Stuart Wilkinson, EY’s Head of Tax in the East of England, comments on this year’s Budget.
Budget 2018: Comments from EY's Stuart Wilkinson
Autumn Budget 2018: Chancellor has a lot to say, but saves the big decisions for the Spring Budget
“As the second Budget of this parliament and the final speech before the UK exits the EU, the Chancellor might have been expected to deliver a big Budget. But, whilst this had 86 Budget measures (15 more than last year), only 33 related to tax measures and there was only one measure that raised, and one that gave away, over £1billion in any one year.
“The net effect was a cut in taxes of just over £5billion across the six year period, with the largest cut being the increase in income tax personal allowance and higher rate threshold, and the largest raise being the extension of the off payroll rules to the private sector.
“With so many small measures, this can be seen as clearing up before the Spring Budget, which will respond to whatever the outcome is of Brexit. To this extent, it clearly was a caretaker Budget, delivering a lot of smaller tax changes which, whilst important, might not have got the attention in a normal year.”
Entrepreneurs need to be in it for the long term
“With all the speculation in the run up to the Budget that Entrepreneur’s Relief (‘ER’) might be abolished, the Chancellor today went for double not quits. Entrepreneur’s relief allows individuals to benefit from a reduced capital gains tax relief of 10% on qualifying assets. Previously individuals would only need to hold their asset and meet the qualifying criteria for one year in order to qualify for the relief. This qualifying period doubles to two years from the 6th April 2019.
“As part of the focus on closing the tax gap, the Chancellor has also introduced measures which tighten the qualifying criteria for shares which will qualify for ER. Although badged as ‘anti-avoidance’ these changes may affect many individuals with slightly unusual share rights, meaning that they will no longer benefit from the relief, with effect from Budget Day. The Chancellor expects to raise only £10m from this measure, meaning what could be a large tax bill for some affected individuals will have a small impact on the country’s coffers.”
A ‘taster’ of the end to austerity, with more to come if Brexit allows
“A modestly brighter picture of the UK economy comes with the Office for Budget Responsibility (OBR) raising its GDP growth forecasts for 2019 and 2020, while also making downward revisions for expected public borrowing over the next five years, especially for the current fiscal year 2018/19. This largely reflects the OBR coming to the conclusion that it has systematically been under-estimating income tax and corporation tax receipts. This implies that growth is more tax receipts-rich than the OBR had previously reckoned. It also suggests that the Government has got better at collecting tax receipts.
“Modestly upgraded GDP growth forecasts in 2019 and 2020 also contribute to the improved public finance forecasts. It is also notable that the OBR has improved its forecasts for the labour market, revising up the expected participation rate and lowering its estimated equilibrium unemployment rate. This means that employment is 400,000 higher at the end of the forecast period than the OBR had expected in March.
“However, while expected public borrowing has been revised down substantially for the current fiscal year 2018/19, the projections thereafter are only revised down modestly. This reflects the fact that, in the words of the OBR, the budget has largely “spent the fiscal windfall rather than saving it”. The OBR specifically comments that the “overall effect of the Budget measures is to increase the deficit by £1.1 billion this year and £10.9 billion next year, rising to £23.2 billion in 2023-24. This is the largest discretionary fiscal loosening at any fiscal event since the creation of the OBR.” Much of this is related to the extra spending on the NHS.
“It is notable that the OBR has not made any adjustments to its Brexit assumptions in its forecasts. The Chancellor has talked about a “Brexit dividend” but the OBR is not delivering one in its forecasts for now at least. Indeed, whether or not the OBR eventually does deliver some form of Brexit dividend in its forecasts will be dependent on what form of long-term relationship with the EU that the UK eventually agrees.”
Chancellor’s ‘tales of the unexpected’ Budget speech points to another full fiscal event in Spring
“Much of the Budget/Brexit commentary leading up to today’s speech was on the basis that the Chancellor was facing the once in a year chance to set the shape of the tax system prior to leaving the EU on 29 March 2019. Whilst this is the implication of moving to “single fiscal event”, with an Autumn Budget and Spring (Economic) Statement, the Chancellor had been careful to make sure that he has enough wriggle room to once again hold a Spring Budget if warranted. The Chancellor has today confirmed that, if there is a no-deal Brexit, there will be another full fiscal event early next year, upgrading the Spring Statement to a Spring Budget. It’s clear that Brexit might satisfy the ‘economic circumstances require it’ but perhaps the “unexpected” might be a little more debatable.”
Chancellor focuses in on Digital Tax, but draws away from the EU model
“The Chancellor committed today to delivering a new turnover tax on Digital Services. In moving away from the EU blueprint, the Chancellor set the rate at 2% (compared to the EU proposal of 3%) and targeted the tax at social media platforms, internet marketplaces and search engines. He also committed to a review in 2025, clearly indicating that he thinks that it may take quite a while for the OECD to gain any consensus on the international stage. The new tax will raise £440m per annum by the end of the Budget period, but will include elements to protect those with low revenues and margins – namely technology start-ups.
“In drawing distinctions from the model under discussion in Europe, the Chancellor can be seen to be, once again, leading the debate in this contentious area, and we now wait to see which other countries follow in this battle over who should have the right to tax the profits of the internet giants. Caught up in the disputes between governments, businesses face the risk of double taxation and complex rules. That isn’t the best environment to encourage innovation at a time when the Chancellor is looking to the digital sector to boost the economy.”
No magic spell for housing
“With housing stubbornly remaining near the top of the public’s list of concerns, we saw the Chancellor offer a few tricks and treats but no magic spell to make the crisis disappear. The measures announced, while positive, unfortunately will not, individually or collectively, solve one of the most pressing problems faced by the country.”
Private Residence Relief (“PRR”) restrictions make for a less flexible workforce
“The Chancellor’s changes to PRR announced in today’s Budget could make the UK’s workforce less flexible and less able to react to changes in the jobs market – or at least leave them with a tax bill for being flexible.
“PRR takes the gain on the sale of an individual’s main residence outside of capital gains tax. At present, where a home has met the conditions to qualify for this relief at any time, it is assumed to do so for the final 18 months. This was already reduced from 36 months from April 2014 and has now been further reduced to nine months. For those having difficulty selling a property and needing to move home for work or other reasons, this may prove an expensive change to this relief.
“Furthermore, those affected will no longer be able to benefit from tax relief if they let out their home. Currently, any gain relating to the letting of a main residence can benefit from an exemption up to a maximum of £40,000. Its abolition could mean an additional £11,200 tax bill for some.
“The PRR grace period at the end of ownership was originally introduced to recognise the time it can take for individuals to sell properties. Its reduction to nine months potentially leaves those needing to move home exposed to capital gains tax for the first time. To compound the issue, capital gains on residential property is 28%, even for basic rate taxpayers.”
EY is a global leader in assurance, tax, transaction and advisory services. With over 400 employees in our Cambridge and Luton offices, our teams provide a range of services to a variety of sectors, including manufacturing, life sciences, consumer products and retail, technology, real estate and construction, health, and the public sector. The broad array of companies across the East allows us to bring real, relevant and key insights to our clients.