What will Mr Osborne say in his Budget?
Kevin Nicholson, head of tax at PwC, said:
“This Budget is an opportunity for the Chancellor to lay the groundwork for the uncertain times ahead. The EU referendum is just a few short months away and so the international backdrop cannot be ignored. Enticing investment by keeping Britain competitive and open for business will likely be a key objective for the Chancellor.
“Confirming plans for further fiscal tightening to eliminate the budget deficit before the end of this decade will also remain high on the agenda. It is the first true opportunity for the Chancellor to enact major reforms in this Government and will see him address some of the long trailed issues.
“Momentum has been building on issues of intergenerational fairness and it could influence the Budget tone. New PwC research shows 57% of people think the tax system should be used to address intergenerational inequalities.”
It is expected that the £30,000 tax-free and National Insurance-free package may be overhauled with some form of payments expected to HMRC from now on.
Erika Campbell, director at PwC in Scotland said:
“The proposed revisions to the legislation governing termination payments comes at a time when there is already considerable change and uncertainty in the oil and gas industry. We hear of further cutbacks and job losses daily. These are already having a huge impact on staff and morale.
“At the moment, those unfortunate enough to lose their job have a small silver lined tax cloud in that any qualifying termination payments are tax free up to a limit of £30,000. These payments are also not subject to national insurance. The Chancellor has been consulting on whether this regime should be so generous, especially to those employees who have not had a long tenure of service before they receive a termination payment. He may look to bring these payments into the scope of national insurance, and introduce a ‘per year of service’ tax free amount in this Budget.
“In light of the proposed changes, even more careful management of the redundancy process is required to manage employee expectations, to explore opportunities to make packages as efficient as possible and to ensure that the company meets its compliance requirements with HMRC.
“Current processes should be reviewed and effective communications with all key stakeholders involved in the redundancy process will be paramount in helping organisations meet these obligations and deliver the best that they can for their employees in what is a very difficult time for the industry.”
Oil and Gas
Fourteen months on from when oil prices began to tumble, the impacts are not only being felt by the oil and gas industry but increasingly by other sectors. With other factors such as over-supply in the market, and the impending transition to a low carbon world also impacting the UK oil and gas industry, it’s more vital than ever that the UK government works with all stakeholders to secure the North Sea basin’s future value and cement its position as a specialist skills and innovation hub in areas such as decommissioning.
Against this challenging backdrop, a smart strategy for sustaining the flow of oil investments in this mature basin and protecting long-term total tax revenues could be to reduce the tax rates on oil companies.
Kevin Reynard, senior partner for Aberdeen at PwC, commented:
“Cutting the headline rate (currently ranging from 50% to 67.5%), would have a minimal cost implication for UK Government in the near future whilst companies are loss making and absorbing capital expenditure.
“However, we would expect some cost in the medium term when companies start paying tax again as they return to profitability and the capital expenditure they have incurred (a record £14.8 billion in 2014) starts to pay some dividends. Nevertheless, the wider benefits to the economy that would result from preserving jobs and investment (and the associated employment tax revenues which are often overlooked but very significant) need to be weighed against that cost.
“Production from oil and gas has been a golden goose for the UK Exchequer to the tune of over £330bn in corporate taxes alone, not taking into account additional revenues from employment taxes, jobs and the supply chain. However, with the current low oil price, the goose is now looking a bit thin.
“The Chancellor has the potential to provide a much needed cushion – and, crucially, provide a stimulus for investment and its tax paying employees – in the March Budget. If this is recognised and an effective response is forthcoming, then there may well be plenty of life in the north east yet.”
Sharon Blain, senior tax manager and member of the Devolution team at PwC in Scotland, said:
“The Chancellor is probably hoping that the (still to be enacted) Scotland Bill 2015 settles the question of further tax devolution but this may be overly-optimistic on his part. The Wales Bill is back on the drawing board and the Scottish Government has other business taxes in its sights.
“With elections to come across the UK in May (and further City Deals under negotiation) the question of fiscal devolution is not going away. We may see London and other English cities at the forefront of the push to allow local authorities greater local tax raising powers but Scottish cities will not be far behind.
“The Edinburgh City deal is currently being negotiated and options for new local taxes could be one result. One such option is a tourist tax, although opinions vary as to the impact this might have on tourism in the city.
