Some Budget predictions from Withers and EY, and a wish list from Smith & Williamson.
Sophie Dworetzsky: I suspect it is going to be an unexciting Budget, but that in all likelihood an emergency Budget will follow after the election. Nonetheless, I expect to see:
Chris Groves: This year's Finance Bill is likely to be one of the shortest in living memory, given that there is only a matter of days before the end of this Parliament to approve it. In light of the upcoming election, we should expect to see the announcement of a number of measures that will not take immediate effect, but will be timed to be brought in after the election, under a new government. With that in mind, we are likely to see the Conservatives and Lib-Dems seek to set some traps for the Labour party, including:
Judith Ingham: There is a good chance of some tightening up of the non-dom regime – either through specific measures or as part of a general clamp-down on abuses (which will certainly be mentioned) in light of the Stuart Gulliver publicity, amongst others.
We can also expect something on pensions, maybe some sort of review so it looks like action but isn't actually delivering changes.
A change to IHT is not unlikely, and perhaps the most likely option is to have no IHT on the first £500,000 worth of residence that gets PPR (the chancellor has allegedly told officials to come up with some eye-catching things and this would certainly be more interesting than a general increase in the nil rate band). IHT could not be abolished without a major recasting of CGT.
Julia Abrey: The elimination of deeds of variation for reasons of tax avoidance. This was attempted at the 1997 general election and then rejected but, following issues such as the Miliband family changing their deeds of variation over the family house, there is pressure to close them off. The reality is that people generally use them because wills have been incorrectly drafted, rather than for tax purposes, and this was the argument used to reject the change in 1997.
Chris Sanger, head of tax policy at EY, says: ‘On business taxes we will see more incentives and tightening of the rules. The vast majority of businesses (69%) are happy so far with the changes the chancellor has introduced to the tax system, as our recent survey showed. However, there are still outstanding elements in particular around investment allowances, support for SMEs and business rates.’
Extension of the £500,000 annual investment allowance (AIA): ‘The AIA is due to revert back to £25,000 this year. We expect the chancellor to prolong the £500,000 extension, or even to increase it, to allow the policy to further support the economy’s expansion.
New capital allowance for infrastructure: ‘To stimulate and support spending on critical infrastructure, we may also see the introduction of a capital allowance taking us back to the good old days of industrial buildings allowances. These allowed businesses to claim a tax deduction for a proportion of the cost of certain buildings.’
Introduction of a tobacco levy: ‘A new levy introduced in addition to corporate tax rates, based on a tobacco company’s market share is on the cards. We will be keeping an eye out for this announcement on Budget day as it may be the Chancellor’s way of laying the foundations to expand similar levies to other sectors in the future.’
Reform of business rates: ‘Following the announcement of the Government’s consultation, the Chancellor may use the Budget to provide details around the reform of what is an outdated system. How fundamental this reform will be remains to be seen and many will be hoping that the Chancellor will remove constraint that any review should be revenue neutral.’
Clarity around the implementation of the common reporting standard (CRS): Julian Skingley, EY partner in financial services tax practice, says: ‘We hope that the chancellor will announce when we can expect published legislation on how the CRS will be implemented in the UK. Regulation needs to be laid out by 30 March if they are to make it through this parliament before the general election, so the Budget is the last chance. The financial services industry has been waiting since July 2014, when the issue was consulted on, and, given the CRS implementation deadline of 1 January 2016, there is growing anxiety to understand the logistics and processes that will be required. Firms are already dealing with FATCA, so clarity around the CRS is needed sooner rather than later.’
Banks hope this Budget isn’t laden with surprises: Anna Anthony, EMEIA head of financial services tax at EY, comments: ‘Banks will be hoping the Chancellor does not announce further changes to the bank levy this year. In 2014, major banks in the UK paid a total of £2.2bn in bank levy, and were hit for a second time later in the year with a new restriction on the use of banks’ brought forward losses. This came in the form of an unexpected additional cash tax cost, aiming to raise £4bn over five years, and effectively equated to a 36% bank levy hike. It came as a very unwelcome surprise, and the industry will be hoping that this year’s Budget doesn’t come laden with more surprises.’
