We consider what the Autumn Budget may have in store for businesses.
The announcement of a single annual fiscal event last year caused many businesses to breathe a sigh of relief, hoping that this would signal a reduction in the sheer quantity of tax changes, yet the original Finance Bill issued in March was the longest ever. The Government’s enthusiastic embracing of recommendations from the OECD BEPS project in the form of the corporate interest restriction (CIR) as well as the domestically focussed UK loss reform rules has left business somewhat fatigued by the sheer complexity involved. International disruptors such as Brexit and, more recently, the proposed US Tax Reforms are casting long shadows of uncertainty across the short term horizon.
Business are very clear on what they want from tax policy; stability, predictability and competitiveness. In the current environment these words may feel more like desperate pleas for reprieve rather than considered objectives. But our own Tax Competitiveness Survey consistently shows that taxpayers prioritise long term stability and predictability over lower tax rates in terms of judging the competitiveness of a jurisdiction. If we get stability and predictability right, competitiveness will follow bringing investment and jobs with it. ‘If you build it they will come’.
So how can we move to a more stable and predictable environment?
Firstly, by setting a clear direction of travel both in terms of law making process and policy objectives. The Corporate Tax Road Map issued in 2010 was welcomed by all. A similar document for Business issued in 2016 failed to deliver to the same degree because it summarised recent deliverables rather than providing the tools necessary to navigate the future. But a reliable Road Map gives confidence to business as well as providing a useful benchmark against which to measure specific policy proposals.
Secondly, by establishing robust and comprehensive consultation processes. Consultation should start early and be used as an opportunity to test policy intent as well as achieve good targeted law. In fairness some consultations work very well. But too often it feels as though the policy is set in stone before the consultation process begins, responses are batted away or barely considered, and the law itself rushed.
Thirdly, by aiming for clear and focussed law. There can be no substitute for good, clear law backed by well-articulated policies. There remains a lack of scrutiny over tax law as it travels through parliament, even though tax law is often the most complex and wide-ranging in terms of its impact. There is no mechanism for reviewing whether any law achieved its policy intent and there is a worrying trend for inadequacies and uncertainties in the law to be fixed through guidance.
Getting these three pillars right would go a long way towards providing a more stable and attractive business environment.
When it comes to the actual content of the Budget there is a clear hope that the Chancellor will not announce fundamental changes to corporation tax whilst the interest restriction and loss relief regimes are bedding in and Brexit is still rumbling.
However there are some areas where there is general acceptance that change is possible, if not likely.
Corporation tax rates
Although there has been some debate in this area we expect the Chancellor to stick to the current plans to reduce the corporation tax rate to 19 percent next year and then 17 percent in 2020. This will help attract inward investment especially in a post-Brexit environment. The planned reduction in the US corporate income tax rate to 20 percent as announced last week will increase pressure on the Chancellor to stick to the low rate agenda. Indeed, the rate cut may not impact the public purse too much depending on how the economy responds. However, the rate in itself is not the panacea of a competitive jurisdiction and the Chancellor must also seek simplification and predictability.
Taxation of work
The taxation of work has got to be high on the Chancellor’s agenda. Following the U-turn in the last Budget on National Insurance (NI) there is still widespread recognition of the need to somehow level the playing field between the self-employed and the employed. Not only is the overall tax and NI burden uneven but the current system no longer adequately reflects modern ways of working. One of the biggest issues is employer’s NI. One potential solution could be the introduction of a levy (a pseudo ‘employer’s NI’ charge) on those that make payments to ‘dependent contractors’. A more radical approach might be to replace employer’s NI with a Business Social Contribution which is decoupled from the payroll and levied by reference to some alternative cost base.
Following the change last year to personal service companies operating in the public sector (IR 35 reforms) there is widespread expectation that this will be extended to the private sector. There has been much media coverage of the impact of last year’s changes, including a migration of contractors from the public sector to the private sector and contractors trying to increase pay rates to cover off the tax impact of the changes. Extending the reforms to the private sector would be an unwelcome administration burden for those that have to implement the changes, but it would at least be expected to stop the migration effect.
Reform is a potential minefield though. All of these issues interact and it is one thing to design a system for taxing work on a blank sheet of paper, but it is much harder to move from one system to another when there will inevitably be winners and losers, especially when those winners and losers have votes.
There remains widespread concern about the housing crisis and it is expected that some form of housing reform will form a central plank of the Chancellor’s Budget. In addition to the fundamental unaffordability of housing, Stamp Duty represents a significant cost for first time buyers getting on the housing ladder. The reforms to Stamp Duty implemented under George Osborne and significantly increasing Stamp Duty for houses worth over £1 million have fuelled concerns that this has caused stickiness at the top end of the market which has trickled down. Whether housing will be tackled in part via tax policy remains to be seen but some form of incentive for house builders or Stamp Duty reform is possible.
Lowering the VAT threshold
The UK threshold above which businesses have to register is currently £83,000 and this is significantly higher than the average in the EU. The Office of Tax Simplification (OTS) was asked to review VAT, including the impact of an increase or decrease in the VAT registration threshold, and has recently recommended the Government look at the level and design of the registration limit, including potential benefits of smoothing mechanisms (aimed at lowering the incentive to operate just below the threshold). Lowering the threshold could be a tempting target for a Chancellor looking to raise revenue. The OTS estimated a drop to £43,000 would generate between £1 billion - £1.5 billion. However, a Parliamentary briefing issued a few days ago notes that the OTS work is purely advisory and further assessment of the economic impact of such a move is needed. It looks unlikely we will see anything in the current Budget, but that doesn’t mean we won’t see something in the future.
Field of Dreams
But where are the areas where we would like to see the Chancellor taking some action?
Following Brexit it will be critical that the UK economy maintains its competiveness and enables business to flourish and grow. Four in five mid-sized businesses see tax as an opportunity to drive growth.
One key lever for doing this is through innovation. There is already broad appreciation of the current innovation incentives in the UK although we continue to be surprised by the number of businesses that are not aware that they may qualify for the incentives available. However, some countries offer better net tax rates for R&D than the UK regime and we think the regime could be made simpler for small and medium-sized enterprises who have to navigate from one regime to another one as they grow. Harmonising the two regimes would prevent this problem. As the UK’s main rate of corporation tax reduces to 17 percent the benefit of the Patent Box rate of 10 percent reduces. A reduction in the Patent Box rate would help maintain the regime’s competitiveness and ensure it achieves its policy aims of attracting investment in innovation and the exploitation of the resulting intellectual property.
Another area could be infrastructure where there is already pressure on the Chancellor to invest. This sector has been feeling the squeeze over recent years. Many infrastructure assets were historically treated as industrial buildings for tax depreciation purposes. The write-offs were never generous but the allowance itself was withdrawn several years ago. Now the CIR regime has arrived and is further hitting this sector which is generally highly leveraged. Whilst there is some relief for certain infrastructure projects, the exemptions are narrowly drawn.
In a sector very dependent upon foreign financing, the tax profile of a project can be a key driver in its attractiveness to overseas investors. Providing relief could be achieved by reintroducing some form of tax depreciation for typical infrastructure asset classes, widening the exemption in the interest restriction rules or introducing an ‘infra-REIT’ by extending the Real Estate Investment Trust regime to infrastructure assets.
Ultimately this Autumn Budget will bring forth its fair share of the expected and the unexpected, but the key message from business is to keep it simple and stable and to deliver a programme for growth in these uncertain times.
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