Budget 2016 may have only been eight months ago, but the world now looks a very different place. When Chancellor of the Exchequer Philip Hammond gets to his feet this week, everybody will be hoping for messages of calm control, a clear plan in uncertain times and a sense of purpose and direction.
The big question, of course, relates to the financial projections for the economy. The number of HMRC consultations which have been published during the last eight months; the amount of debate which these have generated; and the volume of contributions not only by individuals, businesses and the professions but also by the Office of Tax Simplification, suggests that this may well be a tax-heavy Autumn Statement. That would be the case even if the Chancellor did no more than to develop the ideas which are already in the pipeline. But what about new ideas?
Mr Hammond’s spokespeople have already indicated that he does not feel bound by all the policies of his predecessor George Osborne. So we could see a shake-up if he decides to pull a few rabbits out of the hat. At RSM we’ve come up with a few predictions of our own on what these might be.
This Autumn Statement is the chance for the new Chancellor to set out his own course, rather than being bound by the former Chancellor’s strategy. Now is surely the time to ensure minimal loss of tax revenue as UK and overseas politics impact on the UK’s economy.
While it’s clear that changes to the taxation of non-doms have been coming for some while, there are wider implications which could be scaled back or delayed. The new deemed domiciled status, achieved after being resident in the UK for 15 years out of 20, appears to be well on the way to becoming law in April 2017. However, changes to the taxation of offshore trusts and UK residential properties held via offshore companies could be reviewed further, due to a very late consultation and the complexities of current proposals. As my colleague Gary Heynes notes, this could mean a delayed implementation, sensibly giving taxpayers, caught by retroactive rules, to rearrange their affairs in a reasonable timeframe.
Another key area for individual taxpayers is the Government’s proposals for simplifying the tax position for sole traders and partnerships, as well as property landlords. Simplifying the tax reporting for many more small businesses should encourage greater entrepreneurship and we would welcome the changes going as far as possible. Tax is normally paid on profits calculated on the accruals basis, being the income due to be received less any expenses due to be paid. This can result in timing differences and more complexity in drawing up accounts.
The ‘cash basis’ is a more straightforward way of calculating profits based on what income has been received, less any expenses actually paid and the Government intends to allow up to 175,000 more businesses to take this route for their accounts as part of the move to Making Tax Digital (MTD). MTD will see the need for taxpayers to regularly provide information on their profits to HMRC and using the cash basis will simplify that interaction for many taxpayers.
Then there are potential ways to respond to the international tax environment, already in the midst of serious change as a result of the OECD’s crackdown on multinational avoidance, and possibly now on the verge of turmoil if Donald Trump presses ahead with his tax plans. If Trump introduces a profit repatriation tax rate of only 10 percent, less than a third of the current rate of 35 percent, the consequences could be momentous, with unprecedented monies flowing into the US domestic economy. The plan also includes a reduction in the main rate to 15 percent, moving the US from one of the highest tax jurisdictions in the world to one of the lowest.
We have talked about the UK government slashing corporate tax rates over recent years, but nothing of this scale. The rate, which is currently 20 percent, is set to fall to 19 percent from April 2017 and then 17 percent from April 2020 under already enacted legislation. In the aftermath of the referendum, George Osborne said that the UK’s corporation tax rate might need to fall even further, to a rate of 15 percent, to encourage investment into a post-Brexit UK. Whatever Philip Hammond may have been thinking before, he might now have to accept that the US may be about to claim the prize as having the lowest rate in the G7.
Will we see new measures aimed at harmonising income tax and national insurance contributions? The PAYE and NIC system, which was designed for a very different labour market, is straining at the edges and is in need of fundamental reform. What is required is an overarching review of the whole basis of the employment tax system, as my colleague Andrew Hubbard has noted.
The problem that the government faces is that there are now huge pressures on PAYE and NIC, each of which is significant on its own but which cumulatively could fundamentally affect the tax base. Some of those include:
- The emergence of the so called ‘gig’ economy: The Uber decision makes it clear that the old employed/self-employed distinction is not binary: there is a third category of ‘workers’, who are neither employees or self-employed. The tax system doesn’t yet deal properly with this important group.
- The continued use of personal service companies. The IR35 legislation, which was supposed to tackle the issue, has been on the statute book since 2000 but in practice it has had very little impact.
- Remuneration arrangements involving complex offshore structures, loans and third party vehicles, which continue to be promoted.
- The popularity of salary-sacrifice arrangements. Many, though not all, of these will result in a reduction in tax liabilities
The Office of Tax Simplification has taken a strong lead here. This week it has published a very thoughtful and well-researched document on PAYE and NIC alignment for employees. HMRC has also been consulting in some of these areas – for example on the use of personal service companies in the public sector and on PAYE avoidance via disguised remuneration. So I will be looking closely at what the government has to say about the future direction of employment taxes.
What we have at the moment will not collapse tomorrow, but over time it will become more and more distant from the reality of modern employment practices. Now is the time to have a root and branch reform of the whole structure. Will the Chancellor be brave enough to fire the starting pistol? I hope he will.