Phillip Hammond was in a playful mood when he presented his first Spring Statement on Tuesday 13 March 2018. He even referred to himself as being “at my most positively Tigger-like”.
Hammond opened with an update on our economy and reported on the Office for Budget Responsibility’s (OBR) latest forecasts.
He revealed better-than-expected short-term growth figures and shared that inflation is set to reduce by the end of the year.
The Chancellor announced a package of measures to help small businesses, including:
- An investigation into ways to eliminate late payments.
- The release of up to £80 million of funding to support small businesses in engaging apprentices.
- A Call for Evidence to understand how government can help the UK’s least productive businesses to learn from, and catch up with, the most productive.
He also announced that the next Business Rates Valuation will be brought forward by one year, from 2022 to 2021, and that it will be followed by a regime of triennial reviews.
Unlike the UK’s previous Chancellor, George Osborne, he stuck to his word and did not attempt to pull any rabbits out of the proverbial hat.
Hammond also promised the publication of a number of consultation documents. While several covered taxes, none grappled with the longer-term fiscal challenges, as we had been led to expect.
The State of the Nation
What Phillip did not tell us was that we have just lived through the worst decade of economic growth since the 1940s.
Ten years ago, in 2008, Alastair Darling presented forecasts suggesting that our economy would grow at a healthy 2% a year, that deficit and debt would be steady, and that things would carry on much as before.
Since then, productivity has doggedly refused to pick up. In fact, it is now amongst the worst performing in the G20.
The UK economy is at least £300 billion smaller than had been expected ten years ago.
In a post-Spring Statement event, Paul Johnson of the Institute of Fiscal Studies (IFS) said:
“Dismal productivity growth, dismal earnings growth, and dismal economic growth are not just part of the history of the last decade – they appear to be the new normal.”
The good news…? The OBR is predicting productivity to recover to 2% per annum. However, this is not until 2030.
In the short term
This year, the UK deficit is projected to come in at about £4 billion less than expected in the Autumn, and a full £13 billion less than projected in the March 2017 Budget. The improvement has largely been driven by better-than-expected tax receipts – however, it is expected to be short-lived.
The anticipated structural deficit in 2019/20 remains almost unchanged.
The problem appears to be that the UK economy is thought to be operating at full capacity.
Without the potential for further productivity growth, the Chancellor will be increasingly challenged over how to meet the already growing demands for public spending increases on the NHS, schooling, and prisons – against his desire to balance the books by the mid-2020s.
On a more positive note, the Chancellor was bullish on inflation, saying that it had peaked at 3% and that it now looked set to fall back to 2% by the end of this year.
After stating “this government is determined that our generation should leave the natural environment in a better state than we found it and improve the quality of the air we breathe,” Hammond announced that he would publish Calls for Evidence on:
- Whether the use of non-agricultural red diesel tax relief contributes to poor air quality in urban areas.
- The whole supply chain for single-use plastics, “to look at how the tax system can help drive the technological progress and behavioural change we need.”
This was in addition to the consultations released on the day, which will be covered shortly. There will more to follow, as outlined below:
Corporate tax and the digital economy
The Chancellor started this part of his Spring Statement by making reference to a consultation which is already underway. It covers the challenge of how to raise tax from the digital economy.
The international norm is to try to allocate business profits to the countries in which value is created.
The government is concerned that we are getting the allocation of taxable profits wrong, because we don’t account for the fact that, for some businesses, value creation is intimately linked to ‘users’.
For example, users of digital platforms such as Facebook may directly generate content in the form of social media posts or videos. This in turn attracts other users and is the basis upon which advertising revenues are generated.
Users may also generate value by providing data on their preferences, or by being part of a network that underpins the success of a business model.
It is with regards to this style of operating that the UK government thinks it should get a bigger slice of tax, because of the high number of UK users who help create value for digital businesses.
Ultimately, it would like to see the Organisation for Economic Co-operation and Development (OECD) take a leading role in reshaping international tax norms so that a greater share of taxable profits flows to the countries in which the users of digital platforms are based.
However, as the IFS points out:
“This is extremely difficult, not least because, even at a conceptual level, we don’t know how to assess the value created by users. And even if we could find practical ways to allocate profits based on user input, this would imply a reallocation of taxable profits away from some countries, including the US, and towards others, such as the UK. Getting general agreement on that will be challenging, to say the least.”
