2017 Budget – overview

All in all, a creditable if controversial performance from the Chancellor, Philip Hammond

It was Harold McMillan who said that what politicians feared most was ‘events, dear boy, events’. Never has that memorable quote seemed so appropriate as to describe the events we have seen over the past year. If the quote is true, very few politicians will be getting much sleep at the moment. In particular, the Chancellor has a difficult task in delivering stability in the short term, while providing certainty and reinforcing the message that in spite of ‘events’ the UK is very much open for business. However, in a welcome contrast to the dire financial forecast in the Autumn Statement, the UK’s financial situation was much improved – so the Chancellor had an opportunity to make this Budget more like ‘business as usual’.

If the Chancellor is haunted by fear he certainly did not show it. He made a number of witticisms (some rather barbed) and even managed a joke at his own expense, namely his love of spreadsheets. The performance was clearly aimed at supporting the overall message the government is keen to foster that in spite of events there is a steady hand on the tiller.

Personal tax

The Chancellor confirmed the rise in the personal allowance from April 2017 to £11,500 and the higher rate income tax threshold to £45,000 (unless you are resident in Scotland when it will remain at £43,000).

The government has been concerned for some time now about the taxation of different forms of remuneration and disguised remuneration schemes. In previous Budgets, George Osborne announced a variety of measures to try and plaster over some of the worst of the cracks in the system. The current Chancellor is clearly determined to adopt a more strategic approach to this problem and his line of thinking is becoming clearer – he is clearly of the opinion that the self-employed are paying too little tax and NIC as compared to those in employment and it needs to be rebalanced. His 1% rises in the Class 4 NIC rates for two years starting in April 2018 will raise the Class 4 NIC rate from 9% to 11% and bring it closer to parity with the 12% employee’s NIC.

It also looks like this is just the start of the review rather than the end. The new dividend allowance, which only came into effect in April 2016, will be reduced from £5,000 to £2,000 with effect from April 2018. This change will reduce further the benefits available from tax-motivated incorporation. How this will play out with smaller businesses remains to be seen. The furious reaction of his fellow MP's to these changes suggests there is trouble ahead.

Business taxes

The Budget was surprisingly light on business tax changes, a position that will be welcome news for business people given the extensive changes in recent years. With a clear eye on Brexit and sending out a message that the UK is open for business, the Chancellor confirmed that the corporation tax rate will be reduced to 17% from 2020.

The main area of business concern in recent months has been the upcoming changes to business rate bills as a result of the property revaluation, a system that can result in major changes in rates bills and with some winners and others losers. To address concerns, the government is proposing a series of measures to ease the transition for those who face higher rate bills, including indexing rating valuations to reduce the likelihood of large changes in valuations every five years.

The government also remains concerned about productivity and investment and further changes have been announced to the research and development tax credits to encourage smaller companies to take up their allowance.

Making tax digital

The government’s proposals for Making Tax Digital (MTD) have been highly controversial since they were first floated in the 2015 Autumn Statement. The government has received a number of representations about the potential burdens and costs that MTD will place on businesses, in particular smaller ones. The Chancellor has clearly listened to the concerns, specifically referencing those made by the chairman of the Treasury Committee, and announced that the introduction of MTD for businesses that have a turnover below the VAT threshold (currently £83,000) will be deferred by a year, from 6 April 2018 to 6 April 2019. This will give smaller businesses much more time to plan and prepare for the changes as well as giving more time for the software market to develop further.

The public finances

The task of bringing the UK budget back into balance, let alone surplus, remains a huge challenge. The next few years are likely to be rocky but the Chancellor was buoyed by the news that the OECD has increased its UK growth forecast for 2016 from 1.2% to 1.6%. In contrast to the position announced in the Autumn Statement, the OBR has now forecast that the borrowing requirement for 2016/17 will be £11bn less than it anticipated at the time of the 2016 Autumn Statement. Back in November 2016, the OBR had forecast a £13bn increase in borrowing needed as compared to March 2016, so for the moment we are back largely to where we were before the EU referendum on 28 June 2016.

Given the uncertain outlook, the Chancellor has decided to play it safe. Overall, the budget was largely fiscally neutral over the five-year review period, with spending increases in the first two years (mainly on schools and social care) matched by tax and NIC increases over the following three years (the reduction in the dividend allowance and the increase in class 4 NICs). Given the difficulty in forecasting in periods of uncertainty, this approach looks sensible.

In conclusion

In his second outing, the Chancellor again gave a creditable performance. He was certainly in chirpier mood, no doubt buoyed by a set of growth and fiscal forecasts that were much more favourable than those he had to present in the 2016 Autumn Statement. His candour is refreshing, but he must have been relieved that the economic data was much more encouraging than last time.

There were mercifully few tax announcements this time around, which will help businesses to plan with more certainty. However, the Chancellor has clearly set his forensic mind on tax strategy so, at the next Budget in the Autumn, we can expect more developments on addressing the tax (not forgetting NIC of course!) differences between the employed and the self-employed. It is already clear in the reaction to the Budget that any changes in this area are not likely to go down well with UK businesses.  It was an assured performance but, judging from the reaction to his main announcement on the taxation position of the self-employed, he may be about to find out just how tough it is to be chancellor.