We have already seen with Land and Buildings Transaction Tax how the UK budget can have an impact on tax policy in Scotland (and vice versa).
“How will any proposed changes to the personal allowance or to the higher rate tax band affect the tax proposals of Scottish political parties? We may not know until party manifestos are available but this will certainly be a key topic in the forthcoming Holyrood elections with potential for Scottish and UK taxes to diverge from 2017.”
While much affecting Scotland will not be instantly clear on the day due to awaiting responses and reactions from the Scottish Government, the broad areas impacting upon people across the UK are expected to be similar.
After much recent speculation, the Treasury has made a clear indication that “now isn’t the right time” for sweeping changes to pensions tax relief. It is therefore unlikely that the Chancellor will seek to implement either of the tax reforms he was understood to be considering, namely:
– a system of “flat rate” tax relief (potentially in the range of 25% to 35%); and
– an “ISA” style system in which pensions are paid tax free, but contributions are paid from after-tax income.
However, the scale of annual tax reliefs of around £30bn, and the need to update a system of incentives that is poorly understood, continue to make pensions tax a target for future reform. With the level of work the Government has carried out over recent months, it would be a surprise if these proposals were withdrawn for good.
Bruce Saunderson, head of investment at PwC in Scotland, said:
“The pension tax relief that was expected has been put away for now. Let us be clear, it is far from scrapped, it is just not being presented as part of this budget, meaning this will be an ongoing issue to watch as the Chancellor and his team continue talks and revamp their plans over the remainder of 2016 and possibly in to 2017.
“What is painfully clear is that there is a need for reform as the system is regarded as terribly complicated and in much need of an overhaul, so we may see minor tweaks to other parts of the system just now to try and show that some progress is being made in change ahead of the big changes that will be announced later.”
Personal Tax –Salary Sacrifice and Share options
Meanwhile it is also believed that salary sacrifice arrangements, which enable employees to choose between cash and benefits including pensions, annual leave, childcare and other benefits, could be targeted to raise revenue – with a devastating impact on a large number of businesses and employees will feel the impact with hundreds of pounds in savings being lost.
Bruce Saunderson added:
“Scrapping or revamping salary sacrifice schemes and share option tax benefits will have a huge impact – not just on existing staff but will also add to the challenges many companies face in attracting new talent. Many employers pass on some of the national insurance savings they generate from operating salary sacrifice for pensions to their employees in the form of increased employer pension contributions. Introducing NIC on salary sacrifice may remove the incentive for these schemes just as workers and employers are facing an increase in their auto enrolment costs.
“Other employers use the savings generated under salary sacrifice to fund the operation of flexible benefit schemes which are popular with employees. Scrapping salary sacrifice would jeopardise many of these arrangements, at a time when employers are looking to offer a competitive compensation package.”
The Chancellor may also try to further encourage saving through reform of employee share ownership schemes.
Iain McCluskey, tax director at PwC, said:
“Approved share plans have fallen a little out of favour in recent years. These types of plan allow employees to acquire shares in their employer in a tax effective way, and can be a useful talent retention tool for employers. As the Chancellor continues his strategy of looking beyond traditional pensions as the sole long term savings vehicle, he may try and make approved share schemes more attractive for employers and employees.”
The Chancellor has s0me work to do to bridge the gap between the current housing position and his party’s manifesto pledge to deliver 275,000 additional affordable homes by 2020. Similarly, recent effort to use property taxes to drive momentum in the market have been met with mixed reviews on their success and the industry is in need of a period of consolidation.
The Chancellor has an opportunity to create real impact in the housing market by taking decisive action to support home owners and future buyers. That opportunity could be found through targeted tax-led incentives, such as changes to the Stamp Duty regime or a more holistic approach to the issue of available land and housing through other non-tax initiatives.
Robert Walker, partner at PwC, commented:
“Continued tinkering with property taxes has not yet solved the real problems of demand, supply and financing facing the industry. The Government needs to take this task out of the tax playing field and commit to changing hearts and minds with councils and local government on how to tackle the lack of land and housing.”
The real estate industry could expect another round of tax-led reform, focusing on the buy-to-let market where landlords are seeing not only an increase in Stamp Duty Land Tax, but also a reduction in wear and tear allowances.
The Chancellor may also announce future changes to interest deductibility. Given the reliance on debt funding in the industry, any announcements will likely have a significant impact on real estate investment and will be watched with great interest.
