Will the Budget provide stability?

Monday 29 October 2018 is a date that has been bandied about with increasing frequency ever since the chancellor abruptly announced when the Autumn Budget would be revealed.

Some of Deloitte’s leading voices have put forward their predictions for the Budget, and how these could potentially affect the UK, both economically and publicly.

VAT and IPT

Along a similar vein to previous Budget predictions this year, Daniel Lyons, Deloitte’s head of tax policy, has put forward potential changes that will be made to VAT.

“It’s highly unlikely that the VAT registration threshold will be lowered,” said Lyons. “Firstly, all VAT-registered businesses have to implement Making Tax Digital for their VAT accounting from 1 April 2019, which will already be challenging, and adding hundreds of thousands of businesses with no experience of applying VAT could make it even more so.

He continued: “Secondly, such a change could be difficult for HMRC to manage when their resources are already stretched preparing for Brexit. Thirdly, in a position paper from November 2017, HMRC committed to maintain the current VAT threshold of £85,000 until 1 April 2020.”

Insurance Premium Tax (IPT) was another area Deloitte’s head of tax policy highlighted as a possibility for change.

Lyons said: “Until a few years ago, IPT has received little attention, with a relatively low standard rate of 6%. That rate is now 12%, and the tax raises £5.6bn each year for the exchequer.

“The question for the chancellor is whether IPT can be increased further – increasing the standard rate from 12% to 13% would raise an extra £400m a year – without encouraging the individuals and businesses to under-insure.

“Although certain countries align IPT and VAT rates, the chancellor is unlikely to increase IPT again in this Budget,” Daniel Lyons added.

Like previous firms before them in this series, Deloitte predicts a “quiet Budget”. Nonetheless, that does not mean that it will be without any changes at all. For example, the promises made by the government to end austerity and provide extra funding for the NHS are promises that cannot be kept without consequences in the form of “unexpected announcements” where “taxes may have to rise.”

Daniel Lyons outlined how “corporation tax is due to be cut to 17% from 1 April 2020”. There is the option to cancel this reduction, bringing in “a small amount of money in 2020-21, but up to £5bn in the succeeding years.”

“Some of this extra revenue could go into supporting business investment, which would still leave the UK with the most competitive corporation tax rate in the G20, whilst simultaneously raising extra revenue,” said Lyons.

The UK’s Economy Beyond the Budget

Focusing more on the general economy, Deloitte’s chief economist – Ian Stewart – said: “The fact that the UK is running a Budget deficit nine years into a recovery testifies to the damage inflicted by the financial crisis. Hammond’s headroom in the Budget is limited by austerity fatigue and compounded by Brexit-induced political and economic uncertainties.

“This year’s Budget is likely to be a curtain-raiser for far bigger decisions on spending, tax, and borrowing, which will come after the UK’s probably departure from the EU next March.

“What is clear is that it will be hard to end austerity and hit the government’s deficit target without raising taxes.”

Pensions and Stability

Meanwhile, Patricia Mock, tax director at Deloitte, has clearly emphasised the importance of maintaining a “period of stability” in the next few months, in order to counteract the murky waters of Brexit negotiations, Making Tax Digital, and other areas of uncertainty.

Potential changes for the pensions sector that Mock has highlighted, involves the possibility of a “restriction on relief [being] introduced to raise revenue, either by restricting the annual limit or reducing the amount of relief due.”

Mock continued: “Restricting tax relief to basic rate would be hugely complex, particularly for employer schemes, and a reduction in the annual allowance might be more likely if changes are thought necessary.

“Generally, we may also see some tightening of reliefs to more closely focus these to their stated objectives.

“On simplification, The Office for Tax Simplification has been commissioned to report on the possible simplification of IHT, with a report due to be published this Autumn.

“When looking at the current rules in place for individuals, and the interaction of the various tax rates, savings, and dividend allowances, understanding the amount of tax due is challenging for many. This is a sentiment which was echoed in the OTS review of tax on savings income published in May, and some simplification in this area is needed in the future.”

Focusing in on Businesses

Gerry Biddle, director of business rates, has said that there will most likely be another review of UK business rates, “which will focus on their impact in light of recent insolvencies of high street chains.”

“There may also be a move towards partial self-assessment for the forthcoming 2021 revaluation, which would require occupiers to fill out complex ‘forms of return’, requiring detailed information in respect of both their properties and the terms of their occupations,” Biddle continued.

“The Scottish government recently implemented a ‘Business Growth Accelerator’, which provides 12-month relief from business rates when building new commercial property or renovating a store, factory, or other commercial property. The chancellor could announce something similar for England; the cost for such a measure in the first year would be around £500m.”

 Employment Tax

This has been an area that many firms believe will definitely be included in the Budget – Mark Groom, Deloitte’s employment tax partner, is no exception.

 He said: “Though we may not get full details on the measures surrounding IR35 in the private sector, we would hope to get confirmation of the state date, which I predict will be 2020, to allow sufficient time for implementation, given the scale and complexity in the private sector.”

However, Groom has raised the concern that full details on how IR35 could work within the private sector may not be provided by the chancellor on Monday. “We would hope to get confirmation of the state date,” Groom said, “which I predict will be 2020, to allow sufficient time for implementation, given the scale and complexity in the private sector. Non-compliance with IR35 is expected to cost around £1.2bn by 2022, so the alternative of an early start may depend on what revenues can be raised elsewhere.

“There could also be a separate consultation into employment status, which will look into whether or not the current case law employment status tests should be replaced, and whether ‘Limb (b) workers’ should be treated as employees in future.”

Groom concluded: “It’s likely these will be kept under review for the time being, as changing the employment status test is complex. While changes to Limb (b) workers would be unlikely to raise material revenues currently, they could become more attractive in the future as the gig economy expands.”

Public Sector

“After the PM’s announcement that austerity is over, this Budget could tell us where extra funding will go,” Rebecca George, public sector lead partner, has said.

“Our latest research shows that two-thirds of the public believe that government spending should be increased – even if that means tax rises – and 70% are worried that public services will do too little to help people in the year’s end.

“This public sentiment could give the chancellor some room to manoeuvre in seeking additional funding for public services.”

The public and accountancy firms alike do not have much longer to wait, as all should be revealed Monday 29 October, when chancellor Philip Hammond emerges from Number 11.