Business rates scrutiny may force Chancellor's hand despite hopes for 'low-key Budget' - EY
Business rates, social care and taxation of the self-employed likely to top the agenda in the Spring Budget, EY believes.
The Government plans to have a “low-key” Budget in a bid to ensure a smooth run-up to triggering Article 50, but the Chancellor may be forced to make significant announcements following the “intense scrutiny” of business rates in recent weeks, EY has warned.
Chris Sanger, Head of Tax Policy at EY, predicts that business rates, social care and taxation of the self-employed are likely to be high on Philip Hammond’s agenda.
The company has put together a selection of measures they believe the Chancellor could be considering.
Business taxes
Mr Sanger suggests the Chancellor may choose to reset business rates to 41.4% in order to mitigate the harshest effects of the revaluation.
He said: “The ongoing furore surrounding the impact of the forthcoming rates revaluation has focused on the shifting of the current burden of business rates from some locales to others. However, beyond a shift from one taxpayer to another, the revaluation locks in the significant increase in the burden that has been slowly introduced over time. Much like boiling a frog, the gradual increase in business rates each year above the rise in property values has led to the burden in aggregate that started at 41.4% of rateable value in 2010 rising to an expected 48% in the latest revaluation.
“In no other tax is the rate increased merely because the government wants to get the same amount of tax. VAT rates, for example, don’t go up merely because spending falls. If the Chancellor feels the need to respond to the pressure on business rates, resetting business rates back to 41.4% would seem a good place to start. The opportunity for a more fundamental change to a different method of allocating the burden has been sadly missed in the last few years of consultation.”
Corporation tax
EY does not foresee any further reductions in corporation tax.
“With the Government already committed to reducing corporation tax to 19% this April and then 17% in April 2020 (equalling the rate in Singapore), any further drop is unlikely despite murmurs of the UK becoming a low tax haven as it looks to attract post-Brexit investment. A 19% rate will give the UK the lowest combined (national, state and city) tax rate in the G20 but does come at a time when other countries have been reducing their own rates – at 9%, Hungary’s tax rate has now overtaken Ireland as the lowest in the EU. With the US considering proposals to reduce its national tax rate to 20% or even 15%, this trend will remain at the heart of competition for investment.
“Despite the upcoming rate cuts, corporation tax receipts are predicted to grow, highlighting the importance of considering the tax base as well as the tax rate.”
Industrial buildings
Mr Sanger calls for the Government to provide relief for industrial buildings.
“Manufacturers have long been concerned by the way the lack of relief for industrial buildings artificially increases the amount upon which they are taxed. In an environment where the UK needs to attract infrastructure and investment, the Government should now see the benefit of addressing this anomaly and provide relief with this genuine cost of business.”
Employment, self-employment and personal service companies
He urges Mr Hammond to apply caution over the taxation of modern employment practices, and to consider all the different issues before deciding on a course of action.
“With a review of modern employment practices already underway, and the Government’s proposed reform of the taxation of off-payroll working in the public sector, this is an area that looks set to see a fundamental review of its tax and social security treatment. This is a complex area, where tax rules can diverge significantly from employment law. In launching such a review, the Government should start at the ‘green paper’ stage, considering a range of issues rather than jumping straight to the conclusion.”
Property taxation
Mr Sanger suggests the Government could do a wide ranging evaluation of how property investment is taxed.
“Recent budgets have resulted in considerable changes to the UK’s range of taxes applying to property, leaving a sense within the Government that property taxation is fragmented. A broad review of taxation could look not only at stamp duty but the way property investment is taxed.”
Personal taxes
David Kilshaw, Private Client Services Partner at EY, predicts a new strategy, with possibly fewer tax breaks and reliefs but more value being delivered from those that remain.
“Capital gains tax is also an area where the new Chancellor may see an opportunity to make his mark.”
Tax Reliefs
Mr Kilshaw explains he hopes Mr Hammond will choose to reform tax reliefs, making them less restrictive.
“There are more than 1,000 tax reliefs and there is no doubt that they are due a spring clean. If he is to be a reforming Chancellor, he could seize the opportunity to modernise the system.
“The enterprise investment scheme would be a good area to start. Designed to encourage enterprise, the relief can often be lost by traps in the legislation. We need reliefs that do what they say on the tin. Too often reliefs carry too many restrictions. The Chancellor has made great strides to improve business investment relief, so one hopes he will continue to make reliefs more attractive.”
Entrepreneurs’ Relief
EY's Private Client Services Partner also sees the Budget as an opportunity to reset entrepreneurs’ relief pre investment to encourage more entrepreneurship.
“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.”
Other predictions
Helen Sunderland, Health and Social Care Lead for EY, says there could be a radical move to help fund social care.
“The latest figures from the Local Government Association suggest that 147 councils intend to use the rise in the council tax precept announced in the last Autumn Statement for additional funding for social care, with 75% going the full way.
“However, the sector is clear that while more funding is needed, this alone will not plug the immediate or longer terms gaps driven from increasing demand, increasing costs and historic underfunding of care services.
“The Chancellor may have some leeway on fiscal rules, so it is not inconceivable that a rise in borrowing or radical steps to raise additional cash could be considered to boost spending in this area. Timing-wise it would make sense to take any bold steps soon.
“Overall, it is unclear whether additional funding, if announced, will be from central government or from local authority revenue streams.”
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