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Sinead Moore 3 Mar 2017 10:25am

Spring Budget 2017 predictions

A focus on post-Brexit international competitiveness, tax simplification, business rates, the gig economy, social care funding and pensions are top of the profession’s list of predictions for Philip Hammond’s Spring Budget next week

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Caption: Hammond is expected to focus on tax simplification, business rates, the gig economy and pensions.

Michelle Quest, head of tax at KPMG in the UK, said, “There are a couple of areas which have come to the fore recently which the chancellor will be called on to address – these include business rate reforms, the gig economy and the pressures on social care and funding.”

Chris Sanger, head of tax policy at EY, added, “Keen to push the adage that ‘less is more’ by way of tax policy, the government had hoped and planned that the first of its two budgets in 2017 would be a low-key affair, ensuring a smooth run-up to the triggering of Article 50.

"These best laid plans could be frustrated and we may see some significant announcements, not least on the thorny issue of business rates which has been the centre of intense scrutiny in recent weeks. Elsewhere, with a review of modern employment practices already underway, the taxation of the self-employed is likely to be high on the chancellor’s agenda.”

However, Jonathan Riley, head of tax, Grant Thornton UK said, “Overall, and despite the temptation, we believe Hammond will resist providing giveaways or attempting to produce rabbits from hats in this budget, in contrast to the style of his predecessor George Osborne.

"The main reason for this isn’t Hammond’s account-esque caution but more likely the need to provide a war chest against any possible negative impact from the triggering of Article 50, now expected around 15 March, and the subsequent negotiations with the EU as to the UK’s exit.

"We do predict that there will be more flesh provided around some of the bones of the recently launched Industrial Strategy, especially on infrastructure. Although the consultation period for the government’s green paper does not end until mid-April, there will be ways in which Hammond will want to set the tone for future actions, and keeping Britain moving is one way in which he can seek to boost productivity. We expect to hear more on the Northern Powerhouse movement as well as on general road maintenance."

Public finances

John Hawksworth, chief economist at PwC, said the Big Four firm expects UK growth to moderate to an average of around 1.5% in 2017-18, followed by a return to a post-Brexit trend growth rate of around 2% in 2020 and beyond.

PwC added that the budget deficit this year looks likely to come in around £10bn below the OBR’s November 2016 forecast.

“This may give the chancellor some wiggle room to spend a few billion pounds more on political priorities like the NHS and social care, but we don’t expect a big giveaway Budget,” Hawksworth said.

“Instead, we expect the chancellor to use most of the potential £45bn windfall from lower cumulative public borrowing over the period to 2021/22 to reduce the public debt to GDP ratio faster than previously projected.”

Follow our coverage of the Spring Budget here

Ian Stewart, chief economist at Deloitte, added, “After seven years of deficit reduction, annual borrowing still accounts for 3.5% of UK GDP. The squeeze on public spending is stepping up, this Budget is unlikely to see any let up on that, and by the end of this decade the tax burden is likely to be at a 30-year high.”

“As such, rebalancing the public finances after the global financial crisis is likely to be a three-Parliament process and Mr Hammond’s first Budget could mark only the halfway point in the long journey to eliminating the deficit.”

Tax simplification

According to Quest, “KPMG‘s surveys of clients have established that companies look for simplicity, stability and predictability, both in economic and political terms when it comes to deciding where to do business.

"In light of this, a roadmap setting out guiding principles and priorities covering all taxes – personal and corporate – would be welcomed. This would also go some way to offering some stability as the UK heads into what may be many years of uncertainty exiting the EU.”

Quest called for a simplification of the tax system and measures including giving more power and resources to the Office of Tax Simplification; a move towards a consolidated fiscal return for larger groups, similar to the US; and a continued focus on automation to simplify the return process, at a pace that maximises the likelihood of success.

BDO added, “We need a moratorium of tax changes for businesses.”

According to the mid-tier firm, 57% of businesses would be happy to see taxes rise if the system was more simple.

Business rates

Unsurprisingly, an announcement on business rates is widely predicted following recent criticism of looming rate changes.

BDO said businesses are still really concerned about the impact of the changes on 1 April, adding that “a complete overhaul of business rates is needed”.

Sanger said, “In no other tax is the rate increased merely because the government wants to get the same amount of tax. If the chancellor feels the need to respond to the pressure on business rates, resetting business rates back to 41.4% would seem a good place to start.”

Phil Vernon, head of rating at PwC, added, "If the chancellor wants to help ratepayers facing large increases, the fastest and most effective method is to adjust the thresholds of the Transition Scheme that protects ratepayers from large rises.

