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Budget 2016: BDO predictions and wish list

10 March 2016

David Brookes, tax partner comments on the Budget 2016:

“The Chancellor’s Budget is already being overshadowed by two things this year: the EU referendum and pensions speculation. But with global instability and a business community feeling strangled by red tape, it’s important this Budget focuses on tax simplification and on positive incentives for firms to invest, grow and boost productivity."

“I expect this will be a revenue raising – not neutral – Budget, and will be less about tax giveaways or winning over the electorate than in previous years. It will be focused on business and economic stability, and I wouldn’t expect it will immediately hit people in their wallets on a day-to-day basis.

“Osborne will inevitably use the Budget as a platform to canvas support for an ‘in’ vote at the referendum in June. His tactic will be to warn people of the economic threat Brexit poses. I would not be surprised if he announced that, if the referendum vote results in a win for the ‘out’ camp, there’ll be an Emergency Budget in July to fiscally address what he calls Britain’s “long, costly and messy divorce” from the EU.

“In terms of the deficit, the Chancellor seems to have ruled out raiding pensions to help balance the books. The Treasury had floated several pensions options, including introducing a flat rate of tax relief on contributions or bringing in Isa-style pensions. These pose serious and complex changes for individuals and businesses alike, but government sources are now saying “it’s not the right time” for yet more pension changes.

“The challenge for the Chancellor in reducing the deficit will be whether to raise other taxes or make yet more spending cuts. The low oil price means it could finally be time for fuel duty to rise. Alternatively he may simply factor in estimates for higher corporate tax collection in future years because of the implementation of the anti-BEPS legislation.

“Overall, it’s unlikely we’ll see many significant tax announcements in the Budget this year. What we can look out for, however, are plenty of reassurances from the Chancellor that the Government is focused on ensuring the UK is a fair and transparent tax destination for business.

“The Government’s focus on a “higher wage, lower tax” economy has seen the introduction of new policies for businesses, including the National Living Wage and Apprenticeship Levy.  However, these are likely to prove costly and burdensome for many businesses. Now is the time for firms to be given incentives to invest in their long-term future, in terms of both physical and digital infrastructure.

“Two ways of doing this would be to introduce a capital allowance for digital infrastructure (to include investment in automation, online control systems and the so called ‘internet of things’) and, secondly, increase the Annual Investment Allowance for expenditure on plant and machinery on a temporary basis until 2020 to help boost productivity and drive future growth.

“Looking ahead, the Government’s ambition is to create a balanced and sustainable economy. To do this, we believe Osborne should focus on three core areas: make the most of the forgotten middle (the medium-sized businesses with a turnover between £10m-£300m); help UK businesses grow internationally; and create regional and sector powerhouses that will fuel our economy.”

 

BDO Predictions

1. If it’s ‘out’ of the EU, it’s ‘in’ for an Emergency Budget

George Osborne is not in favour of Brexit and will want to show how serious an economic threat it would be. We would not be surprised if he announced his intention to hold an Emergency Budget in July if the UK voted to leave the EU. His focus will be to stop international businesses leaving the UK, to encourage domestic businesses not to give up on international expansion and to protect new foreign investment.

In such a Budget, he might need to bring forward Corporation Tax cuts, reduce the top rate of income tax to 40%, cut government spending further and make VAT changes that are currently not allowed under EU rules.

2. Pensions

Although the Chancellor has apparently dropped changes to the pension tax relief rules for contributions that would have caused huge administrative burden for businesses, he may still decide to prune back the annual allowance for contributions from £40,000 to £30,000. This would cut down on the cost of pension tax reliefs without making radical changes to the system.

3. Business Rates

Business rates reform is well overdue. The current system is not only severely outdated, but it is stifling investment, is a drag on productivity and hindering the potential of our ‘traditional’ sectors, most notably manufacturing, commercial property and retail.

The idea of shifting responsibility for business rates to Local Authorities by no means resolves the UK-wide issue. It’s a tough call for the Chancellor, with little money in the pot for radical reform. However, we agree with leading business groups and manufacturers that in an ideal world there are three things that should be done.

Firstly, change the index for annual increases in business rates from the Retail Price Index to the Consumer Price Index. Then, carry out more frequent valuations of ‘rateable’ property values to make business rates fairer and more reflective of economic conditions - the fact that businesses are paying against April 2008 valuations undermines the principle that business rates are related to the value of property. And finally, remove businesses with a rateable property value of less than £12,000 from the system altogether to reduce the tax burden for small enterprises.

