The Brexit negotiations and uncertainties related to leaving the EU will cast a long shadow over the chancellor’s Budget. Without a clear idea of what the economy will look like over the next 12 months, it will be difficult for the chancellor to make any significant new fiscal policy changes at this juncture. The chancellor will also be keen to give an impression of stability, and to avoid any embarrassing U-turns in his second Budget. As a result, it looks likely that radical reforms will be off the agenda.
There are two areas which have been debated at length, and it is possible that Philip Hammond will choose to address growing dissatisfaction around inter-generational wealth imbalances and barriers to self-employment.
Student loans, care for the elderly and redistribution of wealth between generations
The desire to address inter-generational unfairness has already been raised. There has been a broad range of proposals that might ease the position for the younger generation on student loans or in purchasing their first property, and on how there might be better provision for the costs of care of the elderly (a topic which is clearly a political minefield). This has taken place in an environment where it is perceived that the gap between the wealthy and the poor is widening. The cost of any major reform is, arguably, not affordable in the current environment. Further, a graduate tax would be difficult to implement (consider those with more than one qualification; those who have, in addition, vocational qualifications and so on). In addition, a significant part of the housing market is dependent upon demand from overseas and, it has been suggested, hamstrung by the planning process. New sources of funds will inevitably need to be tapped and there are proposals such as the introduction of a “social care” levy, something that the Welsh government is contemplating.
Equalisation of the NI burden between employed and self-employed workers
Although not tasked with commenting on tax, the July 2017 Taylor Review inevitably commented on aspects of tax affecting the labour market. It highlighted the disparity between national insurance costs borne by employees and the self-employed and the ability of those operating through companies to reduce the incidence of income tax through the use of dividends. The reduction in the dividend allowance from £5,000 to £2,000 goes some way to addressing the latter point. However, the pre-emptive Spring 2017 Budget proposal to increase the rate of class 4 NI was shelved following the outcry it provoked and the proposal to eliminate Class 2 contributions has now been deferred for at least one year. The differential in national insurance costs between employed and self-employed workers won’t go away and there may be an announcement of a consultation on possible changes. These could include widening the scope of the charge to those who are “workers” but not employees or a tightening of the IR35 rules.
Possible technical amendments to the Tax Code
We can expect a number of technical measures and proposals:
1. A further increase in the personal allowance (in line with previously announced policy) will help all taxpayers
2. Hardly a Budget goes by without pension tax relief being cut back. One possibility is to replace the current tax relief with a flat rate of relief of, say 30%. This will boost savings for basic rate taxpayers (typically the younger generation) at the expense of higher earners
3. Further action on tax avoidance – this is a regular feature of all Budgets nowadays and will have heightened interest with the recent publication of the “Paradise Papers”
4. The OTS has been active and its output has been welcomed – expect further action on tax and accounting (relief for depreciation), the VAT system (the registration threshold in particular) and stamp duty
5. Discussion at both domestic and international level on the challenges of taxing the digital economy will lead to some response even if only a proposal for further consultation and further business rates reliefs for the small businesses
6. Changes for “patient capital” to further incentivise entrepreneurial activity
7. The political backdrop to “Brexit” has renewed focus on the scope for further devolution of taxing powers to regional areas. It is interesting to note the potential proposals from Wales for tax reform, such as a vacant land tax, a disposable plastic tax, and a tourism tax
8. There will need to be a change to the SDLT legislation as the filing date will be reduced to 14 days in 2018-19. Further, for complex land transactions, HMRC may streamline the process for collecting this information and there is some concern regarding the technical rules regarding the 3% “surcharge”. Could there be SDLT breaks for first time buyers?
In conclusion, we believe that the political climate and economic outlook will discourage the chancellor from introducing bold or controversial measures. Instead, we expect to see changes that address commonly acknowledged issues in a measured way, allowing the government to return its focus to delivering the best possible outcome from the Brexit negotiations.