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Budget 2018: spending the windfall

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This was the chancellor’s much-anticipated ‘last statement before Brexit’ and many of the predicted tax-raising measures failed to materialise.

The Office for Budget Responsibility (OBR) described the Budget as a ‘near-term giveaway’ that leaves the deficit in 2022/23 ‘little changed overall’. Thanks to an improvement in the public finances, Mr Hammond found himself in the fortunate position of being able to cover the prime minister’s promise of higher spending on the NHS, without having to resort to all those extra taxes. The OBR observed that the Budget ‘spends the fiscal windfall rather than saving it’.

Paul Johnson, director of the Institute for Fiscal Studies (IFS) went so far as to call the chancellor’s Budget ‘a bit of a gamble’.

Indeed, Mr Hammond added the caveat in his speech that if the economic or fiscal outlook were to change materially in the coming year, he would take appropriate action, ‘including if necessary reserving the right to upgrade the Spring statement to a full fiscal event’.

As expected, the government will introduce a new digital services tax from April 2020. This will be set at 2% on revenues of certain large digital businesses and is forecast to raise £400m in 2020/21. Glyn Fullelove, chair of CIOT’s technical committee commented: ‘we suspect that identifying and allocating these revenues will be problematic and may lead to companies disputing how much tax is due’. Fullelove hoped the UK move might spur the international community to find a solution to taxing digital multinational companies by 2020, ‘so that this UK digital services tax is never actually introduced’.

Capital allowances saw some giving and some taking away, with a temporary increase in the annual investment allowance to £1m from January 2019, a reduction in the special rate of writing down allowances on plant and machinery from 8% to 6% from April 2019, a new 2% flat rate structures and building allowance relief, and extension of the 100% first year allowance for electrical charging points to 2023.

A limit will be introduced on the amount of payable tax credit companies can claim under the R&D SME tax relief rules, set at three times the company’s total PAYE and NICs payment for the period. The change will have effect for accounting periods beginning on or after 1 April 2020. This was presented as an anti-avoidance measure and will be subject to consultation.

On intangibles, following consultation on broadening the scope of the UK’s royalty withholding tax rules, an income tax charge will apply to amounts received in low-tax jurisdictions in respect of intangible property, where those amounts are referable to the sales of goods or services in the UK. On the plus side, there will be a partial reinstatement of relief for acquired goodwill in the acquisition of businesses with eligible intellectual property from April 2019. The de-grouping charge rules will be amended for de-groupings on or after 7 November 2018 to prevent charges where the de-grouping arises from a share disposal qualifying for substantial shareholding exemption.

Although changes to entrepreneurs’ relief were expected, the addition of two new tests have ruffled some feathers. One of these tests, requiring 5% beneficial ownership, has effect from Budget day. Eloise Walker, partner at Pinsent Masons, while not surprised by the change itself, believes that bringing it in with immediate effect will ‘cause outrage’, as it allows shareholders no time to get their affairs in order. The second test, extending the qualifying period from one year to two years, will apply from April 2019.

A squeeze will be put on private residence relief from April 2020, with the exemption for the final 18 months of ownership being reduced to 9 months and lettings relief limited to apply only where the owner of the property is in shared-occupancy with a tenant.

A targeted market value rule for stamp duty and SDRT will be introduced with immediate effect for listed securities transferred to connected companies. Where the rule applies, the transfer will be chargeable based on the higher of the amount or value of the consideration, if any, for the transfer or the market value of the securities.

The government published its responses to several consultations, including:

  • off-payroll working in the private sector, confirming it will go ahead with moving responsibility for operation of IR35 rules from individuals to engaging organisations from April 2020;
  • short-term business visitors from overseas branches, going ahead with an extension of the special PAYE arrangement with effect from April 2020;
  • tax relief for self-funded work-related training, which will not be taken forward; and
  • the VAT registration threshold, which the government has decided not to change for a further two years until March 2022.

The chancellor also announced he would increase the tax-free personal allowance to £12,500 and the higher rate threshold to £50,000 from April 2019, a year earlier than promised in the government’s manifesto. A lot of people will be hoping his gamble pays off.