In the short term, the UK could move unilaterally to raise revenue from tech-giant users by instigating an ‘interim revenue-based tax’.
The IFS tell us we shouldn’t expect this to represent a long-term fix for business tax. Indeed, Paul Johnson observed:
“It certainly won’t provide the kinds of revenues that would alleviate long-term spending pressures.”
Tackling the Plastic Problem
This published Call for Evidence explores how changes to the tax system might be used to reduce the production of single-use plastics. It also looks at how innovation might help achieve the same outcomes.
As part of the exercise, government wants to look across the whole supply chain, to gain the best possible understanding of the entire landscape before deciding on the best course of action.
This seems eminently sensible, as a failure to consult properly could result in a knee-jerk reaction – leading to all sorts of unintended consequences, as in the recent government sponsored switch from Diesel to Petrol engines.
Cash and Digital Payments
With cash-use falling from 62% of all payments in 2006 to only 40% in 2016, the government has issued a Call for Evidence to help it better understand the shrinking role of cash in the growing digital economy.
The paper seeks to draw attention to the fact that six out of ten 1p and 2p coins are only used once. As a consequence, the Royal Mint has to produce 500 million replacement coins a year.
At the other end of the scale, it observes that £50 notes are rarely used as currency. Instead, many disappear abroad to act as a store of wealth.
The paper also stresses a determination to further strengthen the crackdown on the use of cash as a method of money laundering and tax evasion.
Well-intentioned it might be, but this paper has already been beset by controversy.
Hardly had the chancellor sat down before the press started to seize upon the impact to charities, and possibly to inflation, if our coppers are to be done away with. This forced Theresa May to say publicly, in less than twenty-four hours of the Spring Statement, that there would be no change to the current mix of coins.
VAT Registration Threshold
In the wake of an Autumn 2018 Office of Tax Simplification (OTS) paper, concerning “how to simplify VAT to ensure it is fit for purpose in the UK’s modern economy”, the government has issued a Call for Evidence to review whether the VAT registration threshold may be disincentivising small businesses from growing their business and improving their productivity.
Different policy options are considered as well as whether any different options could better incentivise growth.
It is worth mentioning that, at £85,000, the UK VAT threshold is the highest in Europe.
VAT Collection – Split Payment
Following feedback received in response to an earlier Call for Evidence, views are being sought concerning potential options for a viable split payment mechanism.
The purpose of such a mechanism would be to address the failure of some overseas online sellers to hand over to HMRC the VAT they’ve collected.
A number of different parties are involved in any online payment, including some or all of the following:
- The issuing bank (the customer’s bank);
- A merchant acquirer (the bank that processes card transactions for the merchant);
- A payment service provider (the entity that provides the services enabling the merchant to accept payment);
- A card scheme (a payment network linked to payment cards)
The key objective for this consultation is to identify how best to utilise industry technology in order to collect VAT on online sales and transfer it directly to HMRC.
In other words, after an online sale involving an overseas vendor has taken place, one of the above parties involved in the transaction would be required to withhold an amount equivalent to the VAT charged, pay it over to HMRC, and pay the balance (after their charges) to the vendor. The vendor would then be left to recover any overpayment as part of their normal VAT return filing process.
This Call for Evidence is concerned with the role of online platforms in ensuring their users’ tax-compliance.
The types of online platforms in which the government is principally interested are those that:
- Allow people to earn money from spare resources such as cars and spare rooms;
- Allow people to use their spare time to generate extra income;
- Connect buyers with individuals or businesses offering services or goods for sale, e.g., Uber, Airbnb, TaskRabbit, or eBay.
Its purpose is to ensure that, where people receive taxable income associated with engagement with the online platform, it is made easy for them to comply.
Self-funded Work-related Training
After previously announcing that it would consult on extending the scope of tax relief available to employees and the self-employed for work-related training costs, the government has now issued a Call for Evidence on exactly this topic.
Its purpose is to gain a better understanding of how an extension to the existing reliefs may be designed to upskill or retrain those who want or need to change their career.