"The chancellor could make an immediate impact by adjusting the relief thresholds and capturing more small businesses in the 5% bracket. Targeted help for London may be an option, with the removal of the medium-band 12.5% increase cap for rateable values between £28,000 - £100,000, and extending the 5% increase limit for rateable values up to £100,000.

However, Gerry Biddle, assistant director at Deloitte Real Estate, does not expect the chancellor to announce any significant changes to the implementation of the 2017 business rates revaluation.

“Any changes now would cause significant problems as the new business rates liabilities come into effect from 1st April 2017 and the bills are already being prepared and issued by the local authorities,” he said.

“However, it’s likely that the chancellor will spend some extra money to help those businesses facing the steepest increases by making the transitional relief scheme more beneficial to those occupiers. In addition it is very possible that he may raise the £12,000 RV threshold for 100% relief from business rates to assist smaller businesses.”

To facilitate more frequent revaluations, Biddle added that the government is currently considering a move to self-assessment for business rates.

Vernon added, “If the government is intent on bringing in a self assessment business rate system by 2022 it will need to cut through a lot of existing red tape. The reform would effectively transfer the administrative burden onto businesses, which would need to find extra resources to conduct the assessment.”

“On the plus side, the Valuation Office would make considerable saving to its running cost and this would enable it to increase the frequency of revaluations, possibly to annual reviews, which is something the industry has been calling for, and would alleviate many of the sharp increases we now see in the 2017 revaluation.”

However, Riley thinks Hammond should "hold firm".

"Business rate rises, although newsworthy and headline grabbing, are merely a symptom of our archaic tax system with its roots in the 19th century. Our current code is fundamentally not fit for purpose. Tweaking around the edges, with a small amend here and an addition there, is not the solution. If we really want to create an environment and vibrant economy where businesses can flourish, the Chancellor would be well advised to instigate a root and branch review of tax legislation, and consider starting with a blank sheet of paper, helping us reimagine a framework that would address any unfairness in the system,” he said.

The gig economy and employment tax

Colin Ben-Nathan, tax partner at KPMG in the UK, said, “All signs seem to be pointing to a significant announcement in the Spring Budget on the future, strategic approach of how work is taxed to better reflect the changing economy.”

“In my view, narrowing the fiscal differences between employment and self-employment is the right approach.”

But he added, “There is no quick fix.”

“We need a careful and considered approach not only to bring things up to date, but also to simplify things and to anticipate the increasing trend to multiple jobs in the gig economy."

"The rise in self-employment and use of service companies, with their tax advantages over direct employment – irrespective of the flexibility these forms of working bring – is a cause for concern,” Riley said.

Riley predicts a possible "increase in the rate of dividend taxation or perhaps the re-introduction of taxing a company’s reserves, called apportionment, which was used to deem profits as dividends but was phased out in the 1980s.

"A further cut to the main rate of Corporation Tax to below 17% by 2020 would make this problem worse,” he added.

Iain McCluskey, partner at PwC said, “There has been a lot of attention around the disparity of tax treatment for workers who are self employed and those who are not. This is a big topic affecting not just the tax take but also the availability of skills and talent.

"An announcement from the chancellor to review this area and think through the policy needs before making any knee jerk changes would reflect a measured response from government.”

Bill Dodwell, head of tax policy at Deloitte said, “It is clear that the challenges to the tax system of new ways of working will need to be considered and it is possible that the chancellor could use the Budget to launch a high-level consultation, alongside the Taylor Review of employment law and worker benefits.

"It is also possible that he could signal a move to asking private sector engagers to follow public sectors engagers in assessing whether or not PAYE should be operated on personal service companies. This would be a highly complex change and would need some time to implement.”

Sanger added, “With a review of modern employment practices already underway, and the government’s proposed reform of the taxation of off-payroll working in the public sector, this is an area that looks set to see a fundamental review of its tax and social security treatment.

"This is a complex area, where tax rules can diverge significantly from employment law. In launching such a review, the government should start at the ‘green paper’ stage, considering a range of issues rather than jumping straight to the conclusion.”

BDO predicts an announcement outlining how “aligning rules for NIC and income tax will help take tax out of the decision for being employed, self-employed or using a personal service company”.

The firm added, “Extending IR35 rules to private sector will help reduce the ‘brain drain’ from public sector."

Corporate and international tax

Bill Dodwell, head of tax policy at Deloitte said, “My hope is that we shall see limited changes in the Spring Budget. We are in the middle of very substantial changes to the tax system, from Making Tax Digital (MTD), changes to employment taxes and changes driven by the G20/OECD Base Erosion and Profit Shifting project.”

