Market leading insight for tax experts
View online issue

Summer Budget Q&A: Osborne unbound

printer Mail
Those who had spent the run up to 8 July wondering how the chancellor was going to pull off the usual post-election tax grab, having previously placed a lock on his main revenue levers, will have been taken aback by the breadth of George Osborne’s sweeping ‘one nation’ Budget. From further cuts on the corporation tax rate to deeper cuts in working age welfare benefits, the first Tory Budget for 18 years has gone for wide-ranging reform, but has also boosted the tax take to a remarkable extent.
The key headline message from the chancellor today was his commitment to eliminate the deficit and run an overall surplus to start paying down the debt. His prescription for achieving this boils down to the need for a further consolidation of some £37bn over the period of the current parliament. Having swiftly identified where this consolidation would come from (£12bn in welfare cuts, £5bn from clamping down on avoidance and the rest to come from the Autumn Spending review), George Osborne was free to turn his mind to reforming the tax system to further boost the UK’s prospects for growth. And at heart of that reform lies Osborne’s continued commitment to lower tax as the key to prosperity.

What kind of Budget was this?

Conventional wisdom tells us that the first Budget after an election tends to be a cash grab, as the chancellor seeks to fill the exchequer’s coffers, safe in the knowledge that his predations will be long forgotten by the time of the next election. This temptation is usually tempered with the chancellor’s desire to be recognised for introducing more principled, reform minded changes that overhaul the system in pursuit of some wider ambition.
This chancellor has sought to have his cake and eat it. On the one hand, this was clearly a reform Budget, with Osborne free to pursue an agenda aimed at reforming the UK tax system in the long term direction of the low tax ideal. His reforming zeal extended to changing the taxation of banks and to opening up thinking completely on the future of pension tax relief. But some of the principled reforms have also produced significant increases in the tax take.
One example is the new tax regime for dividends, with its top tax rate of 38.1% – an easy number to remember? As the UK cuts corporation tax even further, despite already offering the lowest corporation tax rate in the G20, the incentive to incorporate in order to reduce tax increases. To head that risk off, the chancellor has changed the rules on dividend taxation, finally abolishing the imputation system and bringing in a 7.5% increase. This measure helps to support the principled reform to the main rate, but it brings in almost £9bn on its own over this parliament.

So was it all principled reform?

No, there were also some good old fashioned cash grabs. Prime examples here would be the acceleration of corporation tax payments for the most profitable companies and the 3.5 percentage point increase in insurance premium tax (raising £1.5bn by the end of 2020/21 and over £8bn over the parliament). The cash grab on corporation tax shouldn’t impact companies’ profit and loss accounts (since it’s a shift from deferred tax to current tax) but, like the impact on the landlord of paying your rent in advance than arrears, will nevertheless boost the Treasury’s coffers, to the tune of over £7bn.

Okay, so more conventionally, what did he do for business?

The most eye catching change was, of course, the reduction in the headline corporation tax rate from 20% to 19% and then 18%. This was something of a surprise and, at least in the short term, puts some clear water between the UK and the rest of the G20 (with the lowest of the rest being 20%, currently held by Russia, Turkey and Saudi Arabia). This change reinforces the message that Britain is open for business. 
The other, far more heralded, announcement was the ‘increase’ in the annual investment allowance. The increase next year of the allowance from the previously announced £25,000 to £200,000 will be welcome, but is nevertheless far less than the £500,000 that we have currently. We also have the commitment that this will be ‘permanent’ – something I remember other chancellors saying about first year allowances that were changed pretty quickly nonetheless.
On the banks, the story was more mixed. The scorecard shows additional revenues over this parliament, with a new supplementary charge, much like that which applies to oil and gas. However, this is coupled with a reduction in the bank levy and, by 2021, the moving of the levy onto a territorial basis. Overall, this should provide a more sustainable, slightly lower burden on the banks after this parliament, but nevertheless increase the chancellor’s funds in the meantime.
For the small and medium sized businesses, there was the £1,000 increase in the NICs employment allowance, although owner-managers will also be affected by tax on dividends.

So much for business, what about individuals?

On the personal tax front, this Budget ploughed the familiar furrow of increasing the personal allowance (up to £11,000), along with an increase in the higher rate threshold (to £43,000). It also saw the chancellor finally bring in the long cherished £1m allowance for inheritance tax. This was delivered through a rather convoluted reform, focused on the passing of a parent’s main residence down to a child or lineal descendant, at some point in their life. Whilst this may limit the costs of reaching the £1m target, this must be an area ripe for review by the Office of Tax Simplification.
Against that, the further raid on the pension tax relief of the highest earners, included as a manifesto commitment, clawed back another sizeable sum (£4bn over the parliament) for the exchequer. Also on the downside was the new restriction on interest incurred in funding buy to let properties, something new but which nevertheless featured on Radio 4’s Money Box programme in the week before the Budget.
At the same time, the chancellor closed by stealing Labour’s clothes with the introduction of a national living wage for the over-25s – something that may have a wide impact on both employees and businesses.

Any other tax innovations?

The end of the last parliament promised new taxes, both with the diverted profits tax and the prospect of a new levy on tobacco companies. However, yesterday we saw what might be the turning of the tide, with the reduction of the bank levy and the idea of the tobacco levy being dropped. In contrast, hypothecation (i.e. the earmarking of funds from one particular tax to a particular spending programme), for long an anathema to the Treasury orthodoxy, makes a back-to-the-future appearance as vehicle excise duty is once again to be earmarked for the roads programme.

What about special groups like the non-doms?

They are less special than before. While recognising that completely abolishing the non-dom rules could damage the UK’s competitiveness, the chancellor has sought to make it clear that the rules are only to provide a temporary relief from tax. He addressed what he sees as the unfairness of special treatment being handed down through the generations (hence the duration of non-dom status being reduced); and of some UK residents being able to avoid tax on their residential property by using offshore structures. 

What else?

It wasn’t all about the numbers. The chancellor also announced a ‘business tax roadmap’, to be delivered by the next Budget, as well as more spending on HMRC to tackle tax evasion, avoidance and aggressive tax planning by large businesses. This will raise £1.6bn and will include consultation on measures to promote further compliance and transparency, including the deployment of ‘special measures’ and a ‘voluntary’ code of conduct. We can expect to hear more soon on this.

How would you sum it all up?

On the one hand, this was a principled, reform-minded Budget, with significant long term tax cutting changes to some of the key elements of the system (including the corporation tax rate and personal allowances). Listening to the chancellor’s speech and reading through the Red Book, there was a clear and coherent reform rationale running through the Budget. The first impression was very much one of a balanced approach. 
However, standing back from the political theatre of it, and digging into the numbers, a different story starts to emerge. This was very much a tax raising Budget, with the tax take overall up by some £29bn over the parliament. 
The chancellor clearly wanted to fill his coffers now, fresh from the election victory, but has done so in a manner that is widespread. The second chart (below) shows from where the increased revenue and the few cuts come.
So, this is a reforming Budget that sets in place the elements for a lower tax future in the long term, but manages to boost the government’s coffers greatly in the short term. Quite an achievement.