additionally look at how group companies in particular are treated under the patent box scheme.

Since its introduction, patent box has suffered from a lack of promotion and this is borne out by the number relatively few qualifying companies claiming the relief. Along with offering more generous incentives, the Budget could represent a good opportunity for the government to promote the scheme further and help businesses to understand and to make the most of its benefits.