EY’s Autumn Statement predictions: Steadying the ship after the Brexit vote
12 November 2016
- Chancellor will look to provide stability in the run-up to start of exit negotiations
Chris Sanger, Head of Tax Policy at EY said: “The Chancellor heads into his first Autumn Statement with the economy following the Brexit vote faring better than many predicted. As a result, he may look to ready many of the measures used during past times of economic shock but may opt to defer unleashing them until the 2017 Budget. This points to an Autumn Statement of hints, winks and suggestions, but with the real action to follow in the spring.
“However, with the roadmap of his predecessor beset by the roadblock of Brexit, the Chancellor has an opportunity to set out his own vision for the UK’s future direction of travel. Businesses long for stability that will allow them to evaluate their UK investment strategies and give the Government a platform on which to promote the country’s attractiveness.”
Below is a selection of measures that EY believes the Chancellor could be considering:
Supporting infrastructure: “The Chancellor could consider various tax measures to boost infrastructure investment. These may include reversing the recent reduction in the annual investment allowance from £500,000 to £200,000. More substantively, we could see a systematic review of the incentives that the tax system creates towards investment, which could give rise to restoring relief for spending on industrial buildings and potentially going further.
“This pro-investment approach could also affect the proposals inherited from his predecessor, including providing exemptions from restrictions on interest relief for public benefit projects.
“The Government could revisit current plans to delay losses incurred in the early years of project construction being offset against income as the operations start to recover their costs. “Under these plans, tax would be paid well before businesses make an overall profit, potentially hindering up-front investment in large-scale projects.”
The tax rate: “The Chancellor has said he intends to stick with the initial plan to cut corporation tax to 17% by 2020 rather than opt for the further reduction mooted by his predecessor. If he does have funds to spend, he could look beyond corporation tax to a reduction in the employment tax burden, such as reducing the rate of employer National Insurance (NI) contributions to offset the increase in the apprenticeship levy.”
VAT: “A temporary cut in the rate of VAT to boost growth and spending could prevent prices rising due to higher import costs caused by the weakening of the pound. This would repeat the temporary reduction at the height of the financial crisis. However, consumer confidence appears to be solid so the Chancellor may choose to keep this up his sleeve for a later date.”
Disguised employment/IR35: “The new rules around disguised employment in the public sector are proving difficult to develop but could nevertheless be expanded to the private sector. This could affect many small businesses and mark a step-change in the direction of policy, driven by concern over losses from the Exchequer and a wider review of employment and self-employment.”
Tax administration: “The attractiveness of the UK is not just about the tax rate, but also the way tax is administered. HMRC sorely needs to put more resources into the front line of dealing with large taxpayers to counter the complexity of the current tax system. The Autumn Statement provides an opportunity to target additional funding for HMRC, with a view to strengthening its Customer Relationship Manager programme. It also offers the chance to support foreign direct investment and buy time while the Office of Tax Simplification seeks to untie the Gordian knot of complex legislation.”
Tax avoidance: “The Government will likely reaffirm its pledge to tackle tax avoidance. An update on this summer’s proposals to impose penalties on advisors is possible after the consultation on the plans recently closed. We can expect the Chancellor to reiterate the Prime Minister’s pledge that everyone must pay their fair share of tax. Individuals rather than businesses are likely to be the focus.”
Business rates: “The forthcoming revaluation of properties for business rates purposes will see a sizeable shift in the geographic spread of non-domestic rates with London picking up a greater share of overall burden. Since the last revaluation, the Government has increased business rates by 20% while English property values have risen by 10.6%. Without a change in policy, this revaluation will lock in this extra tax burden, penalising property-intensive industries such as larger retail and manufacturing. The Chancellor may therefore seek to soften the impact, such as though targeted relief on plant and machinery for manufacturers.”
Salary sacrifice: “Current plans on reforming the taxation of salary sacrifice schemes would, if implemented as proposed, undermine the effectiveness of the company car regime as an incentive to choosing low emission vehicles. We can expect the proposals to be changed and targeted elsewhere or abandoned.”
David Kilshaw, Private Client Services Partner at EY, said: “The Chancellor could start this term with a ‘spring clean’ that would enable him to make many reliefs less generous while improving others. There are currently around 1,000 tax reliefs in the system. Some are antiquated, others are not fit for purpose and some, in the Chancellor’s view, are too expensive.
“He may not want to be viewed as less innovative than his predecessor, who introduced investor’s relief. A new version of the enterprise investment scheme, which encourages taxpayers to finance smaller companies but is hedged around restrictions, could be on the cards.”