Disguised asset management fee income rules too broad: Fiona Carpenter, EMEIA head of hedge funds for EY, comments: ‘Investment managers will be keenly awaiting the Budget, in the hope that revised draft legislation and anticipated guidance on disguised management fees is narrower than the current broad scope. The rules need significant amendment as they currently have far wider ramifications than the stated policy objective, and the Budget is likely to be the last opportunity for the legislation to be amended before it comes into force on 6 April.’
David Kilshaw, private client services partner at EY comments: ‘We are unlikely to see the chancellor pull any rabbits out of his personal tax hat so don’t expect any major new announcements or changes. However, particularly as it is a pre-election Budget, the chancellor may choose to make tweaks to some of the existing reliefs and allowances that are already available. These will include measures to ensure that from 6 April non-residents will pay CGT for the first time when they sell residential properties in the UK.’
Below is a list of EY’s runners and riders on possible personal tax measures that could be announced in the Budget:
Pensions one year on: Malcolm Kerr, senior adviser to EY, comments: ‘This time last year, the pensions industry had no idea of the extent of changes that were on the cusp of being introduced. One year on and it is unclear how ready either the industry or customers are, and there are still numerous challenges yet to overcome. Now under a month from implementation, it will be interesting to see if the Chancellor gives some much needed clarity on detailed taxation implications in the Budget. Worse, of course, would be further tinkering, adding more complexity to the situation.’
Devolution: Sanger says: ‘In the Autumn Statement the chancellor announced that Northern Ireland would have control over its corporate tax rate. This raises questions as to whether corporate tax will be devolved to Scotland, among other powers, and what that means for Wales.’
Avoidance and transparency: Sanger says: ‘Tax avoidance will be a key theme in this Budget. We are likely to see more announcements building on recent comments on criminalisation of assisting tax evasion and the introduction of possible penalties for evasion and aggressive tax avoidance. More details around the implementation of country by country reporting may also be included in this Budget, as a result of the project by the OECD and G20 on base erosion and profit shifting (BEPS). Combined with the introduction of direct recovery of debts by HMRC, we should expect announcements of increased resources heading the Treasury’s way.’
Relief for the oil & gas industry: Derek Leith, head of oil & gas taxation at EY, comments: ‘We expect the introduction of a basin wide investment allowance (IA). This will replace the plethora of existing field allowances with a single cost based allowance. Effectively it will reduce the proportion of a company’s profits that are liable to supplementary charge. So for those companies investing in the UK continental shelf it will have the effect of lowering their corporate tax rate from 60% towards 30%. We also expect the Budget to contain transition arrangements ensuring that no company with an existing field allowance will be worse off under the new regime.’
Smith & Williamson believes HMRC needs to be adequately resourced so it can run an efficient tax system. This would benefit taxpayers - be they individuals, businesses, charities or others - as well as government, it says. As an example, HMRC’s front line tax teams are currently under-funded. It has insufficient staff with the necessary skills to provide clearances for businesses and taxpayers trying to navigate the complexities of the system and get their tax affairs right. If HMRC were suitably funded, the authorities would be more able to ensure taxpayers pay the correct amount of tax.
Smith & Wlliamson's Budget wish list is set out below.
Introduce progressive income tax rates: The current system of income tax rates includes anomalous peaks and troughs in the marginal rates of tax. The withdrawal of personal allowances for incomes above £100,000pa leads to a band of income taxed at a marginal rate of up 60%. The marginal rate then dips to 40% and rises to 45% on incomes above £150,000pa. These pinch points can distort taxpayers’ behaviour so we favour a more progressive approach which smoothes transition from one rate of income tax to the next.
Increase the higher rate income tax threshold: Continue to increase the threshold at which the 40% tax rate applies by gradually moving it upwards in line with the PM’s promise to take more middle income families out of higher rate income tax. Similar increases should be made to where the high income child benefit charge starts to apply to ensure that fiscal drag does not mean more families will start to be hit each year. Anything to simplify this system must be attractive!
