July 2020 Economic Update – Wish list
The Chancellors announcement on the 8 July will be a summer economic update which will focus on 3 areas: Supporting Business, Supporting Labour Markets and Supporting Consumption, with new measures expected to help the economy move out of the Coronavirus lockdown and get the country working again.
Policies and public projects focussed on infrastructure, green energy and renewables, off-payroll rules, and training and apprenticeships levy, amongst others, will likely be announced and support the first phase of the Governments recovery plan to “Build, build, build”.
In this exclusive article, our experts give their views on the UK’s economic outlook, some of the changes expected to be announced and their potential impact on rebuilding the economy in a post-Covid environment.
Proposed off-payroll rules and their affect on the agility of the Private Sector
By Nigel Morris, Chris Blundell, Richard Maitland
Will this be the ‘moment’ that the Chancellor shows his hand regarding plans to get the IR35 legislation back on track for April 2021 and include the potential to use it to recoup some of the support given to the self-employed during the pandemic?
The deferral of IR35 has been helpful in providing much needed agility in the jobs market and support for businesses during these last few months. It is still unclear though what the economy and the country will look like in April 2021 which could cause difficulties with the introduction of the new IR35 rules. However, the legislation is still focused on April 2021 and so the Government will need to address whether they outline the road map now or wait to provide detailed revisions in an Autumn Budget. Balancing the country’s need for agility, flexibility, and innovation with the Government’s need to generate increased tax and National Insurance will not get any easier!
R&D tax credits scheme
By Jay Bhatti, Gareth Peters, Alison Conley, Scott London-Hill, Marc Mann
Enhancements to R&D tax credits could boost innovation in start-ups and SME’s, helping them to bounce back from the impact of the Coronavirus pandemic. Our R&D team outline potential solutions, including improving incentives for medical research and renegotiating the application of state-aid rules. Read the full article here.
By Laurence Whitehead
There is likely to be some big fallout from the three Covid-19 business support schemes offered by the Government, simply because not all businesses will prosper post-lockdown causing loans to become toxic. The Bank of England has been warned that around £35bn of emergency Covid-19 loans to businesses are at risk of turning toxic, which will inevitably impede economic recovery.
A report by the Recapitalisation Group forecasts a huge increase in lending by the second quarter of 2021 through the government’s three initiatives from £27bn to £123bn, with £32bn- £36bn of that being unsustainable.
Therefore, finding solutions supported by both the private sector and the government is critical. We may see some comment on this in the announcement given that, if the government is writing off billions of pounds of loans that it guaranteed via the schemes, this will need to be funded somehow. One potential solution could involve exchanging potentially toxic CBILS for preference shares and/or swapping BBLS for contingent tax instruments, which will only be repaid when certain payment thresholds are reached. Other measures from the Treasury could see changes to the rules on the allocation of defined contribution scheme funds, to get more pension fund monies into private businesses. Healthy businesses are regarded as essential to any economic recovery so it will be very interesting to see how the Chancellor plans to deal with this looming problem, as the level of government-backed loans increases significantly over the coming months.
Temporary reduction of the VAT rates and business rates for the Hospitality sector
By Chris Sutton
Once the hospitality sector has re-opened, measures will be needed to stimulate demand, which may take the form of a reduction in the VAT rate. On the other side of the profit and loss account, the sector really needs further and continuing help with costs such as business rate holidays, continuance of the furlough scheme for hospitality staff, as it will in all likelihood be some sometime before hospitality businesses can run anywhere near levels which will be profitable. Another support measure could involve some form of temporary reduction in or rebate on employer’s National Insurance.
Changes to Training and Apprenticeship Levy
By Richard Maitland & Nigel Morris
Boris Johnson said at the start of June that “young people, I believe, should be guaranteed an apprenticeship” and we expect that apprenticeships and other training schemes will be at the heart of the government’s plans to reinvigorate the economy.
The Apprenticeship Levy has been payable by larger UK employers since 2017, with all employers potentially able to access funds from the levy to spend on qualifying apprenticeships. We may see this levy being extended or adapted to support the post-Covid-19 employment landscape, linked perhaps to a new skills fund to retrain workers who have been made redundant. Some apprentices are also entitled to a lower rate of the national minimum wage of £4.15 per hour, compared with £8.72 for the top rate. Whilst raising the minimum wage overall is thought to be one of the options being considered by the government, we expect the system will continue to incentivise employers to take on apprentices by maintaining the use of a relatively lower rate for these workers.
If we focus on training or re-training, there is the potential for significant funds to be allocated, particularly focused at the younger generations, to train or retrain workers laid off when the furlough scheme ends. This could take the form of tax incentives or direct subsidies for employers who hire new staff and ties in with the Prime Minister’s view that regrettably many job losses are inevitable due to the fallout from Coronavirus and the Government needs to continue to be active and interventional to support young people in particular, and look to guarantee apprenticeships, as well as looking after people across the board.
Stamp Duty Land Tax (SDLT) to stimulate the housing market and the economy
By Chris Denning
According to reports the Government and the Chancellor are looking at introducing measures around three core concepts supporting business; supporting labour markets; and supporting consumption when we get the statement about the UK’s economic future following the Covid 19 pandemic in early July.
Clearly, spending measures will be key along with a focus on infrastructure as a key fiscal multiplier, and a radial review of the fiscal regime around the UK property market remains long overdue. The UK property sector impacts all three areas of focus so is now the time to consider some fundamental changes to the way it is taxed? The answer is likely to be no and perhaps not because of desire but moreover because there would appear to be a complete lack of data and analysis on which sensible, informed decisions can be made.
By way of illustration one only needs to read the House of Commons briefing paper on Stamp Duty Land Tax (SDLT) on Residential property published on 11 June 2020:
There has been much debate over the effectiveness of transaction taxes versus, say, annual taxes on property value (e.g. a “mansion tax”) and this paper continues along these lines. It is however very binary in really focusing on the impact of the various changes over the years to SDLT and the consequent SDLT yield. In 2018/19 stamp duty land tax receipts (in England and Northern Ireland) were roughly £11.9bn billion being £8.4bn from residential property and £3.6 billion from non-residential property. This needs to be considered in light of the total tax revenues according to Statista.com of £623.36bn. So SDLT accounted for 2% of the total.
There is little focus on the wider impact on tax receipts this sector has on the rest of the economy. There is a mini economy for example around every single residential property transaction, from possibly freeing up capital and spending on professional fees, DIY, carpets, home furnishing, white goods etc., so there should be a focus on fiscal measures which increase liquidity and demand. To do this however, any structural review of property taxes needs to take a different approach and include data and analysis these transactions have on the wider economy. Therein lies the problem.
Find out more
Visit our Spotlight On: UK Economic Update page to read more of our exclusive coverage of this key Government update and to sign up to our special webinar with Global Economist, Professor Joe Nellis.