EY’s Autumn Budget 2018 predictions

24 October 2018

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Chris Sanger, Head of Tax Policy at EY, says:

“This Budget – the Chancellor’s second in this Parliament - might normally be expected to include some significant and bold moves that builds a war chest for later in the Parliamentary cycle. However, this Budget is by no means being delivered in a normal environment.

“The Government is in the throes of Brexit negotiations and the Chancellor is faced with three scenarios: a Brexit deal; a hard Brexit or a transitionary period. Will the Chancellor choose to lay the foundations for the economy in a post-Brexit world or deliver a “caretaker Budget”, waiting for the Spring Statement with the prospect of promoting this to a Spring Budget – when the UK’s future relationship with the EU is much clearer, to make some bolder changes?

“We’ve already heard, from the Conservative party conference, a number of announcements that will be included in this year’s Budget. Namely: the freeze in fuel duty for a consecutive ninth year; the promise of an end to austerity if a good Brexit deal is reached; council borrowing cap lifted to fund council house building; and buyers of UK property who do not pay tax in Britain to be subject to a new stamp duty surcharge of up to 3 per cent. But what other measures might the Chancellor announce?

Will the Chancellor have to raise taxes?

“There have been a number of significant announcements from Government committing to extra spending: the extra funding for the NHS and an end to austerity if a good Brexit deal is secured. How this spending will be funded is still unknown but raising taxes has historically been a popular method by former Chancellors.

“Raising taxes is rarely popular, and even more rarely by those subject to them. Armed with the acknowledge need to fund the NHS, the Chancellor may seek to use hypothecation to lessen the sting and reduce the political risk. Under hypothecation (also known as the ring-fencing or earmarking) the revenue from a specific tax change is used for a particular expenditure purpose. This could ease concerns about the introduction of hikes in National Insurance contributions or VAT.

Business tax

“The debate on the taxation of digital companies has now moved onto a debate about which country should have taxing rights over their profits.  The aim of the EU level, and indeed the UK, is towards a longer term change, which reallocates the taxing rights and ensures that the profits are taxed once.  However, the development of the Digital Services Tax as a turnover tax is a recognition that such a fundamental change is going to take time to agree.  In the meantime, governments are acting to seek to tax what they consider to be their share of the activity, moving beyond profit taxes and supplementing them with turnover taxes.  This will inevitably lead to activity being taxed twice and sometimes taxes being paid even where there are no profits at all.

“The UK’s confirmation that it will act alone if necessary reinforces the pressure on the EU to develop an agreed approach.  Beyond the obvious problems of double taxation and imposing burdens on businesses with no profits, the creation of different turnover tax regimes by different countries adds the risk of complexity and confusion as the rules are likely to differ in each country.

“Following the past consultations, and action for smaller businesses, the Chancellor remains under pressure to address the increased burden of business rates. With the business rates set at 47.9% last year on the revalued stock of properties, we have seen a significant increase in the burden of this tax, which was set at 41.4% at the previous revaluation.  Such an increase in tax rate (6.5 percentage points, the equivalent of an extra £4bn per annum) has occurred gradually but nonetheless represents an increase of over 15%, affecting those businesses which require property, such as manufacturing and high street retail.  Cuts now could boost investment prospects but may require additional funding to local government. Faced with budget challenges, the Chancellor may only be able to acknowledge the need for reform.

 “With the focus on productivity, the Budget might include some incentives for investing in capital, with increases in the rates of capital allowances or the Annual Investment Allowance (potentially reversing the recent reduction in the annual investment allowance from £500,000 to £200,000, providing the relief up front).  More substantively, we could see a systematic review of the incentives that the tax system creates towards investment, which could give rise to restoring relief for spending on industrial buildings and potentially going further.  At a time of uncertainty, the UK’s prospect for foreign direct investment could benefit from the boost that these policy changes would deliver.

“In December the Government launched a consultation to extend Royalty Withholding Tax (WHT) provisions with effect from April 2019.  We expect the draft legislation to be released on 7 December as part of the Finance Bill.  The consultation proposes that WHT would be due on payments, to a connected party in a jurisdiction with whom the UK does not have a double tax treaty, for the exploitation of certain IP made in connection with UK sales, even if the payer has no taxable presence in the UK. 