The government intends to learn lessons from previous initiatives and to ensure that tax relief on work-related training is not obtained on recreational activities.
Allowing Entrepreneurs’ Relief (ER) – after dilution of holdings
Pre-announced in the Autumn 2017 Budget, this consultation has been issued to explore how access to ER might be given to those whose holding in their company reduces below the normal 5% qualifying level (meaning 5% of both ordinary share capital and voting power) as a result of raising funds for commercial purposes by means of an issue of new shares.
The proposal would allow shareholders to elect to crystallise a gain on their shares before the dilution occurs.
Enterprise Investment Scheme (EIS) knowledge-intensive fund consultation
This previously announced document is consulting on the introduction of a newly approved fund structure within the EIS, with the possibility of additional incentives to attract investment.
Such a fund structure would mainly focus on investment in knowledge-intensive companies.
This consultation outlines and seeks views on possible elements and constraints of such a fund structure, while also seeking to better understand the capital requirements of innovative knowledge-intensive companies.
Extension of Security Deposit Legislation
In response to a commitment made at the end of last year, a consultation has been published to invite comments on ways to implement changes to legislation in order to extend the scope of existing security deposits. The proposed changes will include, in these security deposits, corporation tax and Construction Industry Scheme deductions – with effect from April 2019.
The legislation will allow HMRC to require high-risk businesses to provide an upfront security deposit, in cases where it believes there is a serious risk to revenue.
Currently, HMRC has the power to require a security deposit in regards to other taxes such as VAT and Pay As You Earn.
Other Consultations to Be Issued
Toward the end of his speech, the Chancellor announced that a raft of further consultations would be issued in the wake of his Spring Statement. These would cover a range of areas:
- How to help the UK’s least productive businesses to learn from, and catch up with, the most productive;
- How to eliminate late payments, particularly for small business;
- Whether the use of non-agricultural red diesel tax relief contributes to poor air quality in urban areas;
- Reductions of Vehicle Excise Duty rates for the cleanest vans;
- Sanctions for late submission or payment.
VAT Fraud in Labour Provision in the Construction Sector
The government is also pursuing legislation to shift responsibility for paying VAT along the supply chain, with the introduction of a domestic VAT reverse charge for supplies of construction services, with effect from October 2019.
The long lead-in time reflects the government’s commitment to give businesses adequate time to prepare for the changes.
Chancellor’s Broken Promise
Prior to the start of his Spring Statement, we had been promised a fifteen-minute speech. However, by the time he had completed his delivery, he had been on his feet for just under half an hour!
That concludes our coverage of Chancellor Hammond’s first Spring Statement.
As promised, we will devote the rest of our update to bring to your attention some of the key tax changes lurking just around the corner.
The Personal Allowance
The 2018/19 Personal Allowance is £11,850, up from £11,500.
However, don’t forget that it is reduced by £1 for every £2 that a taxpayer’s ‘adjusted net income’ exceeds £100,000.
So, the Personal Allowance is extinguished when your adjusted net income exceeds £123,700.
The Marriage Allowance
In April, the Marriage Allowance, which enables spouses or civil partners to transfer 10% of their unused Personal Allowance, will increase by £30 from £1,150 to £1,190.
This will enable affected couples to reduce their tax liabilities by up to £238 a year.
Note: This can only be done in cases where both parties are only in receipt of income taxable at the basic rate.
Tax rates and bands
- The basic rate of tax remains at 20%,
- The higher rate of tax at 40%,
- And the additional rate is still 45%
- The band of income taxable at the basic rate rises by £1,000 to £34,500 (after deduction of the Personal Allowance).
- The higher rate of 40% is applied to the next £34,501 to £150,000 of taxable income, and
- 45% applies on taxable income that exceeds £150,000.
Note: The tax on income (other than savings and dividend income) is different for taxpayers who are resident in Scotland.
Last December, the Finance Secretary for Scotland announced significant changes to income tax bands and rates for Scottish resident taxpayers, with the introduction of five possible income tax rates ranging between 19% and 46%.
Scottish taxpayers are entitled to the same personal allowance as in the rest of the UK.
Tax on dividends
The Dividend Allowance, whereby the first £5,000 of dividends are chargeable to tax at 0%, decreases to £2,000 from 6 April 2018.