4. Corporate Tax Road Map

We can be confident the Chancellor will provide much more detail on his Corporate Tax Road Map. It should provide certainty for business, giving a step-by-step guide to business tax over the next five years. This should provide some stability to the market, helping businesses to plan and drive investment for sustainable growth. However, if the EU referendum results in the UK leaving the EU, the Chancellor may be forced to do a U-turn on the road map and I’d expect Osborne to warn us of that on 16 March.

5. Tax evasion and avoidance

Although we expect very little that’s new, we do predict that anti-avoidance and tax transparency will be a recurring theme throughout the Chancellor’s speech, addressing the concerns of the 47% of business leaders in our poll that say they want to see it dealt with. He will use the Budget to educate and reiterate how government and HMRC are tackling evasion and avoidance head on.

 

BDO Wish List

While the Chancellor’s immediate focus is on campaigning to stay in the EU, his medium to long-term priority is on balancing the UK economy, setting the foundations for sustainable growth. To get businesses on side, we believe this Budget should focus on tax simplification and on positive incentives for firms to invest, grow and boost productivity.

1. Simplification and cutting red tape

The complexity of UK tax policy and the sheer volume of measures introduced in previous years are undermining our economic recovery. The burden of red tape continues to be an area of contention for those running a business, with 47.3% of respondents to our Budget poll stating it is their biggest obstacle to growth.

We propose the Office of Tax Simplification (OTS) fast tracks the plans it has in place and, importantly, is awarded the power to make decisions on tax simplification measures that aren’t just tax neutral. We would also like to see progress in the alignment of National Insurance and PAYE – something over half (55.4%) of business leaders called for in our poll – to reduce the administrative burdens and help eliminate concerns of facing penalties for getting it wrong.

2. Productivity

The Government spoke extensively about productivity last year but it seems to have gone quiet and the UK economy has yet to see any beneficial impact. As our own Business Trends report shows, business output is slowing yet the workforce is growing.The low levels of productivity are now impacting wage growth as firms struggle to increase revenues in order to raise salaries.

The UK’s productivity remains in a state of crisis and we would like to see Osborne provide a satisfactory update on how the government will be solving the productivity puzzle. Businesses now need incentives to invest in productivity boosting processes. Two ways Osborne could do this are: introduce a capital allowance for digital infrastructure, to include investment in automation, online control systems and the so called ‘internet of things’; and, secondly, increase the Annual Investment Allowance for expenditure on plant and machinery on a temporary basis until 2020 to help boost productivity and drive future growth.

3. No more changes to property tax

The property sector received a battering in last year’s Autumn Statement, being on the receiving end of a hat trick of measures. A 3% increase in stamp duty on second homes and investment properties, an acceleration of capital gains tax payments on residential properties and a housing benefit cap were all introduced. This year, we call for the Chancellor to introduce a moratorium on property tax measures, allowing the sector to recover from what has been an incredibly testing decade.

4. And finally, a nod to the mid-market

The Government’s ambition to rebalance the economy and not be over-reliant on one sector or city, is the right one.  However, the Chancellor is overlooking the importance of mid-sized businesses in his plans to get the economy on a more sustainable footing.Despite creating one in four private sector jobs and contributing £1tn to the UK economy, we do not expect the Chancellor to announce any new measures to support this specific segment of business (those businesses with a turnover between £10m-£300). We do however hope, at the very least, he will acknowledge the importance of the mid-market to the UK economy and find some way to recognise this engine room of future economic growth.

ENDS

Notes to Editors

Accountancy and business advisory firm BDO LLP has a clear ambition to be known in the market for exceptional service delivered by empowered people. The Mid-Market Monitor shows that BDO is the market leader for client satisfaction for the fourth year running – outperforming all its major competitors.

BDO’s heartland is the mid-market. The UK mid-market accounts for less than 1% of all firms but delivers a third of UK revenue and one in four jobs. In the last five years, medium-sized businesses have grown turnover by 55% and profits by 110%. BDO’s New Economy research (www.bdo.co.uk/neweconomy) calls for the government to put the UK mid-market at the heart of its plans to rebalance the economy and help this already successful sector expand further.  

BDO LLP

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 is the UK member firm of the BDO International network with revenues approaching £400m.

BDO International

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. 

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