The Chancellor is expected to announce the results of the review of the business rates system in the budget. With the 2017 business rates revaluation just around the corner, he is faced with a difficult balancing act. How can he maintain £23bn of income that the rates system provides to the treasury while recognising the increasing burden that business rates place on business?
Philip Vernon, PwC business rates leader, said:
“Osborne might choose to give local authorities greater powers under the devolution revolution to support business at local level, but with budgets tight and services being streamlined, how much flexibility will Local Government have to deliver this?
“The 2017 revaluation will signal a shift in the tax base, and in the past the Government has relied on complicated reliefs and surcharges to cushion the impact. The Government may take this opportunity to announce changes to reliefs with a view to simplifying the business rates system, as well as take steps to help local authorities prevent empty rates avoidance.”
The Apprenticeship Levy and the National Living Wage
The Apprenticeship Levy is a new payroll tax that comes in to force from 1 April 2017. Employers with payroll costs of more than £3m per annum will face a new employment tax of 0.5% which will raise £3bn per annum to fund up to three million apprentices by the end of this parliament. While the objective of encouraging greater skills in the UK workforce is to be welcome, and some employers will be able to use the levy to fund their apprentices, it will inevitably mean that for some employers this will simply be another tax on jobs.
John Harding, employment tax partner at PwC, said:
“The Apprenticeship Levy is a new employment tax and for many businesses the bulk of training costs will not qualify for funding. Employers should be using the time now to better understand what the impact of the Apprenticeship Levy will be on their employment costs and how they can best utilise what funding will be available.
“Combined with the introduction of the National Living Wage, the increases in pensions costs under auto enrolment and the recent announcements on holiday pay, employers should be thinking about what impact these changes will have on their employment costs between now and 2020. In deciding on how they address the increases in their employment costs, employers will in future need to be mindful of what impact any changes they make will have on the gender pay gap that they will have to report after April 2017.”
Anti-avoidance – HMRC responses and resources
We will see in this Budget the extent to which the Chancellor seeks to use hypothecated or indeed new taxes as a means to make up the deficit, while maintaining his commitment to the lock on tax rates during this Parliament.
Tackling anti-avoidance has been a consistent theme of this Chancellor and we can expect further measures in this Budget. It is likely he will look to tighten the system in three main areas, evasion, avoidance and removing reliefs.
Alex Henderson, tax partner at PwC, said:
“The Chancellor has run out of scope to get more tax out of the system by only tackling avoidance and the difficulty with further tightening the system is that targeting the small minority of tax payers who are non-compliant must be carefully balanced against the effect on the economy or the Chancellor risks diminishing returns.
“Fostering a culture of cooperative compliance, across the tax system will lead to a shift in mindset and positive reinforcement of good behaviours.”
HMRC has a tough task to meet its objectives on digitalisation and it therefore needs to be supported in this challenge. It is undoubtedly a positive step and one which should improve the taxpayers’ interaction with HMRC and the collection of taxes. As with all major transformation projects, however, success is founded on not only a change of platform but also a change of culture. The Revenue will need to ensure that it is not delivering technology for technology’s sake, with the introduction of an app but also addressing the very real issues of data protection, resourcing to deal with increased real-time tax demands.
Alex Henderson, tax partner at PwC, commented:
“Without a rigid support framework to enable HMRC to deliver the promises of a new digital platform, the digitisation project would risk becoming implausible.”
We are expecting the announcement of a Business Tax Roadmap which will be a welcome response to the call from business for greater certainty and clarity on business taxes. To really have an impact the Chancellor will need to address the growing concerns on the efficacy of the existing incentives and reliefs, as well as business rates.
Without doubt, the Chancellor will want to continue to make the UK an attractive place, although views on whether this has been achieved will likely be balanced against the impact of his commitment to international tax reform, as demonstrated by the recent Diverted Profits Tax. Additional complicating factors in the success of the Business Tax Roadmap will be how it deals with the programme of Devolution and the impact the upcoming EU referendum could have on Britain’s place as a hotspot for international investment.
Stella Amiss, international tax partner, commented:
“The business tax roadmap offers the Government a real opportunity for meaningful dialogue with the business community and a chance to directly address the calls for clarity and certainty on business taxes – ultimately a win/win for the Government. As always, however, it depends on the detail. If his statement doesn’t go into specifics the Chancellor will risk trading confidence for yet more uncertainty. It will also be interesting to see how he deals with demands to give a boost to certain sectors and businesses while still adhering to his own mantra on simplification and the very real concerns over the number and complexity of business incentives and reliefs.”
