Ahead of the Summer Budget on Wednesday (8th July), Ian Stewart, Deloitte’s chief economist, Mike Turley, head of public sector, and Lizzie Hill, tax partner at Deloitte in Cambridge, consider the economic outlook, the state of public finances and potential tax announcements.
Deloitte preview of Summer Budget 2015
Ian Stewart, Deloitte’s chief economist, said: “The UK economy is showing an enviable combination of decent growth, low inflation and falling unemployment. But while growth has been revised upwards, challenges remain. The two defining economic tasks facing the Conservatives in this Parliament are to eliminate the budget deficit and to revive productivity.
“The Government has an ambitious target for debt reduction and for cutting public expenditure. The July Budget will map how Mr Osborne intends to meet those plans by specifying how cuts to departmental and welfare spending will be financed.
“Raising productivity is Mr Osborne’s second big target, and his Budget is likely to have a strong pro-growth, pro-business theme. Support for vocational training and for improving the growth trajectory of areas outside the South East of England, particularly through the Northern Powerhouse programme, are likely to feature prominently.”
Public finances and public services
Mike Turley, head of public sector, said: “Across the public sector there is uncertainty about the three financial years ahead. Office for Budget Responsibility forecasts suggest that cuts in 2016-17 and 2017-18 will be twice as deep as any annual cut in the last Parliament. Then further cuts in 2018-19 will be comparable to those under the coalition.
“Against that backdrop, watchdogs and commentators in the NHS, local government, policing and further education have all sounded alarms about financial stability and the impact of further austerity within their sectors.
“The Chancellor is expected to set out in the Summer Budget, at least in part, how £12 billion will be taken out of welfare spending. He also looks likely to talk about productivity – potentially both public and private sector. To date we haven’t heard enough about improving productivity within the public sector. Deloitte calculated last year that saving one per cent of public sector workers’ time through productivity measures can save £1.64 billion per year. Improving this, and breaking the link between only getting out of public services what we put in, will be key to putting the finances on a sustainable footing.”
Lizzie Hill, tax partner at Deloitte in Cambridge, said: “There is no doubt that the focus of this budget will be the economy, setting out the country’s spending parameters and welfare cuts. Changes will be needed to the ‘patent box’ regime to make it compatible with the new approach agreed by the Forum on Harmful Tax Practices. We doubt that the detailed work at the G20/OECD level will have been completed in time for a Budget announcement – although the new regime will need to be implemented quickly as the existing regime closes to new entrants in 2016.
“We also expect the Chancellor to signal likely UK intentions in relation to the G20/OECD Base Erosion and Profit Shifting project, due to present final actions in October 2015. The Government has proposed to ‘raise £5 billion from continuing to tackle tax evasion and aggressive tax avoidance and tax planning’. It remains to be seen how this figure will be raised.
“The 2015 Budget included provisions to abolish the tax return through the phased introduction of digital tax accounts. It is expected that this will be introduced from 2016 for individuals within PAYE, before being extended to small businesses. A key part of the delivery depends on HMRC receiving data in ways that enable it to be linked easily to an individual’s digital account. The government will need to start to outline how this data should be provided to enable businesses and charities to start implementing the delivery systems.”
In their manifesto, the Conservative Party pledged to accelerate the increase of the personal allowance from £10,600 to £12,500 by 2020/21 and legislate to raise it so that an individual working 30 hours per week on the National Minimum Wage would not pay income tax. Although a pledge was made to freeze the rate of national insurance contributions (NIC), there have been no commitments to raise the earnings threshold in line with the personal allowance.
The Conservative Party also pledged to raise the threshold above which the higher 40% income tax rate is paid, from £42,385 to £50,000 by 2020/21. Under the coalition government, the numbers liable to higher rate tax rose from about one in 10 to nearly one in five. This change should put a brake on the growth in numbers of higher rate taxpayers – although we do not know whether the change will be mainly implemented towards the end of the parliament. It’s also worth noting that hitherto the upper national insurance threshold has been linked to the higher rate threshold –so some of the benefits will be clawed back in the form of extra NI contributions. The Conservatives have also committed not to increase the income tax rates in this Parliament.
Class 2 National Insurance contributions (NICs)
As part of the planned reforms to tax administration, the Government will abolish Class 2 NICs in the next Parliament and will reform Class 4 to introduce a new contributory benefit test. The Government will consult on the detail and timing of these reforms later in 2015.