Sanger added, “With the government already committed to reducing corporation tax to 19% this April and then 17% in April 2020, any further drop is unlikely despite murmurs of the UK becoming a low tax haven as it looks to attract post-Brexit investment.”

Stella Amiss, international tax partner at PwC, agreed, “We don’t expect any announcements to lower the corporation tax rate beyond the 17% planned. However, the chancellor could accelerate the cut so it’s in place before 2020.”

Amiss added, “The chancellor may look to help SMEs. One approach would be to reinstate the distinction between the main rate of tax applied to big and small businesses.

“We expect confirmation of pre-announced changes making it easier for UK corporates to access the exemption to capital gains tax for disposals of shares. This simplification of the rules is welcomed and together with the lowering of the corporate tax rate in April 2017, helps support improving the attractiveness of the UK.

Amiss added, “British business is still grappling with a large number of tax changes with the introduction of loss reform and corporate interest restriction rules on 1 April 2017. After a period of sustained changes to international tax law and continued uncertainty on where the Brexit negotiations will land, a Budget with no “rabbits out of hats” moments would likely be cheered by many.”

Robin Walduck, tax partner at KPMG in the UK, added, “We are not expecting any major announcements with regards to the implementation of BEPS or new anti-avoidance measures.

“As people engage with new rules, I foresee plenty of issues coming out of the woodwork (in terms of interpretation and compliance) so certainly corporates would appreciate a bit of a breather to let the latest raft of changes bed in before any further substantial changes are announced.

“On anti-avoidance, previous administrations have announced a significant package of anti-avoidance measures at almost every fiscal event. The question will be whether Philip Hammond continues this theme or strikes out in a new direction.”

Personal tax

Greg Limb, head of private client at KPMG UK, said,“Most expectations are that this is likely to be a reasonably low key Budget for individuals. Personal allowances, tax thresholds and other changes to be introduced from 6 April 2017 are already confirmed including restrictions to finance costs for non- corporate landlords.”

Limb said he would welcome a delay in the introduction of the new rules currently proposed to come into effect from April 2017 for both non doms (including rules for offshore trusts) and inheritance tax (IHT) on UK residential property as well as the introduction of a personal tax roadmap that sets out the direction of travel for the taxation of individuals.

David Kilshaw, private client services partner at EY, added, “With a new chancellor we may see a new strategy – perhaps fewer tax breaks and reliefs but more value being delivered from those that remain. Capital gains tax is also an area where the new chancellor may see an opportunity to make his mark.”

Overall, we would welcome a period of stability for pension schemes – but that is likely to be a vain hope (David Fairs, pensions partner at KPMG in the UK)

Iain McCluskey, partner at PwC, said, “With continued pressure on available and affordable housing, the government may look to introduce further measures to encourage older homeowners to downsize.

"He may further reform inheritance tax with an even more generous regime for homes that are passed down or sold in lifetime, and potentially other tax measures that might tip the decision for downsizers towards selling.

“Healthcare has rarely been out of the headlines in another tough winter for the NHS. Past governments have ploughed extra funding into the NHS via national insurance rises, and we may well see this approach again. Many other countries have a more complex social security system that splits out contributions to different areas such as state pension saving, healthcare, unemployment protection, etc.

“As a wild card prediction, government hints about post-Brexit Britain being a lower taxed economy might indicate a cut to personal tax. A penny from the basic rate would be eye catching and popular, but very expensive. The government is more likely to continue the policy of hiking the personal allowance and basic rate band upwards, but don't completely rule out a rate cut, or a nod to a rate cut next year if certain economic targets are met.”

Making Tax Digital

"The chancellor is bound to refer to MTD, due to take effect for many from April 2018,” Riley said.

"At the close of the recent consultative process the government indicated that it would consider the level of the threshold below which MTD will not apply. This is currently set at £10k. Despite the temptation to increase this, for example to that of the VAT threshold, this is unlikely to happen. Software companies writing the material on which MTD will rely, will need the largest possible market to sell that software to. Taking more out of the MTD net makes the economics of writing the software much harder,” he added. 

Patricia Mock, tax director, said, “We are waiting for two important announcements – the turnover threshold and whether the start date will be deferred for all or some of those affected. Such a radical change needs time for thorough testing and we hope that the final start date allows time for this.”

Mandy Pearson, tax partner at KPMG in the UK, raised concerns that “the proposed timetable for implementation is too tight, that the exemption threshold is too low and that adoption is to be by mandation rather than voluntary. Added to this, with changes due to come into effect for Income tax and NIC from 6 April 2018, public awareness also seems relatively low".