Diane Hay, special adviser to PwC, commented:
“Given a key factor in the attractiveness of Britain for investors is the certainty of how the tax law applies to them, of keen interest to many will be how the Chancellor will seek to enable HMRC to deliver on the Business Tax Roadmap. The Chancellor will need to ensure that his only revenue generating arm of Government is given the right balance of powers, resources and confidence to deliver on its objectives. Simplification and digitisation will be important elements of ensuring this.”
Large business compliance and strategy
Legislation introducing an obligation for large companies to publish their tax strategy will likely be part of the Chancellor’s drive to ensure that business is seen to be playing its part to improve tax transparency.
HMRC will be empowered to make assessments based on the publications and to take negative inference from non-publication. Efforts to engage business to focus on tax strategy in an open and transparent way will be welcomed, although care will be needed to prevent an administrative burden disproportionate to the policy.
Following the introduction of an array of banking specific tax raising measures in recent years, the banks are in need of a moment of respite in this Budget. For a sector which continues to face significant headwinds as a result of the burden imposed by increased regulation, legacy conduct issues and operating in a low, or even negative, interest rate environment, some predictability in relation to tax will be welcomed.
Matthew Barling, partner at PwC commented:
“With the banking sector and the City of London more generally facing so many uncertainties there is a real need for some stability in relation to tax policy.”
After what seems like quite a long haul, the automotive manufacturing sector is now back in full swing. But the sector is still facing a number of headwinds such as fluctuating commodity prices and exchange rates alongside cost pressures and increasing supply chain and market competition. Maintaining funding for research into new auto technologies via partnership between auto manufacturers and universities will be vital in keeping the UK sector competitive.
Against the lower for longer oil price backdrop, the picture doesn’t look as bright for the motorist.
Phil Harrold, automotive partner, comments:
“As the Chancellor tries to balance the books, the likelihood is that he will return to the well-trodden path of targeting the motorist.
“I’d expect to see not only see an increase on fuel duty on the back of the ongoing low oil price but increasing rates of road tax and car purchase tax. Company car drivers should also expect to continue being a major tax contributor. These changes will undoubtedly reflect the trend towards lower emissions vehicles as the Chancellor seeks to maintain his overall tax take from the auto industry.”
We may see the Government move to bring the UK into line with Scotland’s later timeline for changes to landfill tax. Loss on ignition test limits for the lower rate of landfill tax to apply to fines from waste recycling are due to be reduced in the UK from 15% to 10% from 1 April. Scotland, however, won’t make the changes until 1 October.
PwC’s indirect tax senior manager Jayne Harrold commented:
“If the Government doesn’t amend legislation for the UK, there could well be flows of “fines” over the border from England to Scotland because disposal will be more than £80 per tonne cheaper in Scotland for material that can’t meet the new 10% limit.”
Given the changes announced in the Summer Budget and the continued focus on value for money it wouldn’t be surprising to see further squeezes on the renewable energy sector through cuts to funding and incentives or increased tax. On a more positive note there was progress with consultation on major reform of the Climate Change Levy (CCL) and Carbon Reduction Committee (CRC) towards the end of last year. The aim was to replace the two systems with one new expanded version of the CCL. Any concrete proposals from the Budget around this simplification would be welcome as it would significantly reduce the compliance burden for businesses that fall into the CRC.
Capital Gains Tax
The Chancellor has reformed many areas of personal tax since he got the job in 2010, but has largely left capital gains tax alone (recent tinkering around the edges on residential property aside). He may look at how he can reform capital gains tax to better incentivise long term business investments to ensure that UK plc is an attractive option for the regular investor to put their money into.
Health experts have been campaigning for a sugar tax and the government advisory body Public Health England has even put a case forward in favour of it. However, the Government has delayed the publication of its childhood obesity strategy, meaning any decision on the sugar tax is unlikely to come before the summer.
The surprise withdrawal of the Climate Change Levy exemption for renewable electricity in the last Budget may have set a precedent for further withdrawal of exemptions in this Budget or new taxes introduced. With environmental taxes a popular area of focus for reducing the deficit we could also see surprise proposals for new taxes on water or other raw materials.