A Budget of moving parts – EY’s Budget predictions

18 March 2014

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Revenue raisers will be needed to fund spending giveaways, but any tax tinkering should be niche and carefully targeted, warns EY

Chris Sanger, global head of tax policy at EY, comments: “With an election just 414 days (and counting) away, the Chancellor will be considering whether he can introduce measures that are able to have a positive effect in time, or whether he should wait until his last Budget to announce any eye-catching initiatives.  Whatever his choice, it looks like he’ll have little spare cash available in the Treasury’s coffers and so it will need to be a Budget of moving parts, with revenue raisers required to fund any spending giveaways.

“However any changes to the tax system would need to be carefully targeted and designed to support the re-balancing of the economy. Consumers have been responsible for driving the recovery so far, but the UK’s long term economic growth will be dependent on businesses stepping up to the plate and growth broadening out beyond the high street. The Chancellor won’t want to risk choking off the UK’s fragile recovery.”

Business taxes: What could be in the Chancellor’s Red Box?

The Chancellor has stuck steadfast to his “Britain Open for Business” agenda, which seems to have served the country well, with signs of greater investment by multinationals in the UK and the realisation of the UK being a country of choice for regional and global headquarters.  Next year will finally see the arrival of the 20% corporation tax rate, which delivers on the aspiration of the UK having the lowest (equal) tax rate in the G20, alongside Russia and Saudi Arabia.

Against this background, changes to headline rates are unlikely to appear, and action can be expected to be niche and targeted:

Continuing, Chris Sanger explains:

  • Boosting support for enterprise zones – “The UK currently has 24 enterprise zones, to help stimulate investment in targeted areas of the country. It is possible that the Chancellor could increase the support these regions receive through more generous tax reliefs or expand the zones themselves to accelerate the pace of growth outside London. The Government could also potentially introduce tax breaks to support tourism in coastal flood hit areas.”
  • Introduction of capital allowances for major infrastructure projects – “This would be a popular measure as the reduction in the headline rate of corporate tax was partially funded by reducing capital allowances for manufacturers and other industries. Whilst we may not see the return of industrial buildings allowances, which allowed businesses to claim a tax deduction for a proportion of the cost of certain buildings, might we see a more general allowance to stimulate and support spending on infrastructure?< br/> “On the smaller scale, the Chancellor’s two year initiative of increasing the Annual Investment Allowance to £250,000 per annum from 1 January 2013 comes to an end this year.  This started slowly due to external factors, such as the crisis in Europe, and the Chancellor may feel justified to extend this for a further year, to allow the policy to deliver what was intended.”

On the international aspects, the OECD’s Base Erosion and Profit Shifting project does not formally report until September, so the Chancellor is likely to avoid pre-empting the action that the Prime Minister helped shape as part of Britain’s G8 presidency.

Personal tax predictions:

John Cooney, head of private client tax services commented: “While it is unlikely that the Government will respond to the Labour Party’s demands for a 50p rate of income tax, there are a number of measures that we could see announced on a personal tax front.”

  • Stamp duty increases for high value residential properties – “Rather than making wholesale changes to the Help To Buy Scheme, which could risk penalising the rest of the UK for what is essentially a London issue, the Chancellor may also look to increase the 7% top rate of stamp duty on high value properties (or even add a new “super-band”) to help keep a lid on prices. With the average UK house price now exceeding £250,000, there is also a case for making changes to the 3% band, taking away with one hand and giving with the other.
    “Perhaps now is the time for the Chancellor to look north and evaluate the opportunity of moving away from England’s “slab” system. Instead he could look at a graduated system, where there is no sudden increase in duties, as has been mooted in Scotland.”
  • Increasing the personal allowance to £10,500 – “The personal allowance is already set to increase to £10,000 in 2014/15 but the Chancellor may take the opportunity to go even further. Although this may be politically popular, there are question marks over whether it would ultimately benefit those who need it most at the bottom end of the income scale, as the lowest decile of earnings peaks at just above £6,800 per annum. The Chancellor may instead consider recent changes to the minimum wage to be sufficient or seek to address the widening gap between the National Insurance Contribution lower limit and personal allowance.”

What else are we expecting?

Continuing, Chis Sanger added:

  • Reform of annuities – “Following the recent highly critical report from the Financial Conduct Authority, which concluded that the current annuity market was ‘not working well for consumers,’ this year’s Budget can be expected to include some reforming measures.  These are likely to include increased disclosure of ‘open market’ options as it has been shown that most people do not shop around for an annuity.  However, other possibilities include increased flexibility on draw down schemes and/or the ability to change annuity suppliers.”
  • Review of Business Rates – “The Government is preparing a discussion document on the administration of Business Rates, which is due for publication in the spring. However the Chancellor may use the Budget as an opportunity to commit to a more wholesale review and reform of what has become an outdated system. This tax now raises almost 2/3 of the amount of corporation tax and would benefit from a strategic review.”
  • Gambling taxes – “The UK’s gambling taxes will move onto a place of consumption basis, from December 2014, so that the same tax will be paid whether betting online with a UK bookmaker or one based abroad.  The rate has yet to be confirmed but is expected to be the same as that applying to a licenced betting office -  15%.  Additionally, Bingo which is currently taxed at 20% may be reduced to align with other betting and gaming taxes at 15%.
  • Bank levy - Jonathan Richards, Partner in EY’s Financial Services team, comments on the bank levy: "Despite the fact that it is widely considered to make the UK a less competitive place for banks to locate activity, the bank levy appears to be a permanent feature of the tax landscape. We suspect that it is unlikely that this Budget will see a further increase in the bank levy rate as it has been only three months since a rate rise was announced in the Autumn Statement. That, together with the recent outcome of the review of the bank levy has probably settled the shape of the bank levy for at least this Budget.
    "At a time when many are questioning whether the bank levy is really consistent with the Government's stated goal of having a competitive UK tax system, it is interesting to note that the US appears to be considering adopting its own version of the proposal."

Chris Sanger concluded: “Over this and the last parliament, the UK corporate tax regime has undergone major reform, with the introduction of dividend exemption, the corporate tax roadmap, reductions to the headline rate of corporate tax, Controlled Foreign Companies reforms, and the patent box. It’s turned the tax system into an asset once again and we now seem close to achieving its ambitions of creating one of the most competitive corporate tax regimes in the G20.

“However after this intense tax tinkering, companies are now looking for a period of relative stability and calm while the changes bed in. Greater uncertainty over the tax system could dampen corporate investment intensions and we would caution the Chancellor against pulling any large, unexpected rabbits out of the corporation tax hat – or rather the Red Box.”