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EY’s Budget 2016 predictions: Targeting tax revenues to balance the books

EY

7 min read Partner content

Faced with a slowing economy and challenging public finances, the Chancellor is expected to focus on revenue raising measures to help him deliver his fiscal mandate

London, 5 March 2016 Chris Sanger, Head of Tax Policy at EY, comments: “The Chancellor chose the 16th of March to deliver this year’s Budget missing the Ides of March by one day. With a deterioration in the public finances since the Autumn Statement, the austerity that was expected then may well appear this time around.Sanger, Head of Tax Policy at EY, comments: “The Chancellor chose the 16th of March to deliver this year’s Budget missing the Ides of March by one day. With a deterioration in the public finances since the Autumn Statement, the austerity that was expected then may well appear this time around.

“As the Chancellor will be looking at his options to help him balance the books, this can be expected to be a tax raising and tax generating Budget with the state of public finances giving little wiggle room for any largesse. The Chancellor will have his focus fixed on achieving a surplus in 2019/20.”

Below are a selection of measures that EY says the Chancellor could be considering:

Business tax predictions

Chris Sanger, Head of Tax Policy at EY, says: “For a while, businesses have been asking for a ‘roadmap’ providing a clear indication of where the Chancellor will take the tax system. The business tax roadmap is expected to encompass a whole series of taxes from the next steps on the implementation of OECD’s Base Erosion and Profit Shifting (BEPS) recommendations, to business rates, energy taxation, next steps on the digital initiative that was announced in the Autumn Statement, as well as a redesigned tax policy framework.

“Bringing all this together into a coherent plan is quite a challenge, but it is something businesses have been looking forward to. The Corporate Tax Roadmap introduced at the start of the last Parliament will be a hard act to follow given its popularity amongst businesses. There will need to be some proposals of real substance in this document if it is to result in the same level of certainty and added investment.”

Business rates: “With the reduction in corporation tax, the relative burden of business rates has increased substantially. At the time of the Autumn Statement we were expecting the Government to announce where it had got to after the consultation on business rates closed. Instead we got an update on the tax administration side of business rates. This time, as part of the business tax roadmap, we’d expect more substantial announcements. The Government’s intention to ensure that any new system raises the same amount of money could constrain reform. However, given that this tax doesn’t change with profits, it can be one of the most onerous particularly for retailers and manufacturers and now could be a good time to modernise it.”

Update on OECD’s BEPS project: “The consultation on interest deductibility has closed and an announcement by the Chancellor is likely. The potential impact on businesses is large, particularly for infrastructure projects, so the Chancellor’s decisions on the exemptions from the OECD’s model will be of critical importance. We expect that the Government will heed the warnings from the consultation and temper the impact of a raw implementation of the BEPS proposals. We may also see a reference to the Government reviewing the case for requiring Country By Country Reporting (CBCR) information to be publicly available as currently discussed within the European Union.”

Next steps on HMRC going digital: “Following the announcement at the time of the Autumn Statement about HMRC going digital, there is a certain amount of uncertainty over both time scales and ultimately whether this move to the digital world will make the life of taxpayers easier or add one more burden in their relationship with HMRC. A leap into the digital world will benefit the UK’s tax administration, but it needs to come with a plan attached to it.”

New tax policy making framework: “The tax policy framework was introduced back in 2010. The expectation now is that as part of the new business tax roadmap it is going to be updated and made fit for the tax landscape of 2016.”

Customer relationship management: “The days of referring to ‘the inspector’ and ‘the taxpayer’ are gone. For a while now HMRC has been talking about the customer and the relationship manager. A decade on from its introduction we are likely to see announcements of a new vision for the relationship manager as part of the Business Tax Roadmap.

“As part of that vision HMRC has been working to develop a new framework for working with large businesses. Keeping the UK ‘open for business’ rests not just on the attractiveness of the tax system but also on the certainty, stability and predictability of its administration. It is crucial not only to get the framework right but to also ensure that the way it is applied works for tax payers, the tax authority and the country as a whole.”

Fuel duty: “The extent of the decline in petrol prices coupled with the fact that fuel duty has been frozen in cash terms since April 2011, may mean that the Chancellor is gearing up for an increase. The Chancellor could raise fuel duty in line with inflation arguing that the election manifesto pledge was for a real-terms freeze.”

Personal Tax predictions

David Kilshaw, Private Client Services Partner at EY, says: “On the personal tax side we can expect the Chancellor to follow his familiar themes of which pensions, savings, and families are the top three.”

Pensions: “The Chancellor has shown himself determined to change the way we all save. Continuing this theme we can expect a radical change in the pensions’ regime. We may see a lowering of the annual allowance maybe to £25,000. Perhaps even the abolition of the 25% tax free lump sum, possibly for future contributions, which could raise up to £4bn a year for the Chancellor.

“The Chancellor’s ‘pet vehicle’ is the ISA and if he is feeling radical he may move to the ISA Pension Model. This will mean that people will be able to get their tax relief when they retire and not when they start saving, giving a huge cash flow advantage to the Exchequer.”

Jason Whyte, Director in Insurance at EY, comments on changing pension tax relief: “Years of unrelenting change to the rules are damaging people’s confidence in the pensions saving system. If the Chancellor can’t provide some certainty about how the system will evolve, he again runs the risk of seriously deterring people from saving.

“If there is a completely new system, the industry will have to manage the transition. Leaving current pension assets as they are means creating an extra layer of complexity that could take decades to unwind. But shifting everything to the new system raises complex questions about what tax charge to apply to existing defined contribution (DC) assets and how to value and tax deferred benefit (DB) assets.

“The pensions system is supposed to promote the long term financial health of the nation by allowing citizens to defer current income and current taxation to spend in later life. Balancing that alongside optimising tax receipts from the fairest possible system is a rabbit that may be tricky to pull out of the hat.”

Savings: David Kilshaw says: “On the savings theme recent research has confirmed the effectiveness of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). We can expect a boost to these vehicles perhaps by the savings on income tax becoming more generous.”

Families / Tax reliefs for married couples: “The Chancellor seems determined that marital bliss should be awarded with tax breaks so we could see further tax reliefs for married couples. So far only about 1 in 10 couples have taken advantage of these reliefs so the Chancellor may choose to improve his uptake.”

Families / Inheritance tax: “The number of individuals paying inheritance tax has continued to rise. In 2014/15 the Chancellor collected £3.8bn in inheritance tax - a rise of over 10% on the year before. His attempt at the time of the Autumn Statement to exempt family homes is very complex. Simplification is needed before the relief becomes operational in 2017.”

The surprise: “There is usually at least one surprise in any Budget. Reducing the top rate of income tax to 40% may be this year’s rabbit out of the hat.”

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