The Chancellor may have given a smooth delivery in the commons, but according to the multinational, EY, the devil in the details may prove more tricky to sell.
Budget for Business
According to Chris Sanger, Head of Tax Policy at EY, this was a budget for business, yet one which sees larger firms paying for the cuts for small ones.
Small business received one of the biggest giveaways in this year’s Budget. The threshold for small business rate relief will rise to £15,000 exempting 600,000 business from rates altogether. While corporations got a tax cut too, they may be stung in other areas.
“There is the sweet taste of stimulus for small businesses, whether positively through business rates or neutrally in exceptions to tax relief restriction,” said Sanger.
“The taste for big businesses is less easily determined. The cut in corporation tax will help, as will deferral of the announced advance in payment dates, but the seven other changes to corporation tax will raise over £9bn over the budget period. Whether you like the dish the chancellor has served depends very much on which menu you are ordering from.”
David Kilshaw, Private Clients Services partner at EY, acknowledged the political capital in raising the personal allowance to £11,500, but suggested other means would be more appropriate to helping the worst off.
“Many basic rate taxpayers will benefit from the increase to the personal allowance,” he said.
“However, for the lowest paid the personal allowance is already pitched above their earnings - an increase in the National Insurance thresholds would have had a more significant impact on their wallets.”
The chancellor announced the creation of a new Lifetime ISA available for individuals under 40 which will see the government top up annual savings of up to £4,000 by 25 percent. Despite being one of the more eye-catching and popular motifs of the Budget, for Jason Whyte, Director of the Insurance Sector team, the scheme represents a deferral of tackling Osborne’s more pressing concerns, and may in practice be more difficult to manage.
“The introduction of Lifetime ISAs feels very much like a ranging shot. It’s likely to be popular and it won’t upset those people already saving into pensions - but it doesn’t address Osborne’s larger concerns about the level of pensions tax relief or the cost of public sector pensions. Expect Osborne to come back to this theme once the referendum is done,” said Whyte.
“In the long run it raises some big questions. How will it sit alongside auto-enrolment? Will employees opt out of workplace pensions to save into Lifetime ISAs? Will they get support to choose between them? The questions only get bigger if Lifetime ISAs ultimately replace pensions.”
Capital Gains Tax
CGT tax investors’ relief appeared to be another sweet giveaway, but as David Kilshaw, Private Clients Services partner, commented, it looks better on paper than in practice.
“On a first reading this relief will be hugely attractive, but there will be a dawning realisation that it can be notoriously difficult to extract value from private companies and this may dampen the enthusiasm of investors,” he said.
Oil and Gas
Another headline announcement was the tax rate reduction for oil and gas companies. But according to Derek Leith, Head of Oil & Gas Tax, the windfall still falls some way short.
“Today’s announcement of a 10% cut in corporate taxes, and the effective abolition of Petroleum Revenue Tax for the UK oil and gas sector will fall short of industry expectations. The case for a significant change to the oil and gas regime has been exacerbated by the collapse in the oil price. Decisive action by the government was required to send a strong signal to investors.
“Today’s changes, while welcome, are a missed opportunity to be more radical and abolish supplementary charge completely which would have simplified the regime by sweeping away the complexity of investment allowance and its interaction with decommissioning losses.”
Leith added: “The industry will be very relieved that the proposed restriction on trading losses will not apply to oil and gas companies, and appreciative of the announcement clarifying tax relief on retained decommissioning activities.”
Overall, Martin Beck, senior economic advisor to the EY Item Club, felt that the revision in productivity figures ‘had blown a sizeable hole in the public finances.’
“The Budget was framed by the OBR’s more pessimistic view of future productivity growth. This means that the level of GDP is 1.5ppt lower by the end of 2020 than had been forecast in November,” said Beck. “This downward revision to the productivity assumption is a judgement call and, it must be said, a pretty bold one given how big the stakes are. We have always been of the view that the OBR errs on the side of pessimism when it comes to the supply-side and this revision takes them further in this direction.”
Given the strong link between GDP growth and tax receipts, the productivity revisions have, according to Beck, blown a sizeable hole in the public finances with the revenues forecast more than £16bn lower in the crucial year of 2019-20 compared to last November.
“This Budget demonstrates the flaws in the fiscal rules,” he went on. “In order to achieve the budget surplus by the fixed date of 2019-20, there has to be a whole series of measures to tighten policy in that target year.”
He felt there were major question marks around the OBR’s forecasts here, given the substantial improvement in the fiscal position in 2019-20, which isn’t related to the policy measures.
“The £31bn drop in borrowing in that year also has no apparent impact on growth, which looks a trifle optimistic,” he said.