PwC offers predictions
What will be in the Chancellor’s Budget?
Experts at PwC say the Chancellor will be looking to strike a “difficult balance” between championing the government’s commitment to fiscal responsibility on one hand, and enticing prospective voters with something extra in their pockets on the other.
Decentralisation is likely to remain a major theme, and there may be some more detail on creating the Northern Power House for northern England.
PwC also says we should export support for British innovation and helping UK firms break into fast growing markets such as China, particularly following the Government’s recent GREAT festival of Creativity in Shanghai.
Here are some thoughts on what PwC experts expect:
Mr Osborne and his coalition partners may well consider going further on the central tax policy which has underpinned this government’s parliamentary term; increasing the personal allowance, perhaps up to £11,500.
Michael McCusker, tax partner at PwC in Scotland, says: “Raising the personal allowance is a tried and tested way of offering a little extra something in the pay packets of the full-time working population, although at an annual cost to the Treasury of £2.5bn per £500 increase, such offers don’t come cheap. If he’s looking for an alternative approach, the Chancellor might instead raise the threshold at which the 40% rate kicks in to appease some of the middle earners who have been dragged into the higher rate band as the threshold has dropped in recent years, although this approach would likely meet resistance from the Liberal Democrats.”
Increasing the level at which national insurance is paid could be an attractive option. Mr McCusker says: “National Insurance is a far greater burden on low earners now than income tax”.
Andrew Sentance, senior economic adviser at PwC, says: “Raising the level at which National Insurance (NI) starts by £2 a week or £100 a year would cost the government about £300m a year for both employees’ and employers’ NI.
“That means to make any sort of significant change would be quite expensive: raising the threshold by £1,000 for both employees and employers would cost £5 to £6bn.
“One way the Chancellor could recoup these costs would be to raise the upper limit of NI at the same time as he raises the lower limit. Raising the upper limit by £10 a week or £500 a year would recoup about as much money as raising the lower limit by £2 a week for employees. There is no upper limit for employer NI.
“There could be some issues around whether this helps or hinders the alignment between income tax and NI. Raising the lower threshold would improve alignment, but the upper limit is designed to be at roughly the same level as the 40pc income tax threshold. So that is something the Chancellor would need to consider if he was making changes to the upper limit to offset a rise in the lower limit.
“Another way the Chancellor could recoup lost revenue through the National Insurance system would be to increase the NI rate which applies to employees beyond the upper limit, which is currently 2%. A further 1% rise in this rate would generate £850m and around £1bn if it was also applied to the self-employed.”
They have seen significant reform over the course of this parliament. Further changes, especially this close to the election, would seem ill advised, particularly anything that could be viewed as a hit on pensions. But the Government won’t pass the opportunity to make much of the forthcoming ‘pension freedoms’ which allow people over age 55 to dip into their defined contribution (DC) pension pots. Many people with defined benefit schemes are expected to transfer to DC schemes to take advantage of the freedoms – the Pensions Regulator has been consulting on how pension trustees should advise members.
They too have had their share of change. We could though hear more on the rules letting spouses inherit ISA pots tax free, which have been under consultation.
Bruce Saunderson, head of wealth advisory at PwC in Scotland, says: “Previously the ISA wrapper and its tax benefits were lost on death, so this change will reduce costs for widows and widowers, and makes a lot of sense.”
Businesses as ever will want consistency and clarity, although how much can realistically be offered this close to an election is questionable. On balance it seems unlikely that there will be any major changes in the business taxes arena, where the Chancellor strives for the right balance between promoting Britain as “open for business”, and being swift to tackle both tax evasion and tax avoidance.
This could manifest in a number of ways, although recent suggestions from the Chief Secretary to the Treasury of increased penalties for companies seen to have facilitated or encouraged tax evasion would seem likely to be included.
There will also be confirmation of the wider measures announced in the 2014 Autumn Statement such as the introduction of Diverted Profits Tax.
This new tax will come into force from 1 April. It represents something of a step change approach from the Government in its moves to tackle tax avoidance as is it’s charged at a penal rate of 25%.
The original legislation is intended to apply in two scenarios: (1) where any foreign company sells to UK customers where it’s activities are set up to avoid creating a taxable presence here in the UK and (2) where there are payments out of the UK to a low tax entity with little or no substance. However earlier drafts of the legislation indicated that it may apply more broadly than expected.
David Glen, head of tax, PwC in Scotland, says: “Businesses have had very little time to work through these complex and subjective rules and with implementation now just around the corner time is not on their side.”
Further pre-emption of the OECD’s BEPS programme in this way can’t be ruled out, although would come as a surprise given the need for a consistent and coordinated approach to international tax reform.
We’re also likely to see more measures to support business transparency on tax, such as the extension of country-by-country reporting requirements beyond banks and the extractive industries.
Small and medium sized businesses
There may be a temptation to offer smaller business owners a pre-election sweetener – perhaps through extension of the generally popular National Insurance Employment Allowance introduced in this parliament, which currently provides relief against the first £2,000 of employers National Insurance.
David Glen said: “Our research shows businesses large and small often would prioritise a more certain and stable tax system over reliefs – which sometimes don’t go far enough to make a real difference.”
Oil and Gas
The UK oil industry has been facing the challenges of a falling oil price, a declining basin and a complex tax regime. Industry figures have pointed to declining exploration and cash flows and emphasised the need to encourage investment in the sector.
Alan McCrae, head of energy tax at PwC, says: “Reforming the tax regime for the oil companies, which has a tax rate of between 60% and 80% and is widely recognised as extremely complex, is one lever that the Government could use to encourage this investment.
“The Government have already announced an Investment Allowance, which will encourage investment in North Sea assets, while replacing the numerous complex allowances that had previously existed. We believe that this will be welcomed by industry and should help the Government encourage investment.
“But the oil industry has indicated that this might not be enough. In particular, lowering the headline rate for oil companies from the current 60% (three times the rate for all other companies) may also be needed to prevent an irreversible decline.”
The banking sector has been a major target for tax this parliament, with repeated rises in the bank levy, and restrictions to the use of carried forward trading losses. Whilst one might understand the short term political expediency of these measures, the impact on UK competitiveness should not be underestimated. Particularly as we approach the Election, the banking sector will be looking for signs of Government’s commitment to promoting London as a global financial centre.
We expect a revision of the legislation included in the recent draft UK Finance Bill 2015 on the disguised investment management fees measures, which seek to prevent amounts received by individuals, directly or indirectly out of management fee income, not being fully taxed as income.
David Glen says: “Asset managers will be hoping over the coming weeks that HMRC will continue to provide further clarity and guidance on what specifically they want to achieve following the draft otherwise the confusion that has been present in the City in the run-up to the Budget will continue. It is vital that asset management organisations structured as partnerships consider the new rules in light of their particular remuneration structures including where such organisations have a mobile non-UK based workforce who travel to the UK.”
David Glen says: “Insurance companies will be looking for signs of Government’s commitment to keeping the UK an attractive place for insurance companies, from start-ups to big groups. There are some concerns, such as whether the diverted profits tax will apply more widely with some potentially unintended results for the industry.
It seems unlikely that the Chancellor would choose this moment to make an issue of environmental taxation, given it seems to have fallen away as an area of focus in recent times. There’s currently an unhappy assortment of taxes and levies which raise relatively little revenue and so this is an area ripe for reform.
The predictions above apply to Scotland as well as UK at the moment. But looking ahead to Scottish budget, there is the potential to have different rates and perhaps different approach to income tax bands beyond that. Environmental taxes are also a current area of devolution where further clarity is awaited.