Dividends received above the allowance will continue to be taxed at the following rates:
- 7.5% up to the ceiling of the basic rate tax band; and then
- 32.5% up to the ceiling of the higher rate band; and then
- 38.1% for any balance taxable in excess of £150.000.
Note: Dividends are treated as the last tier of income to be taxed when determining one’s tax band.
Tax on savings income (income such as bank and building society interest)
The Savings Allowance:
- Individuals taxed at the basic rate have an allowance of £1,000.
- Higher-rate taxpayers’ allowance is halved to £500.
- There is no allowance for additional-rate taxpayers.
Starting rate of tax on savings
Individuals qualify for a 0% starting tax rate on savings income up to £5,000.
Every £1 of further income over your Personal Allowance reduces your starting rate for savings by £1.
Since 6th April 2017, landlords have been unable to deduct from their property income all of their finance costs to arrive at their property profits.
Instead, they receive a basic rate reduction from their income tax liability.
Landlords will be able to obtain relief as follows:
- In 2017/18, the deduction from property income (as is currently allowed) has been restricted to 75% of finance costs. The remaining 25% is available as a basic rate tax reduction.
- This is falling, in 2018/19, to a 50% finance costs deduction and a 50% given as a basic rate tax reduction.
- In 2019/20, this will fall again to a 25% finance costs deduction, with 75% given as a basic rate tax reduction.
- From the start of 2020/21, all financing costs incurred by a landlord will only be given a basic rate tax reduction.
Corporation tax rates
Corporation tax rates have already been enacted for periods up to 31 March 2021.
- The rate remains at 19% for 2018/19.
- This will fall to 17% on 1 April 2020.
Capital Gains Tax (CGT) rates
The rates of CGT
CGT rates remain:
- At 10%, when an income tax basic rate band is available, and 20% thereafter.
- And at 18% and 28% in the case of chargeable gains on residential properties (with the exception of any element that qualifies for private residence relief).
The CGT annual exemption
Individuals only pay Capital Gains Tax on their overall gains above their annual tax-free allowance (called the Annual Exempt Amount).
An individual’s Annual Exempt Amount for 2018/19 is £11,700 (up from £11,300 in 2017/18).
A trust’s Annual Exempt Amount for 2018/19 is £5,850 (up from £5,650 in 2017/18).
Inheritance Tax (IHT)
IHT Nil Rate band
The Nil-Rate band has remained at £325,000 since April 2009 and is set to remain frozen until April 2021.
IHT Residence Nil Rate Band
The ‘Residence Nil Rate Band’ (RNRB), which was introduced in April 2017 to make it easier for a family home to be passed to direct descendants upon death, is rising from £100,000 to £125,000 this April. It will continue to rise to £150,000 in 2019/20 and then to £175,000 in 2020/21.
Thereafter, it will rise in line with the Consumer Price Index.
There are several conditions that must be met in order to obtain the RNRB, which may involve redrafting an existing will.
The Residence Nil Rate Band may also be available when a person downsizes or ceases to own a home on or after 8 July 2015, in cases where assets of an equivalent value, up to the value of the Residence Nil Rate Band, are passed to direct descendants upon death.
Review of Inheritance Tax
The Chancellor has requested that the OTS carry out a review of the Inheritance Tax regime, to ensure that the system is fit for purpose.
Their review should include a focus on administrative issues, such as the submission process, as well as on practical issues concerning routine estate planning.
Making Tax Digital
On 15th March, after a near year-long private period of testing, HMRC announced that their self-employed beta has now been opened out to a public phase of testing. This beta is only for the self-employed. The version for unincorporated landlords is set to follow next month.
Class 2 and 4 National Insurance Contributions (NICs)
Class 2 NICs are to be abolished from April 2019, rather than from April 2018, as originally announced.
There will be no increases to Class 4 NIC rates during the lifetime of this Parliament, as the Chancellor confirmed in March 2017.
Most cars are taxed by reference to the band of CO2 emissions, multiplied by the original list price of the vehicle.
This is with the maximum charge capped at 37% of the list price of the car, as well as a 3% diesel supplement.
- From 6 April 2018, there will be a 13% rate for cars with CO2 emissions of up to 50gm/km.