Improve rules on the inheritance of ISAs: The current plans for transferring spouse allowances on death of one party are incomplete and complicated. We would like to see it possible to make a simple transfer of ISA savings via the estate to a surviving spouse or civil partner. This process needs to be simplified, ideally by permitting estates to hold ISAs and allowing the assets to be inherited by a spouse or civil partner under the terms of a will without any tax consequences.
Introduce relief for long term capital gains: Provide relief for assets held over the long term to encourage long term ownership of assets such as shares and enterprises.
Maintain pension contribution allowances: Review the present annual and lifetime limits on pension contributions, the associated tax relief and maximum pension fund once and for all as these are unduly complex and made worse with constant fiddling. These continual changes in rules turn the public away from committing to long-term pension savings. Why limit both the amount that can be put in each year and the size a fund can grow to? If the amount that can be contributed to the pension pot is limited to the current £40,000pa, why also limit the size of the fund? The result is, in our view, primarily a tax on good fund performance - how can that be justified?
Increase inheritance tax thresholds: Review the IHT system including gifts and exemptions. The allowances for annual, wedding and small gifts have been in place for over 30 years and have lost relative value. Many families would welcome an increase in these. Alternatively, simplify the whole system by abolishing these small reliefs and replace with a higher nil rate band.
Merge NICs with income tax: Align all NIC and income tax bands. While income tax only begins at £10,000pa for most people, National Insurance applies to earnings from £7,956 upwards. This anomaly hits hardest at those on short-term or seasonal contracts as NICs are levied according to weekly earnings, rather than total annual earnings. We recognise that the long-term wish to amalgamate the two systems may not be possible in the short-term, but a first step towards integration would be to align all thresholds.
Raise rent-a-room relief: Increase the threshold for this relief to cover the amount a householder generally receives from renting out a room. The £4,250 limit has not changed since it was introduced in 1992. Raising it to reflect the increases in rents over the last 20 plus years would take many people, often those on low incomes, out of tax or reduce the need to submit tax returns. Such a move could be particularly helpful in London and the South East where accommodation is in short supply.
Simplify tax rules for visiting international sports people: Involvement of top sports people at UK events helps to attract a large gate, which brings business to a local area. The full economic implications are unclear but it would be helpful to cut the need for so many one-off exemptions to attract more large-scale sports events to the UK.
Commitment to capital allowances/annual investment allowance: Commit to keeping these allowances at the current rate to help businesses plan investment and prevent the pitfalls of a continually changing allowance. Let’s not forget that certainty helps businesses to plan and develop, which can only be good news for the economy.
Leave entrepreneurs’ relief alone: It is true that amounts paid out through Entrepreneurs’ Relief have risen in the last Parliament, but we think this is a sign of its success and shows how it can incentivise business people to set up and develop enterprises. With record numbers of people engaged in self-employment, the relief’s active support of the entrepreneurial economy is surely appropriate.
Lower business rates for SMEs: With business rates one of the largest ‘tax’ expenses for SMEs, surely it is time for a proper review of the burden these place on growing businesses.
Extend national insurance allowance for SMEs: Broaden the lower rates of NIC, currently applying to under 21s, to young graduates as a means to moderate youth unemployment.
Allow the research and development tax system to settle down: This would help to give businesses confidence to plan ahead! While recent changes have had a mixed reception, it is now important that the rules are left alone to encourage businesses to make appropriate investment potentially leading to economic growth.
Reform employment taxes: The operation of two separate tax systems for EMI schemes and CSOP plans is unnecessary duplication. A simple reform would be to abolish CSOPs but permit £30,000 of options to be granted to any employee of any suitable employer.
Permit the general anti-avoidance rule (GAAR) to settle down: This needs to be tested before bringing in further changes. In practice it appears to be working in terms of providing a healthy deterrent to abusive avoidance. If further changes are to be considered, the GAAR should also apply to benefit of taxpayers. As a result, taxpayers who are not trying to avoid tax could use it to protect themselves from falling foul of double taxation and other bear traps.
