Budget 2018 will take place on 29 October.
Expected tax measures
Philip Hammond has already proved himself a cautious Chancellor. His U-turns on proposed changes to both Class 4 and (more recently) Class 2 National Insurance Contributions emphasise just how careful he has to be in the current political environment. So the theme of the next Budget is likely to be “safety first”.
With Brexit looming, the Chancellor will no doubt want to build up a war chest to cover the associated costs. These cost could range from employing more Customs officers, to the revenue hit from the various concessions and practical arrangements that the Government’s contingency plans envisage to soften the impact of a ‘no deal’ Brexit. In practice, his war chest may be created by reducing current Government borrowing faster than expected to give himself room to increase it again in future as and when it is needed: tax rises to finance Brexit are likely to be a non-starter.
However, the Chancellor will have to include a few tax raising measures to finance the Prime Minister’s commitment to increase spending on the NHS by £20bn. As much as half that sum may come from extra borrowing, leaving the Chancellor the option of creating a package of small measures that, in theory, could raise the required funding for the NHS.
The need for stability in the face of Brexit is likely to mean that the Chancellor is unable to change the timetable for proposed cuts to corporation tax even if he wanted to. However, he has floated the idea of introducing new taxes to address perceived tax avoidance by large global digital companies. While there may be further consultation on such moves, imposing a specific new tax this side of Brexit looks risky: Why frighten away global businesses? The Chancellor is more likely to wait for final OECD proposals on taxing the digital economy in 2020 before making major changes - although taking an interim step of introducing withholding tax on royalties (probably at a low rate) may be attractive.
Reform of the complex area of tax reliefs given on intangible fixed assets is long overdue. Again the Chancellor is unlikely to rush into legislating changes but there may well be a consultation on proposals to give businesses more tax reliefs in future to help attract/retain businesses in the UK after Brexit – another hit to tax revenues he will need to finance.
The Government has already consulted on changes to the special Enterprise Investment Scheme rules for knowledge intensive companies and we expect that these will be included in Finance Bill 2019. Similarly, further technical clarifications are expected on the property capital gains tax rules for non-UK resident owners that take effect from April 2019. Try our UK property taxes tool for more details of these changes. The Government has also announced that there will be a consultation on a further stamp duty land tax charge (an additional 1% to 3%) for non-UK residents buying UK residential property.
It is widely expected that Philip Hammond will announce a new single-use plastic tax intended to encourage manufacturers to use more recycled and recyclable plastic in their products.
Although any changes to NIC appears to be too risky in political terms, it is likely that the Chancellor will again announce new anti-avoidance rules attacking extreme planning arrangements undertaken by some employers.
Having consulted on the controversial topic of employment status and the gig economy, many will be hoping that the Chancellor finally grasps the nettle to overhaul the UK’s complex tax and legal rules. However, little real progress is likely towards aligning the income tax and NIC rules and the most we should expect is a further consultation of some tentative proposals.
Similarly, extending the current rules for off-payroll labour in the public sector to all private sector businesses looks far too politically sensitive at this time (even though it would be a good revenue raiser for the Government).
The Prime Minister has already committed to extending the freeze on Fuel duty rates (a safety first move), however, the Chancellor has been able to increase the rate of insurance premium tax (IPT) significantly in recent years without much opposition. IPT may well be increased again by a small amount.
In its “no deal” Brexit briefings that Government has confirmed that it will grant EU financial services businesses temporary passporting rights to the UK market. Once the UK is outside the EU, this will put EU based financial services firms in a better VAT position than UK firms: they will be able to recover VAT on financial services provided to UK customers, but UK firms will not. The Government will probably want to consult on how to address this issue – although granting a right to recover VAT to UK financial service businesses will be expensive.
Further moves to counter VAT avoidance can be expected, with further detail on the proposed VAT collection split payment rules which will have to be applied by online shopping platforms and other ways in which the platforms will be required to ensure users pay the right amount of VAT.
Delaying the promised increases in the personal allowance and higher rate tax threshold could save significant sums for the Chancellor in the short term. However, it is likely that the promised £12,500 allowance and £50,000 threshold will be in place by the due date of the next election in 2022.
We know that the rent-a-room relief rules will be tightened up from April 2019 although it is not clear how much additional tax this measure will collect.
If the Chancellor is falling well short of his revenue-raising target for this Budget he may be tempted to cut back on pensions tax relief a little. There are numerous ways this could be achieved but he is unlikely to choose to impose a flat rate of tax relief on pension contributions (it would be both controversial and practically difficult to implement). The most likely way to cut down on the cost of this expensive tax relief would be to cut the annual contributions allowance from £40,000 to £30,000 (this would affect far fewer taxpayers).
Duties on alcohol and cigarettes can be expected to increase with the funds raised being spent on the NHS. The Chancellor may also consult on introducing a low rate of duty on vaping fluids that contain nicotine.
It is not a traditional Conservative party approach to tax investors so major changes to capital gains tax (CGT) and existing investment tax reliefs are unlikely. However, the Chancellor may be tempted to cut the dividend nil band to £1,000: this would bring it in line with savings and property income nil bands – these are effectively used as assessing tolerances by HMRC; below these levels it is just not cost effective to try to collect the tax.
Earlier in 2018, the Government floated the ideas to address the current crisis in social care: these included allowing individuals to draw money out of their pension fund tax-free, to cover their care expenses, or creating a ‘Care Isa’ that would be exempt from inheritance tax.
We may see more progress on the Chancellor’s ‘patient capital project’. He might decide that the qualifying periods for all investor tax reliefs should be five years - in line with the recently introduced investors’ relief from CGT and the long established VCT reliefs. Currently the holding period for the EIS and SEIS rules is three years and AIM company shares can qualifying for IHT business property relief after a two year holding period.
There has been media speculation about possible changes to cut back on Entrepreneur’s Relief (ER) from capital gains tax. However, with Brexit on the horizon and business investment already at a low ebb, making investment even less attractive by restricting ER seems a highly unwelcome and unlikely move for a Conservative Chancellor.
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