The key words in Chancellor Philip Hammond's first and last Spring budget were fairness, productivity and resilience. From a tax perspective, there was relatively little that was new or unexpected, but of the two biggest factors on the UK economy, Brexit was barely mentioned and Donald Trump was unsurprisingly completely absent.
After his Oscars-style thanks to everyone from the Chair of the Treasury Select Committee down to his Principal Private Secretary, the Chancellor spoke proudly about the performance of the economy since the Autumn Statement. He then admitted that notwithstanding impressive growth and improving borrowing numbers, which have seen a dramatic improvement in Government finances since the Autumn Statement, the Government had still had to borrow £100bn more than expected at Budget 2016.
This is the background against which the "new fiscal rules" are operating: any spending announcement must be matched by an equal increase in tax revenues. Therefore funding is needed for the £2bn boost to the social care budget, investment in schools, research and skills and caps on business rate increases and numerous other front page spending decisions.
The main headline-grabbing tax changes were the reduction of the new tax-free dividend allowance to £2,000 (from £5,000) from April 2018 and the increase of Class 4 NICs for the self-employed. Together, these were seen by some as an attack on the self-employed.
The key announcements affecting clients in our sectors were:
Corporate & Venture Capital
- Tax-free dividend allowance
The taxation of dividends was overhauled in April 2016 when dividend tax credit was abolished with a tax-free allowance introduced as compensation. The tax-free dividend allowance has now been reduced from £5,000 to £2,000 from April 2018.
- Increased NICs for the self employed
Class 2 NICs (a flat rate charge on the self-employed) will still be abolished from April 2018 as announced previously. However, class 4 NICs (also payable by the self-employed including partners) will increase from 9% to 10% in April 2018 and to 11% in April 2019 which will result in an increase in the total NICs payable by self-employed individuals with profits above £16,250. This increase will apply to profits up to the upper profits limit giving rise to a maximum additional NIC bill of approximately £750 per annum (on the basis of the 2017 limits).
- EIS, SEIS and VCT
The Patient Capital Review is aimed at ensuring high growth businesses can access the long-term capital that they need to fund productivity enhancing investment. Alongside identifying barriers to institutional investment in long-term finance, the review will also consider existing tax reliefs, such as the Enterprise Investment Scheme and Venture Capital Scheme, which are aimed at encouraging investment and entrepreneurship to make sure that they are effective, well-targeted and provide value for money. It is understood that a consultation will take place in May 2017 with a view to making recommendations which will then be announced in the Autumn Budget 2017.
We are expecting HMRC to publish its response to the Advance Assurance consultation at the end of March 2017. This consulation is important for many of our venture capital clients looking to raise funds through tax-advantaged schemes like the Enterprise Investment Scheme.
On R&D, as well as pledging investments in new technologies and developing technical talent, there has, as previously announced, been a review of the UK R&D tax credit regime which has concluded that this is an effective and competitive regime. No major changes are therefore being made to the fundamentals of the regime. However, the Government will make administrative changes to increase certainty and simplicity around claims and will take action to improve awareness of the regime among SMEs. Unfortunately there is no detail as to what this means in practice.
Additionally, as previously announced, the Government will legislate in the Finance Bill to amend the patent box rules for R&D cost sharing arrangements to ensure that such arrangements do not give rise to any unfair advantages or disadvantages. Following consultation, the draft legislation will be revised to narrow the definition of a cost-sharing arrangement and to align better the treatment of payments. We are awaiting revised draft legislation in this respect.
Tech & Comms and Life Sciences
The Chancellor announced a new £23bn National Productivity Investment Fund (NPIF) in the Autumn Statement. The initial investments to be made by the Fund have now been announced and should see additional funding available for clients in the following areas:
- 5G applications - the Goverment also published a new 5G strategy available here
- local transport networks
- aritificial intelligence and robotics, along with batteries for the next generation of electric vehicles
- STEM research - including an additional 1,000 funded PhDs
On the VAT side, which mainly targeted VAT avoidance concerns, the Government announced:
- A call for evidence on the case for a new VAT collection mechanism for online sales, to allow VAT to be extracted directly from transactions at the point of purchase. This is to further tackle VAT avoidance by overseas traders selling goods online to UK consumers
- the end of the UK's use and enjoyment provision for mobile phone services provided to consumers; this will impact mobile phone companies and consumers. The UK currently treats telecoms services used by consumers outside the EU as outside the scope of UK VAT, whereas VAT is applied to mobile phone services used by UK residents when in the EU, and recent case law has shown it is difficult to define and apply the use and enjoyment rule for telecoms services. The new measure will now bring these services within the scope of UK VAT, which according to the Government, will bring UK VAT rules in line with an internationally agreed approach.
