What is the Autumn Statement?
The Chancellor will deliver his Autumn Statement on Wednesday 23 November. This will provide an update on the government’s plans for the economy based on the latest forecasts from the Office for Budget Responsibility, which are normally published the same day.
The draft 2017 Finance Bill
Of more interest than the Autumn Statement, as regards tax, is the publication in draft, due on 5 December, of much of the legislation that will form the 2017 Finance Bill in the spring of next year. Most of this will relate to policy announcements made in the March 2016 Budget, on which the government has been consulting extensively since then.
Key tax items on which we expect more information on 5 December are:
- the ‘deemed domicile’ rules for individuals who have been resident in the UK for 15 of the last 20 years;
- inheritance tax changes to bring into charge UK residential properties held by individuals through offshore structures;
- restrictions on the corporation tax deduction for interest paid;
- changes to the rules for the carry forward and set-off of companies’ losses; and
- the ‘Making Tax Digital’ initiative.
For a more detailed list of expected Finance Bill changes, click here
What measures might be announced in the Autumn Statement
While making significant tax announcements at the time of the Autumn Statement is a departure from the general pattern the Government has set itself, experience suggests that it is unlikely to resist the temptation entirely.
The situation is made more uncertain this year by the recent changes in key Government roles, with Theresa May replacing David Cameron as Prime Minister and Philip Hammond replacing George Osborne as Chancellor of the Exchequer. This marks not only a change in personnel, but a change to the position which has obtained for most of the last 20 years, where the Chancellor has functioned (in practice though not in name) as a deputy to the Prime Minister.
Brexit is likely to dominate the new cabinet’s first few months in office (and possibly the succeeding months as well). However, while leaving the EU will mean more flexibility for the Chancellor in areas of the tax system where the Government is currently bound by EU rules, any resulting changes are unlikely to be seen before the terms of the UK’s exit are finalised.
Balancing the Budget
The new Chancellor is not a completely unknown quantity. A number of important themes emerged from his speech to the Conservative Party conference at the beginning of October.
A key passage in his speech said:
“‘The fiscal policies that George Osborne set out were the right ones for that time. But when times change, we must change with them. So we will no longer target a surplus at the end of this Parliament. But make no mistake. The task of fiscal consolidation must continue.”
There can be no doubt that George Osborne set himself a challenging target in aiming to eliminate the deficit before the next General Election. Freed from that constraint, Mr Hammond can allow borrowing to make up the balancing figure in the fiscal equation, if he wishes. He need not limit Government spending where he sees it as desirable, and neither need he struggle to increase tax revenue while retaining the low headline rates to which the Government is committed.
In this position, he may use the Autumn Statement to indicate a revised timescale for eliminating the deficit; or perhaps he will content himself with a commitment, such as that made by previous Chancellors, to balance income and expenditure over the economic cycle (without being too precise about when the economic cycle starts and finishes).
In these circumstances rises in income tax or VAT rates seem most unlikely. The rate of corporation tax has fallen from 28% when the Coalition government came to power in 2010 to 20% in 2016, and Mr Hammond spoke approvingly in his speech of the planned further reductions to 19% from 2017 and to 17% from 2020, so it also appears unlikely that he will disturb these plans.
An important theme of his speech was the need for improvements in productivity, which he said would be ‘at the heart of our industrial strategy’. He also drew attention to the contribution made to productivity by new technologies. It is possible, therefore, that the Autumn Statement or the spring 2017 Budget will see further tax reliefs for research and development, and innovation.
He also drew attention to a lack of investment in public infrastructure such as roads, railways and flood defences, and to a lack of investment by businesses. Primarily, this appears to signal a willingness on the part of the Government to incur further borrowing to invest in capital projects, but lack of investment by companies could be addressed by increased tax reliefs. For example, increasing the rate of capital allowances for expenditure on plant and machinery, and extending the categories of allowable expenditure to include industrial buildings.
The lack of supply of new houses was another matter of concern to the Chancellor. His predecessor made a number of tax changes to discourage ‘buy to let’ arrangements, but the most these could do was to alter the balance between let property and owner occupied property; they did nothing to increase the overall housing supply. Arguably the solution lies mainly in the relaxing of planning restrictions, but there may also be tax measures that could assist; for example, tax incentives for builders, disincentives to the long-term holding of ‘land banks’, and changes to Stamp Duty Land Tax.
Mr Hammond was silent on maintaining his predecessor’s cuts to public expenditure (except insofar as he signalled the above change in approach as regards capital projects). He did, however, include ‘cutting the welfare bill’ in a list of Mr Osborne’s achievements, perhaps suggesting that he has no plans to reverse the Government’s approach in this area.
Road fuel duties
Looking beyond Mr Hammond’s speech, there are, of course, a number of other possibilities. Road fuel duties have been frozen for several years. This is a politically popular stance, but a relatively expensive one in terms of revenue forgone. With inflation currently at a very low level, now might be the time for a modest increase in the duty at a time when it will not have a major impact on the cost of living.
The BEPS initiative
In October last year the Organisation for Economic Co-operation and Development (OECD) released the results of its long-running Base Erosion and Profit Shifting (BEPS) project. This is designed to counter the reduction of the tax liability of multinational companies by means of measures that shift profits artificially to low-tax jurisdictions, or which otherwise reduce the tax base (i.e. the taxable profits). The proposals rely on enhanced co-operation between different jurisdictions, including the adoption of shared standards for allocating profits between them in certain situations. Implementation of these proposals will be a complex matter. A number of changes have already been made to UK legislation, but there may be other matters where the Chancellor will use the Autumn Statement to give an indication of the government’s intentions.
The House of Commons Public Accounts Committee has been strongly critical of certain aspects of HMRC’s performance, particularly customer service. The Chancellor may wish to comment on this, and perhaps to announce the allocation of increased resources to address this issue.
The structure of the income tax system
In the longer term, some smoothing of the sharp rise from the 20% basic rate of income tax to the 40% higher rate would give a more rational structure to the tax system and would doubtless be welcomed by middle-income taxpayers. So, also, would the removal of the effective 60% rate that applies to income between £100,000 and £122,000, as a result of the gradual withdrawal of the personal allowance between those limits. Even if the Chancellor is sympathetic to such moves, however, making tax changes to benefit the better-off (however strong the rationale) may be politically unacceptable at a time when Theresa May has set out to make the Conservatives the party of ‘ordinary working class people’.
Every Budget and Autumn Statement contains some surprises. No doubt this year’s statement will be no exception.