Dear Mr. Hammond, you had us at “This change will also allow for greater Parliamentary scrutiny of Budget measures ahead of their implementation.” If that were all you had said, we’d still be popping corks even now. Unfortunately not.
This year’s Autumn Statement was rather less colourful than the last few we have seen from Mr. Hammond’s predecessor. There were still some really lame jokes – although perhaps not quite in the league of wasting taxpayers’ money to try to score political points against the leader of the opposition (lest we forget the farce that was the threat to review deeds of variation).
However, when the new Chancellor says “we will no longer be marking our own homework” in a jibe at his predecessors, and then a few minutes later confesses that his government has so badly missed so many of its own fiscal targets that he has had to create a new set of targets… the logical conclusion is that he has merely graduated from marking his own work, to setting his own test questions. The real unknown is whether he was clever enough to appreciate the irony, or simply assumed the public was too dumb to spot it.
Perhaps we should be grateful that there seemed to be fewer tax changes this time around – although we shall still need to assimilate the technical releases due 5 December, to be sure.
Nevertheless, there were some developments worth pondering before that main salvo lands, such as:
Moving to a single Budget each year, in the Autumn (although it seems we may yet have 2 in 2017: an ‘old-style’ Budget in Spring 2017, and a ‘new-style’ Budget in Autumn 2017).
Confirmation that the Personal Allowance will reach £12,500 by the end of this parliament, with future increases to rise in line with CPI by default.
Likewise the Higher Rate Threshold will increase to £50,000 by the end of this parliament.
The Budget 2016 announcements of two new de minimis allowances to cover casual trading and property income will proceed – the “trading allowance” will cover miscellaneous income as well.
The rate of Corporation Tax will still be reduced to 17% by 2020 – but no further mention of 15%.
Corporation Tax loss reliefs will be reformed in line with the Business Tax Road Map set out in Budget 2016: very simply, there will be much greater flexibility in relation to relieving carried-forward losses but, where profits exceed £5 million then only half of profits may be offset by losses brought forwards – the intention being that, if current year profits are sufficiently large, then some tax will always be payable, no matter how great the losses brought forwards. The proposed restrictions to tax relief for corporate interest will also go ahead (these will apply only where the company / group has net interest expenditure exceeding £2million a year).
The government is so pleased with its new regime to tax offshore entities that develop or trade in UK land that it now wants to bring all non-resident companies’ UK income into the UK tax net. There will be a consultation at Budget 2017.
From April 2017, salary sacrifice will be restricted to pensions, childcare, cycle-to-work and ultra-low emissions cars; other arrangements will be taxable on the greater of the amount of salary sacrificed or the statutory cash equivalent, where applicable. Perhaps sometimes the government really can have its cake and eat it too.
The fact that the government’s own research into salary sacrifice revealed that the “vast majority of benefits supplied through salary sacrifice” are pensions, childcare, cycle-to-work – the government-approved options – has not dissuaded the government from hounding the small minority of arrangements that it hasn’t actively encouraged for the last several years. In short, anything that wasn’t the government’s own idea has become “a risk to the Exchequer”.
The government is also proposing to publish a “call for evidence” at Budget 2017 on the use of tax relief for employees’ business expenses. Based on past experience, a “call for evidence” is when the government wants ammunition to float a particularly outrageous proposal that it hasn’t quite got the front to formally consult on yet (such as trying to ban the use of cash in business transactions). You have been warned…
Termination payments will (as already announced) be subject to Employers’ NICs above £30,000 (as well as Income Tax) but not to Employees’ NICs from April 2018. Nice to see that the government listened in the consultation phase when pretty much every man and his dog pointed out that the reform as proposed by the OTS was supposed to be revenue-neutral... well, actually, they clearly did not listen.
Employee Shareholder Status schemes will lose their tax advantage and will be closed to new entrants at the next legislative opportunity.