Media, Entertainment and Sport
The Government is aware that some employers pay their employees in respect of their image rights under separate contractual arrangements to their usual employment contracts. They are, presumably, concerned that this creates potential for employment income tax avoidance. HMRC will therefore be publishing guidelines for employers who make such payments, to "improve with clarity" the existing rules.
Retail and Consumer
The Chancellor excitedly announced that the Government's as-yet-unimplemented Soft Drinks Industry Levy (the "sugar tax" to everybody but HMRC officials) is already having the desired effect of persuading manufacturers to reformulate their products with lower levels of sugar. Consequently, revenues for the tax which will come into force in April 2018 are lower than expected. The levy rates for added sugar drinks were confirmed as 18 pence per litre for drinks with a total sugar content of 5g/100ml, and 24 pence per litre for drinks with a total sugar content of 8g/100ml, with pure fruit juices and milk-based drinks exempt.
Anti-avoidance and evasion
Tax treatment of appropriations to trading stock: from 8 March 2017, businesses will no longer be able to convert capital losses into trading losses. The Government claims this will "eliminate an unfairness in the tax code which is being exploited in certain businesses". This is one of a number of measures which is described as anti-avoidance, but is actually simply a change in tax law.
Promoters of Tax Avoidance Schemes (POTAS): the Government will legislate to prevent promoters of tax avoidance schemes from circumventing the POTAS regime by re-organising their business by either sharing control of the promoting business or putting a person between themselves and the promoting business. The widening of the scope of those within the POTAS regime is a natural step in the Government's crackdown on the promotion of tax avoidance schemes.
Strengthening tax avoidance sanctions and deterrents: the Government has confirmed that it will introduce a new penalty for a person who has enabled another person or business to use a tax avoidance arrangement that is later defeated by HMRC. The Government will also remove the defence of having relied on non-independent advice as taking "reasonable care" when considering penalties for a person or business that uses such arrangements. This measure is part of the Government's drive to ensure that there is no place for "facilitators" or "enablers" of tax avoidance or evasion. The removal of the reasonable care defence means that it will not be possible to mitigate those penalties if non-independent advice was relied on. HMRC have not clarified what is meant by non-independent advice which represents a risk for business involved in enabling tax avoidance.
A requirement to correct: the Government has confirmed its commitment to require those who have failed to declare UK tax on offshore interests to correct the situation, with tougher sanctions applying to those who fail to do so on or before 1 October 2018. The measure will apply to all taxpayers with offshore interests who have not complied with their UK tax obligations as at 5 April 2017. Individuals or entities with assets or interests outside the UK should review their affairs to ensure that the correct declarations have been made.
Penalty for participating in VAT fraud: a new penalty will be introduced for those participating in VAT fraud. Following consulation, the naming of a company officer will now be limited to cases where the amount of tax due exceeds £25,000. The naming and shaming threshold has been changed to bring the amounts in line with other penalty measures. Thought should be given to the reputational impact of being named and shamed and whether there are steps that can be taken now to protect against this risk.
Tax rates and thresholds
As already announced for 2017/18, an individual's tax free personal allowance will go up to £11,500 (restricted if taxable income is in excess of £100,000) and the basic rate will increase to £33,500. This means that the threshold for paying higher rate tax will increase to £45,000 in 2017/18.
The Chancellor repeated his commitment to reduce the corporation tax rate to 17% by 2020. It will fall to 19% on 1 April 2017 from 20%.
Having sifted through the new announcements and consultations, this really seems to be a "wait and see" budget. Advisers and the public in general will have to wait and see the detailed legislation published later this month, along with further consultation documents and policy papers. And perhaps the Treasury is waiting to see what happens during the Brexit negotiations as well as the outcome of the US's proposed tax reforms.
Generally, this note only covers new announcements from the Spring Budget. The Finance Bill, due to be published on 20 March 2017, will contain additional changes announced in the Autumn Statement 2016 and earlier.
Please speak to your usual contact in the Tax department if you need any further information about any of the points raised in the Budget.