Some Budget predictions from Withers and EY, and a wish list from Smith & Williamson.
Sophie Dworetzsky: I suspect it is going to be an unexciting Budget, but that in all likelihood an emergency Budget will follow after the election. Nonetheless, I expect to see:
Chris Groves: This year's Finance Bill is likely to be one of the shortest in living memory, given that there is only a matter of days before the end of this Parliament to approve it. In light of the upcoming election, we should expect to see the announcement of a number of measures that will not take immediate effect, but will be timed to be brought in after the election, under a new government. With that in mind, we are likely to see the Conservatives and Lib-Dems seek to set some traps for the Labour party, including:
Judith Ingham: There is a good chance of some tightening up of the non-dom regime – either through specific measures or as part of a general clamp-down on abuses (which will certainly be mentioned) in light of the Stuart Gulliver publicity, amongst others.
We can also expect something on pensions, maybe some sort of review so it looks like action but isn't actually delivering changes.
A change to IHT is not unlikely, and perhaps the most likely option is to have no IHT on the first £500,000 worth of residence that gets PPR (the chancellor has allegedly told officials to come up with some eye-catching things and this would certainly be more interesting than a general increase in the nil rate band). IHT could not be abolished without a major recasting of CGT.
Julia Abrey: The elimination of deeds of variation for reasons of tax avoidance. This was attempted at the 1997 general election and then rejected but, following issues such as the Miliband family changing their deeds of variation over the family house, there is pressure to close them off. The reality is that people generally use them because wills have been incorrectly drafted, rather than for tax purposes, and this was the argument used to reject the change in 1997.
Chris Sanger, head of tax policy at EY, says: ‘On business taxes we will see more incentives and tightening of the rules. The vast majority of businesses (69%) are happy so far with the changes the chancellor has introduced to the tax system, as our recent survey showed. However, there are still outstanding elements in particular around investment allowances, support for SMEs and business rates.’
Extension of the £500,000 annual investment allowance (AIA): ‘The AIA is due to revert back to £25,000 this year. We expect the chancellor to prolong the £500,000 extension, or even to increase it, to allow the policy to further support the economy’s expansion.
New capital allowance for infrastructure: ‘To stimulate and support spending on critical infrastructure, we may also see the introduction of a capital allowance taking us back to the good old days of industrial buildings allowances. These allowed businesses to claim a tax deduction for a proportion of the cost of certain buildings.’
Introduction of a tobacco levy: ‘A new levy introduced in addition to corporate tax rates, based on a tobacco company’s market share is on the cards. We will be keeping an eye out for this announcement on Budget day as it may be the Chancellor’s way of laying the foundations to expand similar levies to other sectors in the future.’
Reform of business rates: ‘Following the announcement of the Government’s consultation, the Chancellor may use the Budget to provide details around the reform of what is an outdated system. How fundamental this reform will be remains to be seen and many will be hoping that the Chancellor will remove constraint that any review should be revenue neutral.’
Clarity around the implementation of the common reporting standard (CRS): Julian Skingley, EY partner in financial services tax practice, says: ‘We hope that the chancellor will announce when we can expect published legislation on how the CRS will be implemented in the UK. Regulation needs to be laid out by 30 March if they are to make it through this parliament before the general election, so the Budget is the last chance. The financial services industry has been waiting since July 2014, when the issue was consulted on, and, given the CRS implementation deadline of 1 January 2016, there is growing anxiety to understand the logistics and processes that will be required. Firms are already dealing with FATCA, so clarity around the CRS is needed sooner rather than later.’
Banks hope this Budget isn’t laden with surprises: Anna Anthony, EMEIA head of financial services tax at EY, comments: ‘Banks will be hoping the Chancellor does not announce further changes to the bank levy this year. In 2014, major banks in the UK paid a total of £2.2bn in bank levy, and were hit for a second time later in the year with a new restriction on the use of banks’ brought forward losses. This came in the form of an unexpected additional cash tax cost, aiming to raise £4bn over five years, and effectively equated to a 36% bank levy hike. It came as a very unwelcome surprise, and the industry will be hoping that this year’s Budget doesn’t come laden with more surprises.’
