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25 Nov 2015 04:36pm

A populist Autumn Statement

The profession has responded very cautiously to today’s Comprehensive Spending Review and Autumn Statement, although there is general agreement that the chancellor has probably left himself with little margin for error

As Jonathan Riley, head of tax at Grant Thornton, commented, “The fundamental point though is that the statement relies on low interest rates being sustained over the life of this Parliament AND the achievement of forecasted growth – something on which there is not a strong track record.”

ICAEW chief executive Michael Izza agreed. “The nation’s finances are very finely balanced with little margin for error if we are to meet the Chancellor’s goal of a surplus by the end of this Parliament.

“It is dependent on increasing tax revenues as a consequence of economic growth and low interest rates on debt. But it would only one major, unexpected event to blow the government’s finances off course. This would make sorting out the nation’s finances a three parliament challenge.”

The Institute of Directors welcomed the chancellor’s recommitment to achieving a budget surplus by the end of the parliament but warned that he could be blown of course if the economy does not continue as strongly as expected.

IoD director general Simon Walker said, “There will be plenty of complaints about individual cuts, but it’s important to remember that total debt will still be colossal, over £1.715trn (70% of GDP), by the end of the spending review period.

“The chancellor will know that if the economy chills and tax receipts disappoint, his plans will suddenly become much harder to achieve.”

Not much new

Martin Beck, senior economic advisor to the EY ITEM Club, said that after three other fiscal events within a year, it was always going to be a struggle for the chancellor to come up with any interesting and radical measures.

He dismissed the revised forecast for GDP growth as “little more than rounding errors” and described the borrowing forecast cut of a cumulative £28bn over five years as “small beer”.

“Overall, the chancellor’s announcements will deliver a small net fiscal boost to the economy next year of around £6bn, or less than 0.3% of GDP, mainly through the preservation of tax credits. But this largely disappears over successive years as the effects of tax rises (a new apprenticeship levy and bigger rises in council tax) kick in.

“And while we heard little about it today, the economy still faces the drag from a major fiscal squeeze over the next four years.”

Yael Selfin, KPMG’s head of macroeconomics at KPMG, was more positive, pointing out that the higher short term forecasts for the UK economy had helped the chancellor’s numbers. “Despite the climb down on tax credits, the £12bn cuts in the welfare budget remain, allowing the chancellor to stick to his original target of a surplus of £10bn by 2019/20.

“This should give him some room for manoeuvre in the coming years should more spending be required, as he will still be able to stick to a surplus as promised ahead of the next election.”

Devil in the detail

There was widespread agreement that it would take time to assess the Statement’s overall impact. EY’s head of tax policy Chris Sanger, who described it as “less of a mini Budget and more of a trailer for what’s yet to come”,

“With limited detail announced today, we have to wait two weeks to Legislation Day on 9 December when we see the draft Finance Bill,” he said.  

Grant Thornton’s Riley added, “This is the most comprehensive and detailed statement I can recall. The devil is going to be in the detail and there is going to be a lot of detail to sift through.

“The key will be the extent to which this statement will help create a vibrant economy, one where dynamic businesses and other entities can grow and where we can create the right environment in which those entities and our people can thrive.”

Some commentators thought the statement was a missed opportunity. Duff & Phelps transfer pricing economist Shiv Mahalingam would have liked to have seen the chancellor respond to the heavy criticism over pension tax changes, while his fellow transfer pricing economist Danny Beeton thought the chancellor had missed a trick in not making changes to the onerous 8% surcharge on banking activities.

New payroll tax

Although the apprenticeship levy had been long anticipated, the amount – 0.5% of payroll – was a shock. The IoD’s Walker said it could only be described as a new payroll tax.

“At 0.5% of payroll it will be a big new cost for many companies, including medium-sized ones. We are very concerned by the government’s assumption that a quarter of the money collected will be spent on just administering the levy. Firms have been promised they will get back more than they put in, but it’s not clear how this will happen if so much is being lost in bureaucracy.”

PwC’s employment tax partner John Harding welcomed the government’s commitment to investing in apprenticeships, but was surprised that it was being introduced as quickly as April 2017.

