As the chancellor gets ready for his first and last Spring Budget, BDO tax partner David Brookes looks at the key issues that could and should be addressed on 8 March to support businesses as the UK makes its exit from the EU
The chancellor has talked about getting the economy “match fit” for the post-Brexit world. But he must take a long, hard look at the 20,000 pages of UK tax legislation in order to do that.
The sheer volume and complexity of tax law is a major obstacle to growth, with more than half (57%) of the businesses we’ve spoken to saying they would support tax simplification even if it meant marginal tax rises.
As the chancellor announced in December, we’re moving to just one major fiscal event per year, the Autumn Budget, as of 2018. This is a step in the right direction, which should result in less frequent change for businesses and hopefully make it easier to plan for the long term.
But we think he should go a step further and announce a moratorium until 2020 or until Brexit negotiations are finalised (whichever comes first) on any tax changes that do not simplify the tax system. A commitment to simplicity would send a clear pro-business message, allowing the government to focus on Brexit and giving businesses some certainty in uncertain times.
The chancellor should also do a U-turn on his decision not to align income tax and national insurance contributions (NIC) – a decision only discovered in a letter to the Office for Tax Simplification in November last year. It now seems likely he’ll announce a consultation on this matter before committing to changes in the Autumn Budget.
The gig economy has moved from the margins to the mainstream, with the number of self-employed people in the UK growing by 26% in the last decade.
However, the UK tax system has failed to keep up. The new business models and working patterns of the gig economy, which is reportedly costing the Treasury £4bn a year, are embroiled in a maze of employment law that is concerning and confusing for everyone involved.
Aligning the rules on NIC and income tax for the employed, self-employed and those using personal service companies would remove tax from the decision-making process. Creating a level playing field for all, this would deliver a lasting benefit of simplicity for employers and individuals, and could raise a reported £1bn for the Treasury if NIC rates for the self-employed were increased from 9% to 12%.
The forthcoming clampdown on public sector employers using non-payroll labour could also be extended to the private sector in 2018. As the changes within IR35 take effect next month, there are reports that contractors are already moving away from public sector contracts. If the private sector was subject to the same tax regime, it would limit the public sector’s “brain drain” concerns while addressing another imbalance in employment tax legislation.
The persistent issue of business rates continues to be a source of debate in the run up to the Budget.
Although Hammond has said “he’s alive” to the impact the proposed changes will have from 1 April, there is still significant concern among high street retailers as they remain uncertain about whether the Budget will provide any relief to alleviate the steep increases they face next month.
I would call on the chancellor to commit to a full overhaul of the business rates system; one that seeks to level the playing field for traditional and online retailers and creates an environment that encourages mid-sized entrepreneurial retailers to invest for future growth.
This should include removing investments made by businesses out of the calculation for valuing properties. He should also remove the link with annual RPI inflation and instead index to CPI, allowing business rates to flex more closely with the economy.
In the longer term, I wouldn’t be surprised to see the government introduce some form of low tax on the “digital real estate” of large online retailers.
For now, however, it’s crucial that policymakers grasp the full extent of next month’s increases and acknowledge, in particular, that high street retailers have to contend with this on top of rising import prices, increasing employment costs and a consumer with tightened purse strings.
David Brookes is a tax partner at BDO.
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