With the economy ticking along smoothly and Brexit negotiations around the corner, BDO expects the Chancellor to make no dramatic announcements in the Autumn Statement later this month.
However, Hammond needs to make his mark and BDO predicts there’ll be a light peppering of announcements, aimed at reassuring people that the UK is not only open for business but that the Government is firmly focused on an economy that “works for all”.
David Brookes, tax partner at accountancy and business advisory firm BDO LLP, comments: “Hammond faces a difficult balancing act. On one hand he does not want to be seen as abandoning all financial prudence now that the focus is away from reducing the deficit, but he will want to strike a different tone to Osborne and follow the new party message that the economy can “work for all”.
“Over the next few years, there will inevitably be bumps in the road as we look to leave the EU. Because of this, I expect the Chancellor will keep his powder dry. He will have plans up his sleeve but he’ll want to keep them to himself for now, giving the Government headroom to respond and support the economy should a downturn come along.”
Supporting business growth
From a business perspective, the sheer volume and complexity of tax legislation is a major obstacle to growth.
David Brookes said: “If there is little room for tax changes amidst EU uncertainty, a focus on simplification would be welcomed by all and would not impact our Brexit negotiating position. Few can argue that a more simple tax system would make the UK a more attractive place to do business.”
BDO believes there are a number of ways he could start the simplification process, including scrapping the confusing reforms to corporate tax loss relief and starting a bottom up consultation process to clarify the tax treatment of partnerships. The firm is also calling for progress in the alignment of National Insurance and PAYE to help reduce the administrative burden and help eliminate concerns of facing penalties for getting it wrong.
In terms of infrastructure investment, Hammond has said there would be no “splurge” on capital spending. The Government has already committed itself to three major infrastructure projects - the three “H”s being HS2, Heathrow and Hinkley Point.
In September, the Chancellor confirmed the creation of a £3bn homebuilders fund and £2bn of new investment in building on public land, and earlier this month he announced the £1.9bn cyber security plan.
“Further major investment announcements are unlikely to be announced. However, a more interesting long-term development could be on the plans to encourage pension funds to invest in infrastructure projects. If they propose a guaranteed return, this would address both investment issues and ease some of the pressure pension fund deficits”, says Brookes.
“Although this will add to the Government’s long-term liabilities, this might be acceptable under the Chancellor’s more relaxed national deficit reduction plan.”
Bold move for pensions
Philip Hammond may decide to go where Osborne feared to tread and introduce a flat rate of tax relief to pension contributions, at say 25%.
“This would be bold move but would play to the “working for all” theme as the current structure sees most tax relief going to high and middle income individuals”, says Brookes.
Protecting Brexit negotiations
While the Chancellor’s immediate focus will be on protecting the Brexit negotiation position, he should not ignore the pressing issues that are affecting individuals and businesses that drive the UK’s economy.
David Brookes adds: “To truly create an economy that works for all, Hammond should consider other avenues too.
“We support the CBI’s calls for extending the child care support given to parents under school age. To provide 15 free hours for children between the ages of one and four, although costly to the Treasury, would help parents – particularly women – return to work earlier. This would result in skilled people getting back in to the workforce sooner, reducing the career breaks many are forced to take and minimising the gender pay gap in the long term.”
Brookes says employment law also needs to be updated to keep up with working patterns in the ‘gig economy’.
“The recent Uber case has highlighted how the UK tax system is failing to keep up to date with disruptive markets. The long-running employed versus self-employed issues have got to be addressed soon. Hammond should give workers a simple opt-in/opt-out choice and cut through the maze of employment law sooner rather than later.”
1. Business tax
Many tax reliefs have to go through EU state aid approval process and, with Brexit negotiations in mind, the Chancellor may decide that now is not the right time to introduce more UK tax breaks.
2. Tax simplification
With little room for tax changes, Hammond may – and rightly so – focus on tax simplification to help make the UK a more attractive place to do business and to relieve business owners of the administrative burden that is holding back growth.
The proposed reforms to corporation tax loss relief are supposed to make losses easier to use but, restricting the maximum offset against profits to 50% for losses brought forward, is seen as a tax raising measure. Announcing an end to the streaming of losses could be a real simplification.
