By Clare Munro, Tax Partner
In less than a week the new Chancellor of the Exchequer, Philip Hammond, will stand at the despatch box to deliver his first Autumn Statement. The economic and political landscape has undergone seismic shifts since the last ‘real’ Budget in March and so some fiscal reaction is warranted. But what?
Whilst sterling has recovered some of the ground it lost in the immediate aftermath of the Brexit vote, our exchange rate, widely seen as a barometer of our economic health, has deteriorated against most major currencies since June 23rd. That could well help in the campaign to boost exports and encourage investment, but is also likely to fuel inflation, due to increased import prices which, in turn will feed wage rise demands. A cut in the rate of VAT, possibly back to the 17.5% that we had in 2010-11, or even to the 15% rate that we briefly enjoyed in 2009-10 would dampen the inflation rate and, equally importantly, encourage consumer spending.
A VAT cut will, however, do nothing to reduce the national debt. For that, our new Chancellor will need to find ways to boost growth and productivity. Keeping the investment funds flowing into start-ups and SMEs is going to be important, and so it’s quite possible that the tax breaks on investment will be extended or enhanced. SEIS funding for start-up companies, for example, offers a 50% income tax reduction on investment up to £100,000. It has been a success story and one can see that limit being raised.
To quote Mrs May, “Brexit means Brexit and we’re going to make a success of it”. To do that, the UK economy needs to rebalance towards high skill and added value industries. The UK’s fledgling tech sector is a great example of that, and one which Hammond will want to encourage. The tax system already has generous allowances for research and development, especially for the SME sector but rates could be tweaked.
The regime for patented intellectual property, however, changed this year, with more restrictions being introduced as a result of OECD pressure to rein in these tax reliefs, which were considered ‘harmful and open to abuse’. Although the OECD is an international organisation, it depends on the co-operation of member countries for success and, with the accession of President Elect Trump, OECD projects like the BEPS anti tax avoidance project, may well get kicked into the long grass. In any event, as we exit the EU, the restrictions on state aid could be lifted, allowing for more generous incentives for innovation.
Pensions and property tax are tempting areas for a Chancellor who is looking for additional revenues and both have been raided in successive Finance Acts recently. One would hope that property taxation could be left to settle for the time being. Nevertheless, thinking back to Theresa May’s initial speech after becoming Prime Minister, which was aimed squarely at low income workers, it’s possible to envisage higher rate relief on pension contributions going altogether. Pensions might ultimately look more like ISAs than the system we now have.
Whatever Philip Hammond does on 23 November, one thing that all our clients need is more certainty and less tinkering with the system. The pace of change has been so rapid over the past decade, to the extent that we now have the longest tax legislation in the world. More and more burden is pushed towards taxpayers, and businesses in particular, and the government’s scheme to move entirely to digital compliance is only going to increase that load. All in all, Mr Hammond would probably win most friends in the business community if he stood up, announced a moratorium on tax changes, and then sat down again. Somehow it seems unlikely.
To discuss any points raised above, please speak to your contact partner or to our tax partner, Clare Munro on 020 7490 7766 or email firstname.lastname@example.org.