National Insurance thresholds for employee and employer are to be aligned – from 6 April 2017, both primary and secondary contributions will be triggered on earnings above £157 a week.
Class 2 NICs will be abolished from April 2018 as planned, and the self-employed will in future earn their State Pension credits through Class 4 (or Class 3) contributions.
But NICs will also be removed from the Limitations Act from April 2018, so that HMRC can pursue older NICs arrears.
Insurance Premium Tax – the Chancellor announced that the standard rate of IPT will rise by 2% to 12% from 1 June 2017. The Autumn Statement added “IPT is a tax on insurers and so any impact on premiums depends on insurers’ commercial decisions.” Which sounds a little like the government trying to suggest that any increase in people’s insurance premia will be the fault of the insurer. Well, Table 2.1 of the Autumn Statement suggests that the additional 2% will be raising almost £1billion for the Exchequer by 2018/19, so my uneducated guess is that insurers’ commercial decisions will pretty much universally be to pass on the cost to the consumer.
There will be a new VAT Flat Rate of 16.5% for businesses with limited costs, such as labour-only businesses, from 1 April 2017. This counters a perceived risk that in some cases the current categories were proving too generous.
Disguised remuneration schemes are to be extended to cover the self-employed. The government intends also to deny tax relief on employer contributions unless tax and NICs are paid within a specified time period. This is the denial of relief for a ‘real’ economic cost to the business and it is clearly wrong. Perhaps the government feels emboldened by its recent success in relation to denying/restricting relief for landlords’ finance costs.
The government is pressing ahead with its proposals to penalise “enablers” of tax avoidance. Given that the penalty will apply if HMRC wins at tribunal, there are real concerns within the mainstream tax profession as to how these proposals will affect ordinary advisory work.
The government intends to extend HMRC’s data-gathering powers even further to money service businesses, to help to identify those operating in the hidden economy.
There will also be a consultation on creating a new legal requirement for intermediaries arranging complex offshore structures to notify HMRC of the structures and related client details.
HMRC is going to use “external analytical expertise” in order to develop its ability to identify emerging insolvency risk in its debt collection activity, to “improve customer service and provide support to struggling businesses”. There have been similar announcements over the last few years about HMRC involving third parties. They have not always been good for taxpayers. Certainly the use of external debt collection agencies – while cheap from HMRC’s perspective – has resulted in much less satisfactory outcomes for taxpayers – poor communication, agencies’ lack of access to HMRC records – in particular where there are credits in relation to other taxes, to name but a few of the recurring issues. In fact, it might be accurate to say that they have always not been good for taxpayers. We shall have to wait and see.
The Scourge of Incorporation…
Finally, let’s look at the apparent concerns shared by the Chancellor, HM Treasury, the Office for Budget Responsibility (OBR) and (presumably) HMRC about the rate of incorporations and their deleterious effect on tax receipts.
For now, let’s put to one side the highly questionable validity of the argument that, because a particular business model yields lower taxes than employment it needs to be “fixed” (although at some stage, the government is going to have to realise that tax yield to the Exchequer is not the sole criterion by which an ordinary (non-multi-national) business’ worth is gauged. I distinguish multi-nationals on the basis that ordinary businesses are being taxed to the hilt, so that we can encourage multi-nationals to rock up to the UK and pay… basically, minimal Corporation Tax. Let’s not forget, Mr. Hammond’s predecessor was quite open about why the owners of ordinary family companies would be paying many thousands of pounds more in tax a year from 2016/17 onwards: to fund the (rough) halving of the Corporation Tax rate for really big companies – so far, the vast majority of UK companies have not enjoyed more than 1% of former Chancellors’ largesse, lavished all but exclusively on large companies)
This Chancellor said in his speech:
“And tax receipts have been lower than expected this year, causing the OBR to revise down projected revenues in future.
Added to this is a structural effect of rapidly rising incorporation and self-employment, which further erodes revenues.”
(Let’s also set to one side that Mr. Hammond had only just played up that employment and unemployment were at record highs and lows, respectively – does he really believe that these factors are not connected?)