Non-domicile status/business investment reliefs: “Non-doms have been subject to a series of tax restrictions but it now looks likely that proposals will be relaxed as the Government looks to protect foreign investment. Plans to remove the tax exempt status of offshore trusts if any benefits were paid out are likely to be amended. Instead, capital gains would be taxed only in the event of a payment to a UK resident. Business investment relief or an increase in the lifetime ISA, despite recent criticism of the scheme, are options that might be on the table.
“The business investment relief encourages UK resident non-doms to bring money into the UK without an immediate tax charge if this is invested in a trading company. This relief is seldom used, however, because it has so many restrictions. The Chancellor has recognised the need to make the relief more workable and we can hope to see a remodeled version to help drive the economy forward.”
Entrepreneurs’ Relief: “This relief is intended to encourage serial entrepreneurs to reinvest their successes into new ventures in the UK, but is capped at £10m over the entrepreneur’s life. The Chancellor now has an opportunity to reset the approach and apply it once per investment. This would encourage those who are particularly successful to reinvest, which would benefit the UK, employees and the economy.”
Residence relief that exempts main homes from capital gains tax: “The Chancellor will probably see removing this relief as a step too far. He may opt to restrict it through removing an existing rule that makes the relief available for 18 months after an individual has stopped living in the home.”
Income tax: “Tackling what it considers to be social injustice and an imbalance of wealth is a priority of the Government. Overall, the cupboard of options looks bare but measures under consideration may include an increase in the personal income allowance that is not passed on to those already in the higher tax bracket.”
Inheritance tax: “Inheritance tax reliefs cost more than £20bn so may attract attention. The ‘nil rate band’ may be reduced or two key reliefs refocused. Currently, business property tax exempts businesses from inheritance tax on death. This exemption could be removed but it is more likely that the Chancellor will introduce a cap on the value of the relief. The scope of Agricultural Property Relief, which exempts farmland from inheritance tax, could also be modified.”
Financial services: Jeff Soar, UK head of Financial Services Tax at EY, said: “In recent years, the Government has increased the tax burden on financial services at almost every Budget. We hope that this Autumn Statement will mark the beginning of a new period of stability, at least in terms of tax, and that the Chancellor might even announce that there will be no additional major taxes to hit the sector for the remainder of this Parliament.”
Mark Persoff, Banking Tax Partner at EY, said: “The previous Government’s pledge to reduce the bank levy and restrict its scope to UK liabilities was welcome. The Autumn Statement gives the Government an opportunity to send a positive signal to the banking industry that the UK is open for business. Announcements might include an acceleration in the reduction of the bank levy rate, the narrowing of its territorial scope and a reduction or even abolition of the 8% surcharge for banks.”
Richard Milnes, Financial Services Tax Partner at EY, said: “The Government is yet to indicate the extent to which new interest restriction rules, due to come into force from April 2017, will apply to banks and insurance companies. But some of the possible implementation methods suggested in the UK’s consultation document could hit both sectors hard. It is therefore important that the Government recognises that existing regulation of the banking and insurance sectors means that, in practice, they cannot use interest deductions to shift profits in any case. Time is now very short to finalise the rules and a definitive announcement is long overdue.”
Holding companies: Chris Sanger added: “Building on the Britain ‘open for business’ vision, the Chancellor may also take the opportunity to modernise the rules for businesses disposing of shareholdings, to make the UK a competitive location for holding companies, particularly for fund investors.”
Pensions: James Tufts, UK Head of Life and Pensions at EY, said: “The pensions industry has had a tumultuous couple of years, and the dust is still settling. The new Cabinet has recently dropped the idea of a secondary annuity market and insurers will be hoping that nothing is added in its place.
“The impact of removing tax relief from pensions for high earners has had a negative effect on saving rates and there are signs that the constant change of the last few years has damaged customers’ confidence in the system. There seems a good chance that the Chancellor will move more slowly on pension reform than his predecessor.”
Infrastructure: Manish Gupta, Head of Infrastructure Corporate Finance at EY, said: “Despite the Government’s stated renewed focus on infrastructure investment, it will be very surprising if we see any new committed funding for ‘blockbuster’ infrastructure projects at this Autumn Statement. We know that there are projects waiting in the pipeline, but the funding gap between the public and private sectors needs to be bridged. The Chancellor will look to ensure that all infrastructure projects meet a minimum investment grade credit rating so they can be set up to take advantage of financing from UK capital markets.”
Housing: Russell Gardner, Head of Real Estate at EY, said: “We may see a relaxation of regulations making it easier to get planning permission. An extension of land remediation relief to a greater number of brownfield and industrial sites could be an effective way of spurring the housebuilding industry. An extension of tax relief or a repayable tax credit for housing projects is another possibility while owners of undeveloped or unoccupied land could be penalised through higher rates. A successor to the business property renovation allowance could also be on the cards as this is viewed as an ineffective incentive.”