“Whilst this applies to companies in all industries, for political reasons this measure is likely to be portrayed as tackling the taxation of the digital economy and so a lot of focus might be put on this change.”

“A potential positive move would be the Government’s response to the consultation on tax relief for goodwill and customer related intangibles. The rules were changed back in 2015 to address concerns, including over potential increases in tax motivated incorporation, and this Budget could provide the opportunity for the Chancellor to return the UK to the international norm but providing a targeted relief. This, combined with the UK’s low corporate tax rate and non-tax advantages, could reinforce the attractiveness of the UK, building a strong investment base for the future.”


“The consultation in relation to off-payroll working in the private sector, known as IR35, which closed in August 2018, looks at how to align compliance with the existing 'off-payroll' working rules which came into effect in the public sector from 6 April 2017. These rules mean that contractors such as IT and management consultants, who work through their own personal service company, would be taxed as employees if engaged directly.

“We may see a response to the consultation. Although it is rumoured that the new rules could be brought in from 6 April 2019 - in which case we would expect to see legislation in the Finance Bill – it is more likely that the rules would be brought into effect from 6 April 2020.

“With the UK economy facing uncertainty post Brexit, any changes, if announced, would come at a time when the economy needs a flexible workforce more than ever. The new rules could make it more difficult for off-payroll workers in the private sector to operate flexibly if required.

“The Chancellor has made it known that he is keen for both employed and self-employed workers to bear more equitable overall levels of taxation, such as National Insurance Contributions. Although we would normally expect the Budget speech reveal the Government response to the Taylor Review and contain measures to change the taxation of the self- employed or change the tax treatment of those businesses engaging gig workers, given the current attention demanded by Brexit, it looks likely that anything definitive will be deferred to another Budget.”

Making Tax Digital (MTD)

“We are still awaiting a consultation on MTD for corporation tax so this may be launched at this Budget (although the Government has committed not to bring any changes into effect before 2020 at the earliest so it seems unlikely).

“In any event, we may get a general update on the progress on the MTD project. The implementation date of MTD for VAT of 1 April 2019 for most VAT registered businesses with taxable turnover exceeding £85,000 may be referenced within any update concerning progress on MTD.”

VAT and Brexit

“On 23 August 2018, the ‘no-deal’ Brexit notices published by HMRC announced that postponed accounting for import VAT on goods brought into the UK would be introduced.

“This means that, in the event of a ‘no-deal’, UK VAT registered businesses that import goods into the UK will be able to account for import VAT on the VAT return, rather than having to pay import VAT on, or soon after, the time that the goods arrive at the UK border. This provides a cash flow benefit for these businesses.

“Customs declarations and the payment of other duties will still be required. HMRC indicated at the time, that further guidance would be issued.

“As this is a facilitation measure, it is possible that more details will be released during the Budget including confirmation of a delay to the implementation of the measure in the event of a transitional period.”

VAT registration threshold

“The call for evidence which explored whether the design of the VAT registration threshold could better incentivise growth/improve productivity closed on 5 June and so a response may be published around the time of the Budget.

“No changes are expected to the threshold before April 2020. However, it will be interesting to see whether any further details on future threshold changes are announced, particularly as reducing the threshold would increase VAT receipts at a time when the Chancellor is looking for additional revenue.”

VAT and online retailers

“Following previous consultation, the Chancellor may consider introducing the split payment method for online retailers, where VAT is paid over to HMRC in real time. The challenge with such a move is: how wide does he spread the net? Many UK-based retailers have an online presence so who will this target and who could be inadvertently caught?”

Plastic waste

“It is expected that the Government will set out how changes to the tax system could be used to reduce the waste of single-use plastics. This follows a call for evidence which closed on 18 May 2018 and received the largest response of any call for evidence in HMT history (162,000 responses). The Government published a summary of responses on 18 August and said it would explore and will announce policies at Budget 2018.”