The Autumn Statement also included the following:
“Total income tax and NICs receipts are forecast to be £23 billion lower by 2020-21 [than forecast at Budget 2016], of which £7 billion can be attributed to weaker outturn data, £9 billion to slower earnings growth over the forecast period, and a further £3 billion to higher rates of incorporation which reduces the effective tax rate.”
Which has led to a promise that:
“The government will consider how we can ensure that the taxation of different ways of working is fair between different individuals, and sustains the tax-base as the economy undergoes rapid change… We will consult in due course on any proposed changes.”
Given that the new dividend regime has hammered the tax-efficiency of incorporation, it is difficult to understand how the government expects to lose a further £3bn from people wanting to incorporate in future. The Autumn Statement reveals its figures – and presumably government policy – are based on the OBR’s publication Economic and Fiscal Outlook – November 2016, Table 4.11. Box 4.1 of the latter document goes into great length about how incorporation is damaging tax receipts. It seems reasonably clear that nobody with a decent grasp of how the new tax regime works has been anywhere near Table 4.11 – which is, apparently, what is driving government attitudes towards incorporation. Relevant extracts follow:
“Our PAYE, SA, NICs and corporation tax (CT) forecasts are affected by our assumption that incorporations will continue their rising trend… The incorporations model is estimated on a sub-population of companies that are considered to have a genuine choice over their legal employment status... While the data used in the model only extends to 2014, other sources point to growth continuing…
These calculations assume that typical directors take a salary of at least the primary NICs threshold (currently £8,060) to ensure eligibility for state pensions and other benefits, retain a portion of earnings within the company each year and then withdraw the remaining post-CT profits as dividends. For the 2016-17 tax regime, the theoretical annual tax benefits for employed and self-employed individuals with incomes of around £30,000 are £3,300 and £700 respectively. These incentives are sensitive to tax rates. In 2021-22, when the CT rate will be 17 per cent, the equivalent figures (in today’s prices) will be £4,200 and £1,000.”
These figures for moving from employment to a limited company are utter garbage. Any half-competent tax practitioner would be able to work out that the maximum saving for an individual moving from employment to a limited company in 2016/17 would be in the region of £1,300, rising to perhaps £1,700 by 2020/21. And that would be to – unforgivably – overlook the very substantial additional costs that would come with running one’s own business: payroll software, printing, stationery, compliance, professional advice and accountancy fees, to name but a few. And that is in turn before the new marvel that is “Making Tax Digital” makes small companies pay additional licence fees for compliant book-keeping software, etc. Simply put, if an individual has to pay an extra £2,000 in running costs to save £1,300 in tax, he will not be motivated to incorporate based on the potential tax saving.
The new reality is of course that there is no longer any substantive tax-based incentive for an employee to incorporate. The figures for moving from self-employed to a limited company are more realistic (and much smaller) but, again, take no account of the additional cost of running a limited company.
I should add that there is an additional adjustment potentially to consider in relation to incorporation in some cases, which is the effect on Employers’ NICs. But that would be a saving to the engager, and not likely at all to influence whether or not the individual might want to incorporate his or her employed activity. And, of course, it points to the real underlying cause of incorporation in very many cases: the employer/engager wanting to offload employer responsibilities and liabilities. But such cases are outside the “genuine choice” population selected by the OBR for its forecasting and, in any event, why should an individual and/or his company be blamed for the Exchequer’s loss of revenue from an employer as well?
Finally, it is perhaps appropriate to point out the unedifying image of a government that decries “Tax-Motivated Incorporation” but whose broad range of incentives – from R&D super-reliefs and the Patent Box, through to Enterprise Zones and High-End Television and all the other “cultural” reliefs to name but a few – are available only to companies. Simply put, if the government didn’t want businesses to incorporate, it probably shouldn’t have spent the last ten years and more, offering quite so many tax breaks exclusively for companies.