Autumn Budget 2017 predictions: what to expect?
The Spring Budget brought some interesting announcements in the wake of the referendum. Growth in the UK economy had picked up through 2016; employment reached a record high of 31.8 million people. The Office for Budget Responsibility (OBR) forecast that the UK economy would grow by 2% in 2017 although while in 2009-10 the UK borrowed £1 in every £5 that was spent, it was set to be £1 in every £15 for this year.
In terms of tax, the Chancellor had announced a deferral of Making Tax Digital (MTD) for small businesses and landlords with turnover below £85,000, a reduction in the tax free dividend allowance form £5,000 to £2,000 from April 2018 and an increase in the main rate of NIC’s for the self- employed. Interestingly, in the aftermath of the budget, the hike in Class 4 NIC’s was scrapped, with a threat that this gap in revenues would have to be plugged in the next budget; MTD has been deferred for all by a year now and will now affect VAT registered businesses first as opposed to landlords and the self-employed, with the change in the dividend nil rate band being the only announcement where no major alternation to the original proposal was made.
So where do we stand today? Philip Hammond will be boosted by figures released this week that show the budget deficit is the lowest it has been for a decade. The Conservative manifesto promised “a balanced budget by the middle of the next decade”. Faced with slow growth and the possibility of a Brexit-induced contraction of tax revenues, the journey to deficit elimination looks precarious.
Given this is the second budget of the year, it is questionable as to whether there will be too many changes. That said, speculation is rising and we have summarised some of the rumors circulating in national press.
The Adam Smith Institute is one of the world's leading think tanks. On the 30th October it released a research paper calling for stamp duty land tax (SDLT) to be scrapped. It argues this on the basis that the current SDLT system hugely biases against mobility, that taxing housing transactions keeps people in houses that are either too small, too big, or too far away from jobs, which is especially harmful when the housing supply is so tight, as it is in the UK today.
They suggest in the short term the Treasury should rationalise its property taxation system by abolishing SDLT altogether, and then eventually roll council tax and business rates into one sys¬tem, with everyone paying the same rate, set at roughly 20% of imputed rental income. This would be comparable to extending VAT to property services. They predict that this would be roughly fiscally neutral on a static analysis, but may lead to large increases in revenue over time.
A scrap of SDLT for first-time buyers might at least win back some younger voters for the Conservatives.
The Government pledged to maintain the state pension triple lock (a guarantee to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5%) earlier this year, a guarantee that is costing the Government money that some would argue it can not afford. This means that it is possible the Chancellor will target pension’s relief in this budget. Even the OECD came out earlier this year to say that the triple lock was ‘putting one group in society [pensioners] on a pedestal over another’.
While some reports suggest the Chancellor may be considering moving to an overall flat rate of 33%, a change that would hit middle income professionals hardest, other reports suggest Hammond is considering a flat rate of 20% for all.
In July, the government published a review into working practices in the modern economy. The Taylor Review recommended auto-enrolment into pension schemes for the self-employed through self-assessment. Under this system, the automatic pension scheme would acquire 4% of a contractor’s income, unless they chose to opt out. The budget will reveal whether the Chancellor has taken this advice.
After the Chancellors monumental U-turn on the Class 4 NIC increase announced in the last budget following public backlash, it is little wonder NIC’s are back in the spotlight. Yet again the OECD has wadded into the discussion calling on the Exchequer to revive the proposal to “improve fairness in tax policy and reduce risks for the financing of the social insurance system.” There is after all a £2bn 5-year hole still remaining from the reversal.
Bright Blue, a prominent Conservative think-tank is warning Philip Hammond against giving high-paid graduates a handout by cutting the interest rates on student loans in a bid to win over younger voters.
Instead, the think-tank is suggesting the Government should raise the earnings threshold at which graduates start to repay their loans to £25,000 – currently set at £21,000 a year. The chief-executive stated “this would mean all young people repaying student loans would pay a smaller amount from their salaries each month. It would effectively be a tax cut for graduates”.
However the real question should be how much it costs. Those who benefit most from the current system are the lowest and highest earners. Graduates whose earnings spanning their career remain low, will make minimal repayments and have a large amount of debt written off after 30 years. Research by the Institute for Fiscal Studies suggests three-quarters of graduates will not pay off their loans in full, even if they continue making payments into their 50s.
Meanwhile, very high earners will pay down their debt quickly, minimising the amount of interest that they need to pay, which can be significant.
Those who sit in the middle pay the most. They earn enough to make significant repayments but they do not earn enough to clear the debt quickly. The result is that they can pay punishing amounts of interest.
Other possible proposals being discussed are a cut in tuition fees to £7,500 per annum from their current £9,250 level, and differing fees for different subjects could also be introduced and may depend on the course’s employment rate.
The Enterprise Investment Scheme (EIS) provides 30% tax relief for investments in high-risk private companies and has the capacity to reduce a wealthy individual’s tax bill by up to £300,000 a year. The scheme, along with its sister Seed EIS has been put under review this year so it is possible that the budget could set out changes.
This tax relief is attracting the Treasury’s attention as it is costing more than expected. A report published by the National Audit Office in 2013 revealed that the cost of Entrepreneurs’ Relief in 2013/14 was three times more than originally expected. If the Chancellor decides to restrict Entrepreneurs’ Relief this could leave individuals holding investments that will attract a higher tax liability than they had expected potentially undermining investor confidence and discourage future entrepreneurial activity. Combined with growing speculation about a potential increase in interest rates and in the midst of mounting Brexit uncertainty, it may be an imprudent move for the Chancellor to attack Entrepreneurs’ Relief at this stage.
This Budget is an unenviable task. The Chancellor will be torn between acting in the interests of the economy in the context of Brexit, while maintaining prudence over spending, appealing to the younger voters that the Conservatives appear to have lost in the election and ensuring a tax system that is fair for all. We await the 22nd November where no doubt professional advisers all over will be watching with popcorn at the ready.