The 2015 Budget proposed that a tax-free Personal Savings Allowance would be introduced from April 2016. This would apply to basic rate and higher rate taxpayers, but not additional rate taxpayers, at a maximum rate of £1,000 and £500 respectively, giving a tax saving of £200 in each case. From the same date, tax will no longer be deducted at source from bank and building society interest so that those who can benefit from the allowance will not need to make repayment claims. Conversely those liable to tax will see this recovered through PAYE or directly by HMRC.
We can also expect to see more detail on the ‘Help to Buy’ ISA, expected to be introduced from Autumn 2015, which will allow first time house buyers to build up £12,000 of savings over three years, and receive a Government bonus of £3,000.
Also mentioned in Budget 2015 but not included in the Finance Act 2015 is a relief for losses made on peer-to-peer lending, which will allow such losses to be set against income received. This is expected to be introduced from April 2016.
The Conservatives proposed that from April 2017 there will be a new transferable main residence allowance of £175,000 for each parent leaving their home to their children or grandchildren. This will increase the inheritance tax (IHT) threshold from £325,000 to £500,000, totalling £1 million for married couples and civil partners. The transferable main residence allowance will be tapered for those leaving a home worth more than £2 million, with the new relief unavailable for those leaving a home worth more than £2.35 million.
The 2015 Budget included provisions to implement changes to ‘pilot trusts’ from 6 April 2015. These were not included in the Finance Act 2015, so future legislation in this area is likely. The changes will cancel out the IHT benefit of having multiple nil rate bands. Trusts established before 10 December 2014 are outside these provisions provided additions are not made to them. ‘Small’ same-day additions up to £5,000 are also protected.
In their manifesto the Conservative Party proposes to increase the annual tax charges paid by ‘long-term’ UK resident non-UK domiciliaries who make a claim to pay tax on the remittance basis and continue to ‘tackle abuses of this status’. However, no substantive changes were noted in the party manifesto.
The annual allowance is intended to cap tax relief on pension contributions by applying an income tax charge where pension contributions made in pension input periods ending in a particular tax year exceed £40,000. In their manifesto, the Conservative Party proposed that the annual allowance will be reduced for the highest earners by restricting it to 50p for every additional £1 of income between £150,000 and £210,000, subject to a minimum annual allowance of £10,000. Those earning over £210,000 will therefore receive a maximum annual allowance of £10,000. It is thought these changes will apply from April 2017.
The 2015 Budget included proposals to reduce the pension Lifetime Allowance from £1.25 million to £1 million from 6 April 2016. Any excess over that limit will be taxed at 25% (if used to increase pension) or 55% (if taken as a lump sum) when the member starts to take their pension or benefits. Transitional protection will be put in place to protect those saving with the current threshold in mind.
The 2015 Budget also stated that those who have already bought an annuity should be able to benefit from the same flexibility as those who have not yet retired by being able to sell the income stream to a third party. The original intention was that this would apply from April 2016 and a Consultation Document was issued on 18 March 2015.
The Conservative Party manifesto included a commitment not to increase the rates of VAT or National Insurance Contribution rates in this Parliament, in addition to the pledge not to increase the income tax rates. No specific capital gains tax, stamp duty land tax or annual tax on enveloped dwellings policies were made in the manifesto.
Some changes in Class 2 and Class 4 NICs may be expected following the 2015 Budget announcement in this area. The intention is that, following a consultation period, Class 2 NICs will be abolished and Class 4 NICs will be based on a new contributory benefit test.
The Conservative Party pledged to ‘raise £5 billion from continuing to tackle tax evasion and aggressive tax avoidance and tax planning’. It remains to be seen how this figure will be raised.
The implementation of the Common Reporting Standard from 2017 together with the early closure of the Liechtenstein and Crown Dependencies Disclosure facilities, and their short term replacement by a limited facility with higher penalties, will no doubt generate some revenues in this area.
The 2015 Budget also announced tougher measures to be enacted against ‘serial avoiders’ (i.e. those who persistently enter into tax avoidance schemes which fail). These will include a special reporting requirement, imposing surcharges and possibly naming offenders. Specific tax-geared penalties may also be introduced for cases where the General Anti Abuse Rule is found to apply.
Following consultation and recognition of the need for stronger safeguards, legislation enabling direct recovery of debts from debtors’ bank accounts is also likely to be included in a future Finance Bill.
Follow us online
Deloitte’s Budget coverage will be on our dedicated website www.ukbudget.com. You can also follow us on Twitter: @ukbudget where Bill Dodwell, head of tax policy at Deloitte, gives regular views.
The Deloitte Cambridge office comprises 8 Partners and over 250 staff who deliver a full range of professional services to the East Anglian region. As well as focussing on the life sciences and technology sectors for which the region has become so renowned, the office has long standing specialisms in other sectors including the professions, consumer business, food and agribusiness.