Disguised asset management fee income rules too broad: Fiona Carpenter, EMEIA head of hedge funds for EY, comments: ‘Investment managers will be keenly awaiting the Budget, in the hope that revised draft legislation and anticipated guidance on disguised management fees is narrower than the current broad scope. The rules need significant amendment as they currently have far wider ramifications than the stated policy objective, and the Budget is likely to be the last opportunity for the legislation to be amended before it comes into force on 6 April.’
David Kilshaw, private client services partner at EY comments: ‘We are unlikely to see the chancellor pull any rabbits out of his personal tax hat so don’t expect any major new announcements or changes. However, particularly as it is a pre-election Budget, the chancellor may choose to make tweaks to some of the existing reliefs and allowances that are already available. These will include measures to ensure that from 6 April non-residents will pay CGT for the first time when they sell residential properties in the UK.’
Below is a list of EY’s runners and riders on possible personal tax measures that could be announced in the Budget:
Pensions one year on: Malcolm Kerr, senior adviser to EY, comments: ‘This time last year, the pensions industry had no idea of the extent of changes that were on the cusp of being introduced. One year on and it is unclear how ready either the industry or customers are, and there are still numerous challenges yet to overcome. Now under a month from implementation, it will be interesting to see if the Chancellor gives some much needed clarity on detailed taxation implications in the Budget. Worse, of course, would be further tinkering, adding more complexity to the situation.’
Devolution: Sanger says: ‘In the Autumn Statement the chancellor announced that Northern Ireland would have control over its corporate tax rate. This raises questions as to whether corporate tax will be devolved to Scotland, among other powers, and what that means for Wales.’
Avoidance and transparency: Sanger says: ‘Tax avoidance will be a key theme in this Budget. We are likely to see more announcements building on recent comments on criminalisation of assisting tax evasion and the introduction of possible penalties for evasion and aggressive tax avoidance. More details around the implementation of country by country reporting may also be included in this Budget, as a result of the project by the OECD and G20 on base erosion and profit shifting (BEPS). Combined with the introduction of direct recovery of debts by HMRC, we should expect announcements of increased resources heading the Treasury’s way.’
Relief for the oil & gas industry: Derek Leith, head of oil & gas taxation at EY, comments: ‘We expect the introduction of a basin wide investment allowance (IA). This will replace the plethora of existing field allowances with a single cost based allowance. Effectively it will reduce the proportion of a company’s profits that are liable to supplementary charge. So for those companies investing in the UK continental shelf it will have the effect of lowering their corporate tax rate from 60% towards 30%. We also expect the Budget to contain transition arrangements ensuring that no company with an existing field allowance will be worse off under the new regime.’
Smith & Williamson believes HMRC needs to be adequately resourced so it can run an efficient tax system. This would benefit taxpayers - be they individuals, businesses, charities or others - as well as government, it says. As an example, HMRC’s front line tax teams are currently under-funded. It has insufficient staff with the necessary skills to provide clearances for businesses and taxpayers trying to navigate the complexities of the system and get their tax affairs right. If HMRC were suitably funded, the authorities would be more able to ensure taxpayers pay the correct amount of tax.
Smith & Wlliamson's Budget wish list is set out below.
Introduce progressive income tax rates: The current system of income tax rates includes anomalous peaks and troughs in the marginal rates of tax. The withdrawal of personal allowances for incomes above £100,000pa leads to a band of income taxed at a marginal rate of up 60%. The marginal rate then dips to 40% and rises to 45% on incomes above £150,000pa. These pinch points can distort taxpayers’ behaviour so we favour a more progressive approach which smoothes transition from one rate of income tax to the next.
Increase the higher rate income tax threshold: Continue to increase the threshold at which the 40% tax rate applies by gradually moving it upwards in line with the PM’s promise to take more middle income families out of higher rate income tax. Similar increases should be made to where the high income child benefit charge starts to apply to ensure that fiscal drag does not mean more families will start to be hit each year. Anything to simplify this system must be attractive!
