The Chancellor has a difficult task ahead. Not only are his hands tied by Brexit uncertainty, they’re handcuffed by low growth forecasts and a wafer-thin majority in Parliament too. Unlike other Chancellors in their first Budget since a General Election, we can’t see him announcing many surprises.
Invest today for tomorrow
We recently surveyed 450 clients asking them what they thought the Chancellor could do to strengthen the UK economy as we trudge through the uncertainty of EU negotiations.
One thing that came across loud and clear was that businesses are urging him not to lose sight of the domestic business agenda; focusing on UK growth and not being distracted by Brexit was their number one priority.
Businesses are calling on the government to invest in the future by spending today. Hammond will have to decide whether to abandon his commitment to tackle the deficit or give in to pressure to increase capital expenditure and address the UK’s worst productivity issue since World War II.
On top of that, he’s facing the issue of having a tiny political majority, meaning anything slightly controversial is unlikely to get passed.
Many will be looking to the new Industrial Strategy for answers. Investment in digital and physical infrastructure to help improve productivity, substantial house building programmes to address the housing shortage and a focus on boosting business confidence and investment are all popular measures.
Tax simplification matters
In addition, the big issue of tax simplification has been raised by businesses. The sheer scale and complexity of UK tax law is proving to be a real obstacle to growth and in itself won’t be helping the UK’s productivity crisis.
More than 60% of the business leaders we spoke to said they would be willing to see taxes rise in return for a simpler system. That’s a huge number of people that are willing to pay more tax, which goes to show the administrative burden of compliance and the impact it’s having on growth ambitions.
Hammond has already made several confusing changes in policy direction on simplification measures – most recently when he delayed the abolition of Class 2 NIC for another year. He has talked about moving to a new consultation cycle on tax legislation, which is welcomed but won’t speed things up if he continues to delay decisions on the changes needed.
There needs to be a coherent tax strategy that deals with the inter-generational fairness; one that supports growth and protects the tax base in a globally-mobile and digitised economy. The strategy absolutely needs to go beyond political cycles.
We want to see the Chancellor announce a tax simplification road map – similar to the business tax road map that was introduced in 2016 – which starts after Brexit negotiations have finalised and spans the next decade to give businesses some clarity for the future.
Firms are fed up with the government tinkering at the edges. They want systematic change. They understand that won’t be easy and that it can’t happen overnight, but a commitment to simplicity would be a clear signal to businesses that the government is on their side and, importantly, it would send a message to the world that the UK is a destination where businesses can flourish.
HMRC: tax avoidance and Brexit
There seems to be a general consensus among businesses that HMRC is making positive inroads in its efforts to tackle tax avoidance, and therefore the government should continue to use its significant armoury to give the Revenue the tools they need and not introduce fresh measures.
However, the perception of many mid-sized businesses is that they spend a lot of time and money navigating compliance and ensuring they pay the right amount of tax but, from their perspective, multinationals still seem to pay less than their share. As a result, when we asked what HMRC should focus on over the next year, more than a third said following through on all OECD proposals to deal with avoidance by multinational companies should be a priority.
The other big challenge for HMRC is Brexit. Last month, David Davies said that HMRC will need an extra 5,000 staff to work on new custom arrangements after Brexit. If this is true, this could increase HMRC’s wage bill by an additional £200m a year.
There’s also an increasing amount of discussion around ‘authorised economic operators’ (AEO). This is a special status that allows traders to clear customs more quickly; something that is likely to become increasingly important post-Brexit. When AEO status is granted by one customs authority in the EU, it is recognised by all others.
Just 600 UK companies have been registered by HMRC as AEO, representing less than 5% of the companies registered across the EU.
MPs, businesses and industry experts are urging HMRC to register more companies but concerns are mounting that HMRC doesn’t have the specialist resources to deal with the expected growth in AEO applications after the UK leaves the EU.
HMRC will be stretched paper thin in the years ahead. In order to ensure the most seamless of transitions in post-Brexit trading and to be able to continue to tax avoidance, HMRC must be given the resources to support UK businesses. We, and the businesses we work with, hope to hear the Chancellor address this head-on in his speech on Wednesday.
Paul Falvey is a tax partner at BDO LLP