Tom Evennett, Private Client Services Partner at EY, says:

Changes to Entrepreneurs’ Relief

“There has been significant speculation that, following a report by the Resolution Foundation setting out the cost of Entrepreneurs’ Relief (ER) and querying whether ER was achieving the aim of incentivising individuals to establish and grow businesses in the UK, the Chancellor might take this opportunity to reduce the level of lifetime gains that an individual can claim ER on from its current level of £10m.

“There are some welcome changes that have already been announced which actually extend the relief to cover part of an individual’s gain where they have been diluted below the 5% qualifying threshold due to a commercial fund raising that occurs after 6 April 2019. It would be surprising, given the choppy waters faced by the UK economy and the outcry from entrepreneurs that would be caused, for the Chancellor to significantly reduce the benefits of this relief.

“One change which would be welcomed by serial entrepreneurs would be for the ER limit to be moved from a lifetime limit to a disposal limit, thus encouraging further entrepreneurial activity even where £10m of gains qualify for the relief have already been met.”


“The Chancellor may look to reduce the annual allowance for pensions to as low as £20,000. For those people on defined contributions, this allowance may seem quite generous for some. However, for those people paying into a defined benefit scheme this is likely to affect them significantly, since promotions/increases in salary can result in a large deemed contribution for one year and could therefore lead to unexpected tax charges. Whether the Chancellor makes any changes to this remains to be seen, he may choose to deliberate further.”



Corporation tax on property income and gains of non-resident companies: Draft clauses were published on 6 July which confirm that non-resident companies that carry on a UK property business or have other UK property income will be chargeable to corporation tax on income from 6 April 2020, such that they may need to consider the UK's loan relationship regime, corporate interest restrictions and anti-hybrid regime when computing their corporation tax liability on rental income.

Following the announcement by the Prime Minister at the Conservative Party Conference, that buyers of UK property who do not pay tax in Britain will be subject to a new Stamp Duty Land Tax surcharge of up to 3 per cent, with the proceeds going towards a scheme for tackling rough sleeping. The proposed tax would be levied on both individuals and companies.

“The significant increases in SDLT that have occurred over the recent past have distorted the operation of the residential property market and there is a question as to whether this announcement will indeed raise further sums for the Exchequer.”

Financial Services

Jeff Soar, UK Head of Financial Services Tax at EY, comments:

“With the ongoing uncertainty over Brexit, a period of calm on the tax front would be welcome. In the decade since the crisis, the financial services sector has dealt with major reform on an almost annual basis, so will be hoping that they are spared any big surprises. 

“Banks and insurers are currently focusing their resources on the recent EU Directive on mandatory disclosure of cross border tax arrangements. This centres around disclosure of tax arrangements and greater disclosure to tax authorities and brings in extensive reporting obligations even where there is no tax avoidance motive to the arrangements.  This is an important project and financial services companies are working hard to implement the Directive so will have their fingers crossed there is not more change announced on October 29th.”

Brexit and Banks

Neil Harrison, UK tax partner at EY, comments:

“Given this is seen as the “Brexit” Budget, the big question for the City is whether the Chancellor will look to make the UK more attractive for Financial Services.  A relatively simple measure the Government could consider is cutting or removing the current bank and building society surcharge, which imposes an additional 8% charge on the profits of these companies compared to other sectors. The surcharge makes the UK less attractive for financial services businesses and reduces the amount our domestic banks can lend to stimulate growth.”


Kevin Paterson, Financial Services Tax partner at EY, comments:

“”Many Financial Service firms who have lease obligations will be keen to see the finalisation off HMRC’s proposals on new tax rules.  These tax adjustments are in response to a new lease accounting standard (known as IFRS 16) and HMRC are keen to ensure the tax rules continue to operate in the way they currently do. The new standard requires firms to recognise most leases on their balance sheets, which they haven’t had to do in the past and the tax effects of transition adjustments could be significant.”


Jason Whyte, Associate Partner, Financial Services, EY, commented: “After a brief respite, pensions may be back in the firing line. Funding for the NHS dividend and the end of austerity has to be found from somewhere, and higher rate tax relief may look like a tempting candidate. With the National Insurance Fund due to exceed its funding solution by 2032, wider reform of pensions and benefits is inevitable before too long. With the issue of enabling tax relief "top ups" for low earners on net pay arrangements becoming a hot topic, the Chancellor may see an opportunity to make the long expected switch to a flat rate of tax relief. 