- This rate is currently at 9%.
- It will see a further increase to 16% on 6 April 2019.
There will generally be a 2% increase in the percentage applied by each band from 6 April 2018, increasing by a further 3% from 6 April 2019/20.
The diesel supplement is set to increase to 4% – unless the car is registered on or after 1 September 2017 and meets the Euro 6d emissions standard.
The maximum charge will remain at 37%.
There is no change to the current position whereby the diesel supplement does not apply to hybrid cars.
Employer-Supported Childcare schemes close to new joiners
Many employers help employees with childcare costs, often by providing childcare vouchers by way of a salary sacrifice.
Following the roll-out of Tax-Free Childcare, existing Employer-Supported Childcare (ESC) schemes were expected to close to new joiners from April 2018.
However, following the Chancellor’s Statement, Education Secretary Damian Hinds made a concession, to delay scrapping the scheme by six months.
Employees already using ESC can choose whether to remain in existing schemes or to switch to Tax-Free Childcare. However, parents cannot be in both Tax-Free Childcare and ESC at the same time.
Changes to termination payments
The government announced changes to align the rules for tax and employer NICs, by making an employer liable to pay Class 1A NICs on any part of a termination payment that exceeds the £30,000 threshold that currently applies for income tax. This will not now come into effect until April 2019.
From April 2018, ‘Non-contractual Payments In Lieu Of Notice (PILONs) will be treated as earnings, rather than as termination payments. They will therefore be subject to income tax and Class 1 NICs.
Foreign Service Relief
Employees who are UK-resident in the tax year in which their employment is terminated will no longer be eligible for Foreign Service Relief on termination payments.
- Reductions in the case of foreign service for seafarers is to be retained.
- The changes will apply to those whose employment contract is terminated on or after 6 April 2018.
Entrepreneurs’ and Investors’ Relief
Left untouched are the two specific types of disposal which potentially qualify for a 10% rate, both of which have a lifetime limit of £10 million for everyone:
- Entrepreneurs’ Relief (ER), targeted at working directors and employees of companies who own at least 5% of the ordinary share capital in the company, as well as at the owners of unincorporated businesses.
- Investors’ Relief. The main beneficiaries of this relief are external investors in unquoted trading companies who have had newly-subscribed shares.
Increased limits for knowledge-intensive companies
The government is hoping to stimulate investment in knowledge-intensive companies, under the Enterprise Investment Scheme and Venture Capital Trusts (VCTs)
From 6 April 2018:
- The annual limit that individuals may invest under the EIS doubles to £2 million – provided that the additional £1 million is invested in one or more knowledge-intensive companies.
- The annual investment limit doubles to £10 million for knowledge-intensive companies receiving investments under the EIS and from VCTs.
- However, the lifetime limit remains at £20 million, and
- Knowledge-intensive companies are now permitted to use the date on which their annual turnover first exceeded £200,000 to determine the start of the initial investing period under the permitted maximum age rules.
This replaces the date of the first commercial sale rule.
Property transaction taxes
From 22 November 2017, there has been an exemption from SDLT on the first £300,000 on the purchase of a home, where the total price of the property is not more than £500,000.
5% is payable on purchases between £300,000 and £500,000.
Buying a property in Scotland can bring different tax consequences.
In Scotland, Land and Buildings Transaction Tax (LBTT) applies, rather than SDLT. Therefore, a LBTT relief, for first-time buyers of properties up to £175,000, has been proposed in the Scottish Draft Budget 2018/19. This is subject to a government consultation before the relief launches in 2018/19.
Welsh first-time buyers benefit from the Budget SDLT relief until 31 March 2018. After this date, Land Transaction Tax (LTT) replaces SDLT.
The starting rate threshold for LTT will be £180,000, benefiting not just first-time buyers, but other home buyers in Wales too.
A higher rate, of 3% over standard rates for additional residential properties, applies to purchases throughout the UK, regardless of whether SDLT, LBTT, or LTT applies.
Talk to us:
Our Spring Statement has covered a lot of ground. If you wish to know more, concerning any of the tax topics covered and concerning what impact they might have on you or your business, why not speak to us?
A small amount of timely advice could save you thousands later on.