Pearson added, “We could very well see the chancellor start this ball rolling by announcing the proposed exemption threshold on Budget day.

“On the other hand, the recent scrutiny around costs and timetable could plausibly lead to MTD being deferred for a year or mandation being dropped. Either way, we do expect that the chancellor will have something to say on MTD come Budget Day.”

Social care funding

Caroline Hope, lead social care partner at Deloitte, said, “The challenges facing social care loom large over this Budget. Increasing demand puts NHS and social care budgets under intense pressure and presents providers with a difficult financial backdrop to carry on delivering services.”

“The reality is that, while a short term injection of cash from the chancellor would be welcome, it would not be a long-term solution.”

“These are challenging times for pressurised public services. Beyond additional funds, transformation and constantly evolving to meet societal change are the best ways to forge more sustainable health and social care.”

Helen Sunderland, health and social care lead for EY, said, “The latest figures from the Local Government Association suggest that 147 councils intend to use the rise in the council tax precept announced in the last Autumn Statement for additional funding for social care, with 75% going the full way.

“However, the sector is clear that while more funding is needed, this alone will not plug the immediate or longer terms gaps driven from increasing demand, increasing costs and historic underfunding of care services.

“The chancellor may have some leeway on fiscal rules, so it is not inconceivable that a rise in borrowing or radical steps to raise additional cash could be considered to boost spending in this area. Timing-wise it would make sense to take any bold steps soon.

“Overall, it is unclear whether additional funding, if announced, will be from central government or from local authority revenue streams.”

BDO expects a consultation to be announced “to address long-term funding care; new death levy, reduction in pension tax relief for higher earners, creation of ‘pensioner loans agency’ and a lower NIC rate for the over 65s are all options”.

"We also expect to see support given to local authorities to help try and tackle the current social care crisis,” Riley said.

"As councils start to reach financial breaking point local authorities urgently need new investment to meet the rising demand facing this service and the government cannot rely on tax payers alone to fund this. This budget is the perfect opportunity for the government to prove their commitment to solving this problem and providing the funding desperately required,” he added.

Pensions

Steven Dicker, pensions partner at PwC, said, “With full tax relief already limited to contributions of up to £40,000, and only £10,000 for the highest earners, it would seem on the face of it that there isn't much more to go for. But total tax relief on pension contributions is still very substantial and with the ISA limit ever increasing, now might be the time that these two long term savings products move even closer together.”

David Fairs, pensions partner at KPMG in the UK, said, “We know that the government is continuing to eye further changes to the tax regime for pension schemes. However, what we don’t know is whether this will involve sweeping changes – along the lines of the pensions ISA mooted in the 2015 Treasury green paper – or just further tinkering with existing allowances.

“The recent DWP pensions green paper raises the prospect of a lot of further changes to the regulation of defined benefit schemes. Yet this runs the risk of completely overwhelming employers and scheme trustees if these have to be implemented alongside a range of other tax changes that are currently being worked through for business.

“Overall, we would welcome a period of stability for pension schemes – but that is likely to be a vain hope. The likelihood is that, if we don’t have pensions tax measures announced in this Budget, we will get something in the new Autumn Budget.”

R&D

Continued investment in science, research and innovation is also a big prediction for next week.

David Woodward, tax partner at KPMG in the UK, said, “The prime minister has already signalled the government’s intention to improve support for R&D to make the UK more competitive in this regard.

"At the Autumn Statement the chancellor announced that the government would review the tax environment for R&D and the chief secretary to the Treasury recently confirmed this review is due to conclude at the Spring Budget. We are therefore likely to see some announcements on this on 8 March.

“There are various simplifications and improvements that could improve the current regime which include increasing R&D Expenditure Credits to 12.5% to give a 10% net headline rate and monetarising R&D Allowances which could encourage business to ‘lay foundations’ to lock in their investment in the UK for the longer term.

"The government could also look at offering more support across the full lifecycle of innovation all the way through to exploitation of the IP generated here as, at the moment, there are no real incentives to build hi-tech manufacturing facilities in the UK.

“Looking further ahead, if the UK no longer has to follow certain EU guidelines post-Brexit this could open up more avenues for reform to encourage and support additional investment in innovation.”

Sarah Prior, tax partner at PwC, said, “We need to look at existing tax incentives to encourage research and development through a future world lens. They shouldn't just encourage the creation of things you can touch, but the development of technology such as Fintech. It's about making sure tax incentives are fit and appropriate for a digital age.”

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