A backwards glance at the Budget
Friday, December 14, 2018
As the year draws to a close, we reflect on a busy few months for the Chancellor and HM Treasury, having delivered the 2018 Budget, announced the Finance Bill 2019, and speculated about the economic impact of Brexit. In this article, we summarise the key messages from October’s Budget, as well as other interesting announcements since then.
Christmas came early for many taxpayers in the autumn Budget; Philip Hammond offered early tax cuts for millions of workers because, according to the Chancellor, “austerity is coming to an end.” As a result of improved forecasts, the famously tight HM Treasury purse strings loosened with a £100 billion bonanza, set to trickle down in the next six years.
Income tax cuts were the finale in Mr Hammond’s 72-minute Westminster performance, as he announced that the manifesto pledge – of raising the Personal Allowance Threshold to £12,500 and the Higher Rate Threshold to £50,000 – would be achieved a whole year ahead of target. On average this will see a basic rate taxpayer pay around £130 less tax than this year, and HMRC estimates that 32 million individuals will see their tax bills fall in 2019-20.
Ending speculation that VAT would be cut, the Chancellor has frozen it at £85,000 until 2022, to give “small business clarity” for the foreseeable. Interestingly, VAT options are restricted by EU law, so there is the potential for rates, the “cliff edge” registration and deregistration thresholds to shift in a post-Brexit future, “as our future VAT regime becomes clear over the years ahead.”
An interesting new announcement, as the Government tries to keep up with an increasingly digital business landscape, was a big tech tax; a £400 million levy aimed at global internet behemoths like Amazon, Google and Facebook. At the other end of the spectrum, the ailing High Street – the biggest victim of online consumerism – has been promised a package of support worth £675 million to “support Councils to draw-up formal plans for the transformation of their High Streets.” This should equate to more investment, improvements and unused retail units used for residential.
On the topic of small businesses, the Government announced that it would immediately cut business rates by a third for smaller retailers, with a rateable value of £51,000 or less. The Chancellor claims that is “an annual saving of up to £8,000 for up to 90% of all independent shops, pubs, restaurants and cafes.” While excellent for smaller independents, it offers little help for struggling chains and larger operators. There will be a revaluation of business rates in 2021, when rateable values will adjust to reflect changes in rental values.
As predicted, it was declared that IR35 in the private sector will be brought in line with the rules that the public sector currently adheres to. It has been a long-term vision for HMRC to do this, but will have taken 20 years to implement by the time we see the changes take effect in 2020. There will be exemptions for small businesses and more clarification is needed here. HMRC has stated it will work with stakeholders to improve the Check Employment Status for Tax tool and provide more advice before any reforms are made.
In addition to the bigger announcements, there were some smaller but important revelations in what turned out to be a bumper Budget. This included an increase in the pension lifetime allowance to £1.055 million, with no change to the annual allowances. The annual investment allowance will increase to £1 million for all qualifying expenditure on plant and machinery. Fuel duties were frozen for another year, despite speculation to the contrary. The Junior ISA limit will rise to £4,368, although other ISA limits are untouched. And entrepreneur’s relief has been retained, but the minimum qualifying period has been extended to 24 months.
Beyond the Budget…
We must remember that some announcements – specifically those around income tax personal allowances – do not consider the tax regimes in devolved Scotland and Wales. The Scottish Budget is announced mid-December and the Welsh Assembly will also need to reflect on the proposals. Practitioners in Scotland and Wales, or with clients in either country, will need to wait until more is known.
Since the Chancellor delivered his third Budget, it has been reported that Government spending has risen sharply. It undoes some of the reduction in the deficit earlier in 2018, and consequently could threaten some of the Government’s spending plans. Borrowing rose to £8.8 billion in October – the biggest October deficit in three years. The national debt is whopping; standing at £1.79 trillion, which is 84% of GDP.
Insisting that he is true to his word, the Chancellor insists his spending pledges – of which there were many – were fully planned for and funded, regardless of national debt issues or the outcome of Brexit. In fact, squirreling money away to prepare for the potentially turbulent times ahead, Mr Hammond announced that he had allocated an extra £500 million for Brexit preparations – he already allocated £2.2 billion to departments for Brexit readiness.
What might Brexit mean for the Budget? Philip Hammond said that he is “preparing for every eventuality” and would hold an emergency Budget, a “full Fiscal Event” – not just Spring statement – if it is required. The Office for Budget Responsibility is already warning that a ‘disorderly Brexit’ could have severe implications on the economy, exchange rate, asset prices and public finances. So, it obvious why HM Treasury is stockpiling funds.
Following hot on the heels of the Budget was the Finance Bill 2019. Or as it is officially called, ‘Finance (no. 3) Bill 2017-19’, which becomes the Finance Bill if passed in March of next year. Although, for the reasons mentioned already, March 2019 is liable to be a momentous and rather hectic one for the Government, so the Finance Bill seems the least of anyone’s concerns!
The 324-page Bill has grown by over 50 sections since the summer, and there are now areas that have been amended since the last draft was published, or where new legislation has been introduced. This includes capital allowances, taxation of intangibles and hybrid capital instruments.
The Bill also saw a tweak to the rent-a-room initiative. The new condition for shared occupancy for rent-a-room relief has been dropped, but the property must still be considered the landlord’s main home and will not apply to buy-to-let property or holidays-lets. Also noteworthy was a carbon emissions tax, which would be a replacement for the EU emission trading system, in the event of a ‘no deal’ Brexit.
Missing was the penalty model for MTD, and the alignment of late payment interest and penalties across VAT, income tax self-assessment and corporation tax, as was proposed in July’s draft Bill. HMRC claims this is to give it more time to consider the communication needed for successful implementation, so we can assume sanctions will be in the Finance Bill 2020, at the earliest.
An eventful season passed for the Treasury and a lot of changes for accountancy firms to keep up with and decipher the most pertinent points for them and their clients. With a dramatic year ahead with trade negotiations and UK withdrawal from the EU, and the unpredictability that brings, the pace of change is unlikely to ease up. As ever, the CPAA will closely monitor developments and ensure you have all the necessary news and updates.