Current proposals to clarify the tax treatment of partnerships should be dropped and a bottom up consultation started.
3. Talent and skills
There are calls for the Government to delay the introduction of the Apprenticeship Levy, which is due to take effect from April 2017. All indications are that a delay is unlikely. The practicalities are fairly well developed and it is a key plank of the Government’s support for the younger generation. It plays well to the “working for all” theme.
4. Infrastructure investment
With no major new infrastructure investment projects expected (the Government has already committed to the three Hs), we expect any announcements to be directed in two areas: pension fund-backed investments and cyber security.
Hammond could follow up on his predecessor’s plans to encourage pension funds to invest in infrastructure projects, potentially with some guaranteed return factored in. This would be a long term liability for the government, but addresses infrastructure needs, investment issues and could ease some of the pension deficit burden.
Digital infrastructure is becoming an increasingly important issue and more detail of Hammond’s £1.9bn cyber security plan will no doubt feature in the speech. This is the perfect type of investment for the Chancellor; there’s no EU issue and the money has already been committed.
5. Tax evasion
The Government is focused on ensuring the UK is a fair and transparent tax destination for business and the Chancellor is likely to press ahead with the BEPS agenda. Many of the anti-BEPS changes raise revenues for the Exchequer (for example, the restriction on corporate interest deductions is set to collect £1bn a year). It also sends a clear message to the EU and other trading blocs that the UK is not going to become a tax haven after Brexit.
HMRC’s focus on wealthy individuals yields £29 for every £1 spent. That is a rate that few businesses can achieve. If the Chancellor focuses on these returns, he may decide to allow HMRC to retain a small percentage of the additional revenue it recovers to invest in expanding the team. No one could publicly object to this and it would have no impact on current spending plans.
BDO WISH LIST
While the Chancellor’s immediate focus will be on steadying the political ship and protecting our Brexit negotiation position, he should not ignore the pressing issues that are affecting individuals and businesses that drive the UK’s economy.
To truly create an economy that “works for all”, here are the top three things we would like – but don’t necessarily expect – to see in Hammond’s speech.
1. 2020 moratorium on new tax changes
Tax complexity and red tape is the single biggest obstacle to growth for UK businesses. If Hammond cannot commit to new tax legislation or reliefs to support businesses, he should announce a moratorium until 2020 on any changes that do not simplify tax. This will allow the Treasury to focus on Brexit, and business leaders to focus on growing their businesses for the long term.
2. Supporting working parents
BDO supports the CBI’s calls for extending the child care support given to parents with children under school age. Currently providing 15 hours free childcare for all children aged three and four, the Government should expand childcare (from one to four year olds) to bridge the gap from the end of parental leave and school age. Although a big expenditure for the Treasury (estimated £2bn), this would ensure that far fewer parents, particularly women, are lost from the workforce and help reduce skill shortages. With more parents encouraged to return to work sooner, far fewer will have a significant gap in their careers which will help to reduce the gender pay gap in the long term.
3. Address the ‘gig economy’
The recent Uber case has highlighted how the UK tax system is failing to keep up to date with working patterns and new business models disrupting markets. The Government must address these ‘gig economy’ issues and the long running self-employment v employment saga by cutting through the maze of employment law. Creating a simple opt-in/opt-out approach will give individuals the choice of their employment status and provide certainty in the long term for businesses. This would, of course, require equalising the rates of employed and self-employed national insurance and apply some form of employers NIC so that there is little or no financial differential.
Notes to editors
Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help businesses navigate a changing world.
Our clients are Britain’s economic engine – ambitious, entrepreneurially-spirited and high growth businesses that fuel the economy.
We share our clients’ ambitions and their entrepreneurial mind-set. We have the right combination of global reach, integrity and expertise to help them succeed.
BDO LLP operates in 18 offices across the UK, employing 3,500 people offering tax, audit and assurance, and a range of advisory services. BDO LLP has revenues of £405m and is the UK member firm of the BDO International network.
The BDO International network provides business advisory services in 154 countries, with 64,500 people working out of 1,400 offices worldwide. It has revenues of $7.3bn.
Senior PR Manager
Tel: 0161 817 7627
Mobile: 07814 500 799
020 7893 3000