"Some in the industry are resigned to this change happening eventually – but will be hoping that it comes with a simplification of the contribution rules, removal of the lifetime limit and reform of defined benefit schemes. On the other hand, radical change might be too difficult at the current time given the uncertainty around Brexit, so we might see a tweak for low earners and another squeeze on higher rate relief accompanied by a consultation on longer term reform.”

Oil and gas

Derek Leith, EY’s Global Oil and Gas Tax Lead, predicts the Chancellor will continue on a course of stability for the oil and gas industry in his Autumn Budget

 “The priority for the UK oil and gas industry in recent years has been stability and there is no obvious reason for the Chancellor to make an announcement to divert from this course in his Autumn Budget.

“Despite the oil price rising and breaching the $85 per barrel mark, the Chancellor is likely to maintain a steady legislative environment. This reflects a widely held view of industry leaders that such a move could boost the long-term prospects for the UK Continental Shelf. Only a couple of months ago the Exchequer Secretary to the Treasury shared reassurances with the industry that there were no plans for tax increases. It would therefore be surprising if this was a course of action announced on October 29, and it would be most unwelcome.

“It is much more likely the Chancellor will make a positive statement on the importance of the Driving Investment principles, released by HMT in 2014, to the UK’s oil and gas industry, demonstrating the shared vision for the future of industry and government.

“In terms of transferable tax history (TTH), this was announced at the previous budget and is now very close to enactment through legislation. As such we are unlikely to see a change or major modification to the direction of travel on this welcome, and novel, measure. It may not even be mentioned, but if it is it will probably be to reaffirm the Chancellor’s commitment to TTH.”


Beyond these themes, there are a number of discrete measures that may feature on 29 October:

The apprenticeship levy

The apprenticeship levy (AL) was introduced on 6 April 2017 and was intended to boost the number of apprentices available to UK businesses producing a highly skilled workforce to boost the economy.

The levy is charged at a rate of 0.5% for employers whose salary costs are in excess of £3 million. The money from the levy is pooled into a government fund and distributed to fund new apprenticeships.

If the money contributed to the fund is not used by the employer to train its own staff within a certain amount of time, the money may be used to train other employers’ employees.

Figures appear to show that since the introduction of AL, the number of apprenticeships has reduced, suggesting that the levy may not be working as intended. As a result, the Chancellor has announced that government will allow large companies to transfer funding for apprenticeships to smaller firms in a bid to create more high-quality training places. 

Large employers will be able to hand up to 25% of apprenticeship levy funds to their supply chain and this will begin in April 2019.  Currently businesses can only pass on 10% of their levy funds.

It also seems likely that a consultation document will be published during the Budget that reviews how training is provided to staff and the associated supply chain in order to make the most of the AL scheme. Businesses may also wish to review the VAT recovery position of associated costs, particularly capital costs, some of which may become blocked in certain circumstances.

VAT education exemption

The Office for Students (OfS) has announced that the Treasury intends to make an announcement with respect to changes to the VAT exemption for certain education providers.  It is possible that this announcement will be made on Budget Day.

The Treasury is expected to announce that education providers registered with the OfS in the Approved (fee cap) category will be eligible for the same VAT exemptions as currently apply to traditional universities and providers eligible for public funding from the OfS.

The changes to the exemption are expected to take place with effect from 1 August 2019.

Education providers with University title or College of University status will be unaffected by the changes and providers with Approved status may also still be able to access VAT exemption through other routes.

This change will be welcome news for education providers impacted by the change, as well as students who will feel the benefit through not paying an additional 20% VAT on tuition fees.

Public disclosure of tax information

There have been some calls to introduce the public disclosure of tax information. Will this happen? The challenge is here is that the information disclosed could be misinterpreted.


For further information or to arrange an interview, please contact: Adam Holden, EY senior media relations manager: 0121 535 2128 / 07917 000028

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