Business rates, social care and taxation of the self-employed are likely to top the Budget agenda, says EY.
Business rates scrutiny may force Chancellor’s hand despite hopes for ‘low-key Budget’
Keen to push the adage that ‘less is more’ by way of tax policy, the Government had hoped and planned that the first of its two budgets in 2017 would be a low-key affair, ensuring a smooth run-up to the triggering of Article 50. These best laid plans could be frustrated and we may see some significant announcements, not least on the thorny issue of business rates which has been the centre of intense scrutiny in recent weeks. Elsewhere, with a review of modern employment practices already underway, the taxation of the self-employed is likely to be high on the Chancellor’s agenda.
Below is a selection of measures that Stuart Wilkinson, Tax Partner at EY in Cambridge, believes the Chancellor could be considering.
Business rates -“The ongoing furore surrounding the impact of the forthcoming rates revaluation has focused on the shifting of the current burden of business rates from some locales to others. However, beyond a shift from one taxpayer to another, the revaluation locks in the significant increase in the burden that has been slowly introduced over time. Much like boiling a frog, the gradual increase in business rates each year above the rise in property values has led to the burden in aggregate that started at 41.4% of rateable value in 2010 rising to an expected 48% in the latest revaluation.
“In no other tax is the rate increased merely because the government wants to get the same amount of tax. VAT rates, for example, don’t go up merely because spending falls. If the Chancellor feels the need to respond to the pressure on business rates, resetting business rates back to 41.4% would seem a good place to start. The opportunity for a more fundamental change to a different method of allocating the burden has been sadly missed in the last few years of consultation.”
Corporation tax: “With the Government already committed to reducing corporation tax to 19% this April and then 17% in April 2020 (equalling the rate in Singapore), any further drop is unlikely despite murmurs of the UK becoming a low tax haven as it looks to attract post-Brexit investment. A 19% rate will give the UK the lowest combined (national, state and city) tax rate in the G20 but does come at a time when other countries have been reducing their own rates – at 9%, Hungary’s tax rate has now overtaken Ireland as the lowest in the EU. With the US considering proposals to reduce its national tax rate to 20% or even 15%, this trend will remain at the heart of competition for investment.
“Despite the upcoming rate cuts, corporation tax receipts are predicted to grow, highlighting the importance of considering the tax base as well as the tax rate.”
Industrial buildings: “Manufacturers have long been concerned by the way the lack of relief for industrial buildings artificially increases the amount upon which they are taxed. In an environment where the UK needs to attract infrastructure and investment, the Government should now see the benefit of addressing this anomaly and provide relief with this genuine cost of business.”
Employment, self-employment and personal service companies: “With a review of modern employment practices already underway, and the Government’s proposed reform of the taxation of off-payroll working in the public sector, this is an area that looks set to see a fundamental review of its tax and social security treatment. This is a complex area, where tax rules can diverge significantly from employment law. In launching such a review, the Government should start at the ‘green paper’ stage, considering a range of issues rather than jumping straight to the conclusion.”
Property taxation: “Recent budgets have resulted in considerable changes to the UK’s range of taxes applying to property, leaving a sense within the Government that property taxation is fragmented. A broad review of taxation could look not only at stamp duty but the way property investment is taxed.”
“With a new Chancellor we may see a new strategy – perhaps fewer tax breaks and reliefs but more value being delivered from those that remain. Capital gains tax is also an area where the new Chancellor may see an opportunity to make his mark.”
CGT rate: “Recent budgets have introduced the concept of CGT for particular assets, such as property and private equity carried interest. The Chancellor could find this an attractive trend and perhaps have a rate for luxury assets. He may also consider the current five possible CGT rates is too many and perhaps move to a higher blended rate.”
End of the annual exempt amount?: “The annual exempt amount for capital gains tax was originally introduced alongside capital gains tax to avoid the reporting of smaller gains and the consequential need of cumbersome record keeping. In a digital society where records are easy to retain, this no longer seems to be such a difficult process. It is possible, therefore, that the Chancellor could abolish of the annual exempt amount. If he is less ambitious, the Chancellor make seek a reduction. Reducing the exempt amount by £500 would raise £20million a year.”
Tax Reliefs: “There are more than 1,000 tax reliefs and there is no doubt that they are due a spring clean. If he is to be a reforming Chancellor, he could seize the opportunity to modernise the system.
“The enterprise investment scheme would be a good area to start. Designed to encourage enterprise, the relief can often be lost by traps in the legislation. We need reliefs that do what they say on the tin. Too often reliefs carry too many restrictions. The Chancellor has made great strides to improve business investment relief, so one hopes he will continue to make reliefs more attractive.”
Entrepreneurs’ Relief: “This relief is intended to encourage serial entrepreneurs to reinvest their successes into new ventures in the UK, but is capped at £10m over the entrepreneur’s life. The Chancellor now has an opportunity to reset the approach and apply it once per investment. This would encourage those who are particularly successful to reinvest, which would benefit the UK, employees and the economy.”
Inheritance tax (IHT): “This could be the Budget in which the Chancellor decides to restrict agricultural property relief (APR) or business property relief (BPR). The latter exempts assets such as family businesses from IHT while farms are exempt through APR.
“The Chancellor may feel that abolition is a step too far so may opt for the introduction of a cap on the relief. A period of consultation around the operations of the relief and potential tax reform is also likely.”
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