“Despite the benefits, the cost impact for large businesses can't be ignored. For many large businesses the 0.5% payroll levy will be far higher than the costs of the number of apprenticeships they currently offer.

“Unless larger businesses can reap the benefits of apprenticeships in other parts of their supply chain, this will simply be a payroll tax for them. When taken together with the National Living Wage and increase in auto enrolment costs, these businesses face a significant increase in their employment costs over the next few years.”

Neil Todd, a partner in law firm Berwin Leighton Paisner, said it was “disappointing” to see the government introducing an additional levy on employment “when it should be continuing to encourage businesses to come to this country and to employ people in the UK”.

“Coupled with the continued rhetoric on avoidance, multinationals may well question whether the UK will remain a tax friendly environment in the years to come,” he warned.

There was relief though that smaller businesses (those with a payroll less than £3m) would be exempt.

For we are builders

The property measures also drew a lot of comment from firms. KPMG head of housing Jan Crosby said that the announcement of a £6.9bn investment in house building was “a sure sign that this is a Government which is making all the right noises when it comes to tackling the crisis of home ownership”.

However, there are fears that Starter Homes will not offer the right solution. As Crosby pointed out, “They may cannibalise housing that would have otherwise been built – particularly social housing and rental stock. 

“And although they might create an initial easing at the starter end of the housing market, the fact that they can be sold in five years at market rate is hugely inflationary and tantamount to a big tax-free cash lump sum for those able to buy them.

“Such a populist strategy may work for the government itself, but could cause more issues within the market during the next parliament.”

EY’s Dom McAra, who specialises in construction products, was concerned about the challenges that many companies will face such as the battle for skilled labour and capacity constraints around materials supply.

“Throughout the recessionary years both the construction companies and those in their supply chain were forced to scale back operations and increasing their capability will be no small feat.  The sector has shown itself to be innovative in meeting these demands historically so I consider this will be a challenge the sector will rise to.”

 He added that the government would have to think carefully about the incentives it will need to offer to persuade companies to build the homes, “particularly given the cost pressures brought about by the ‘battle for skills’”.

A populist Autumn Statement

The third area of focus for commentators was the chancellor’s decision to clamp down on property investors. They were the largest losers, according to BDO tax partner David Brookes, being hit by a “hat-trick of measures”. 

A 3% increase in stamp duty on second homes and investment properties from April 2016, an acceleration of capital gains tax payments on residential properties to 30 days after sale and a housing benefit cap potentially hitting rents will make property investment a less attractive option, he said.

KPMG tax partner Chris Morgan thought that, in increasing stamp duty and imposing the apprenticeship levy on big business, the chancellor was being populist.

“The tax agenda is very much a populist one. The chancellor is raising nearly £21bn of extra tax over the Spending Review period – largely from large business with the apprenticeship levy and increasing stamp duty on additional residential properties – while relaxing the welfare squeeze by just over £5bn.”

Bill Dodwell, head of tax policy at Deloitte agreed. “This is an Autumn Statement with few tax announcements – although it raises taxation over the life of the parliament by nearly £21bn.The major burden falls on larger business in the form of the apprenticeship levy. This is expected to raise £2.7bn from 2017, increasing annually thereafter.  Small business is effectively exempted from the levy thanks to a £15,000 rebate. The levy increase is substantially more than the cuts in corporation tax announced at the Summer Budget.

“The second major tax increase is an additional 3% stamp duty land tax charge on the acquisition of buy-to-let residential property and second homes. This starts on 1 April 2016 and is thought to bring in £625m in its first year – nearly £4bn in this parliament.  

“From April 2019 capital gains tax due on residential property sales will be payable 30 days after the sale. This is another example of one of the Treasury’s favourite policies – bringing forward the date when tax must be paid. The chancellor did however confirm this won’t affect the UK’s best-loved tax relief – the principal private residence exemption.”

Overall, though, most commentators were relieved that there weren’t too many new measures. It would give them a breather after last year’s Autumn Statement and this year’s two Budgets, and enable them to implement the measures that those three had announced.

Julia Irvine

 

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