Improve rules on the inheritance of ISAs: The current plans for transferring spouse allowances on death of one party are incomplete and complicated. We would like to see it possible to make a simple transfer of ISA savings via the estate to a surviving spouse or civil partner. This process needs to be simplified, ideally by permitting estates to hold ISAs and allowing the assets to be inherited by a spouse or civil partner under the terms of a will without any tax consequences.
Introduce relief for long term capital gains: Provide relief for assets held over the long term to encourage long term ownership of assets such as shares and enterprises.
Maintain pension contribution allowances: Review the present annual and lifetime limits on pension contributions, the associated tax relief and maximum pension fund once and for all as these are unduly complex and made worse with constant fiddling. These continual changes in rules turn the public away from committing to long-term pension savings. Why limit both the amount that can be put in each year and the size a fund can grow to? If the amount that can be contributed to the pension pot is limited to the current £40,000pa, why also limit the size of the fund? The result is, in our view, primarily a tax on good fund performance - how can that be justified?
Increase inheritance tax thresholds: Review the IHT system including gifts and exemptions. The allowances for annual, wedding and small gifts have been in place for over 30 years and have lost relative value. Many families would welcome an increase in these. Alternatively, simplify the whole system by abolishing these small reliefs and replace with a higher nil rate band.
Merge NICs with income tax: Align all NIC and income tax bands. While income tax only begins at £10,000pa for most people, National Insurance applies to earnings from £7,956 upwards. This anomaly hits hardest at those on short-term or seasonal contracts as NICs are levied according to weekly earnings, rather than total annual earnings. We recognise that the long-term wish to amalgamate the two systems may not be possible in the short-term, but a first step towards integration would be to align all thresholds.
Raise rent-a-room relief: Increase the threshold for this relief to cover the amount a householder generally receives from renting out a room. The £4,250 limit has not changed since it was introduced in 1992. Raising it to reflect the increases in rents over the last 20 plus years would take many people, often those on low incomes, out of tax or reduce the need to submit tax returns. Such a move could be particularly helpful in London and the South East where accommodation is in short supply.
Simplify tax rules for visiting international sports people: Involvement of top sports people at UK events helps to attract a large gate, which brings business to a local area. The full economic implications are unclear but it would be helpful to cut the need for so many one-off exemptions to attract more large-scale sports events to the UK.
Commitment to capital allowances/annual investment allowance: Commit to keeping these allowances at the current rate to help businesses plan investment and prevent the pitfalls of a continually changing allowance. Let’s not forget that certainty helps businesses to plan and develop, which can only be good news for the economy.
Leave entrepreneurs’ relief alone: It is true that amounts paid out through Entrepreneurs’ Relief have risen in the last Parliament, but we think this is a sign of its success and shows how it can incentivise business people to set up and develop enterprises. With record numbers of people engaged in self-employment, the relief’s active support of the entrepreneurial economy is surely appropriate.
Lower business rates for SMEs: With business rates one of the largest ‘tax’ expenses for SMEs, surely it is time for a proper review of the burden these place on growing businesses.
Extend national insurance allowance for SMEs: Broaden the lower rates of NIC, currently applying to under 21s, to young graduates as a means to moderate youth unemployment.
Allow the research and development tax system to settle down: This would help to give businesses confidence to plan ahead! While recent changes have had a mixed reception, it is now important that the rules are left alone to encourage businesses to make appropriate investment potentially leading to economic growth.
Reform employment taxes: The operation of two separate tax systems for EMI schemes and CSOP plans is unnecessary duplication. A simple reform would be to abolish CSOPs but permit £30,000 of options to be granted to any employee of any suitable employer.
Permit the general anti-avoidance rule (GAAR) to settle down: This needs to be tested before bringing in further changes. In practice it appears to be working in terms of providing a healthy deterrent to abusive avoidance. If further changes are to be considered, the GAAR should also apply to benefit of taxpayers. As a result, taxpayers who are not trying to avoid tax could use it to protect themselves from falling foul of double taxation and other bear traps.
