This Parliament started with the abolition of the Pre-Budget Report, which was considered by many to be a mini-Budget allowing the chancellor to tinker with the tax system twice a year. In the honeymoon period of the coalition, the government heralded a new era of Autumn Statements, in which the chancellor would merely update Parliament on the economy rather than add further complications to the tax system. This week’s Autumn Statement was a reversion to prior form and even more like a Budget than the one in March, with 59 policy measures compared to 56 earlier this year.
So, what was contained in those measures? The answer is a veritable smorgasbord of tax measures, combining anti-avoidance with incentives, and small reductions with fundamental reform, either delivered (in the case of stamp duty) or promised (in the case of business rates).
Aren’t these stamp duty reforms long overdue?
In short, yes. The previous ‘slab’ system had a rate structure which increased as property value increased, but applied the higher rate to the entire purchase price of the property. This created distortions in the market, making it difficult to sell properties valued just above each threshold. The system was already being reformed in Scotland through the land and buildings transactions tax (LBTT) and estate agents and mortgage lenders have been calling for change in the rest of the UK for some time. The new system will apply the tax rates in a similar way to income tax, with each higher rate applying only to the value in its band.
This was the chancellor’s single biggest giveaway in the Autumn Statement, effective overnight and costing around £800m a year. Although purchasers of homes at the higher end of the market will be subject to significantly increased bills, all purchasers of homes below £937,500 will pay less. Even for homes above £937,500, there is a surprising group of winners: purchasers of homes from £1m to £1,125,000 will also pay less, arising from the sudden increase in duty at £1m under the old slab system.
Given that the new system applies in Scotland, preempts the move to LBTT and is considerably more generous (for example with the 10% band starting on £925k in the UK but £250k under LBTT), the cut will create a potential headache for policy makers north of the border. No longer is the move to LBTT ‘revenue neutral’; instead, it represents a significant increase in the tax burden. This may not be popular with the Scottish electorate.
What is this ‘diverted profits tax’ all about?
If you are looking for details, you’ll need to wait a week until ‘legislation day’. The chancellor described this as a 25% tax on profits generated by multinationals from economic activity in the UK ‘which they then artificially shift out of the country’. Politically, this policy is a response to the public and media scrutiny of large corporations’ tax arrangements and, given the higher rate, appears designed to encourage companies to change their structures, rather than to pay this tax.
This policy is one of the biggest revenue raisers in the Statement, raising around £1.4bn over five years. This is only surpassed by the £1.9bn saving generated by new employer contribution rates for public service pensions; and the £3.5bn cash flow raid on the banks, by allowing only half of their taxable profits to be covered by brought-forward losses, leaving the rest liable to tax.
And was there much else on tax avoidance to note?
There certainly was. Once again, the chancellor has looked to tax avoidance as his primary means of raising additional revenue for the exchequer in what was, overall, a revenue raising statement (see figure 1). In total, £8.5bn of revenue was raised over the scorecard period from measures related to BEPS or ‘avoidance, tax planning and fairness’ (see figure 2). Other significant measures include: higher charges for individuals with a ‘non-domiciled’ status who have been in the UK for long periods; a significant increase in the annual charge on properties worth over £2m that are ‘enveloped’; and a number of other measures relating to self-incorporation, salary sacrifice, expenses, share schemes, disguised income and the use of umbrella companies.
Is tax going to be increasingly devolved?
Yes. The Autumn Statement came hot on the heels of Lord Smith’s Commission on Scotland, which set out proposals for the devolution of income tax rates and thresholds, but not for the devolution of corporation tax. In contrast, the chancellor confirmed that the government would devolve corporation tax setting powers to Northern Ireland this Parliament, provided that the Northern Ireland executive can show that it can manage the financial implications. As with the change to stamp duty, this will again prompt calls for more reform in Scotland.
For Wales, there was also an announcement on the devolution of business rates and further discussions on the devolution of further powers to Wales in the period up to next year’s Budget.
Anything else worth knowing about?
For an Autumn Statement that could have been low key, there was a lot to take in. The increase in the personal allowance to £10,600 in 2015/16 with no reduction for 40% taxpayers, the abolition of air passenger duty for children and the continued fuel duty freeze despite falling oil prices were all designed to appeal to voters ahead of next year’s general election. On business rates, there was further support for small businesses and retailers, a continuation of the 2% increase cap in 2015/16 and the commitment to a full review of the structure of the tax.
What next?
Further detail on many of the announcements will become available when draft finance bill clauses are published on ‘legislation day’ next Wednesday (10 December).
Figure 1: Total impact on revenues raised through Autumn Statement tax and spending policy decisions
Figure 2: Cumulative revenues raised through Autumn Statement policy decisions from 2014/15 to 2019/20 by policy area
