The calm before the storm? Philip Hammond seeks to reassure with a steady Budget, but what happens next is the question to which we all want to know the answer.
The 2018 Budget was delivered by the Chancellor, Philip Hammond, on 29 October 2018.
Given the Chancellor had been handed a difficult job, he gave a pretty impressive performance but, as chancellors go, he is getting to be quite an old hand at this game. With less than six months to go before the UK leaves the EU, it was hardly surprising that the shadow of Brexit would loom over this Budget. He made it clear that if the UK leaves the EU without a deal, then it is likely that the 2019 Spring Statement will be ‘upgraded’ to a full Budget. Was this the warm-up act for an Emergency Budget in the Spring of 2019?
Given the uncertainty of Brexit and the need to encourage business and entrepreneurship, the Chancellor announced a number of business-friendly measures. In view of growing concern about the death of the high street, he announced some further relief from business rates for smaller businesses: one-third off the rates bill for retail businesses with a rateable value below £51,000. That will be welcome news for many struggling retail businesses but will not help larger retailers trying to compete with internet-based businesses (for which he announced a new tax, see below).
As had been widely trailed, the Chancellor has decided that the amended IR35 rules that currently apply only to those in the public sector will be extended to the private sector. However, this change will be introduced with effect from 6 April 2020 rather than 2019 as had been feared. But make no mistake, businesses will need the next year and half to prepare for this change. It was also interesting that smaller businesses will be exempt from the extension of the IR35 rules. The extra revenue this measure will bring in is estimated at more than £3bn over the five years to 2023/24.
On the business investment front, the Chancellor announced a major increase for a two-year period in the annual investment allowance, up from £200,000 to £1m for investments made on or after 1 January 2019. In addition, a new 2% structures and buildings allowance is being introduced on new non-residential structures and buildings. This sounds rather like a modern form of the old, and much missed, industrial and agricultural buildings allowances, and will allow you to write off the cost of otherwise non-tax-relievable buildings over a 50-year period. As a quid pro quo, however, the capital allowances special rate on qualifying plant and machinery will be reduced from 8% to 6%. The phrase ‘what goes around comes around’ springs to mind.
Taxing digital services
Given the current environment perhaps the biggest surprise, although not entirely left-field, was the announcement of a proposed tax on digital services. The Chancellor had stated previously that, while he preferred a global solution to this problem, he would not be afraid to act unilaterally, and the government consulted on what such a tax might look like.
He has clearly lost patience with the slow progress on the international front and has announced that the proposed new tax will be introduced with effect from April 2020. However, it will only be aimed at the largest internet businesses with global revenues from in-scope business activities of more than £500m. The amount raised looks to be very modest at only £400m per annum, small change in the greater scheme of the UK government finances. But it will be another tax for HMRC to administer, along with a proposed new tax on plastic packaging.
With Making Tax Digital (MTD) due to take effect from 1 April 2019, it always looked unlikely that the VAT registration threshold of £85,000 would be reduced. That would be one double whammy too many – hands up all those who remember that famous phrase from the era of Margaret Thatcher? In the event the Chancellor announced a further freeze in the registration threshold for two years with effect from April 2020. Given the uncertainty over the introduction of MTD for VAT, this was a welcome announcement.
The government’s manifesto commitment to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020 has been brought forward a year and will now happen with effect from 6 April 2019 rather than 2020 as planned.
The public finances
As we have said many times previously, the task of bringing the UK budget back into balance, let alone surplus, remains a huge challenge. The Chancellor confirmed that austerity was coming to an end, which was code for taking the brakes off public spending. To decode the message it was necessary to have a look at the figures in the Red Book, which laid bare the increase. Table 1 of the Red Book shows that the total forecast cost of the spending decisions announced for the period up to 2023/24 weigh in at … wait for it … just over £100bn.
Ironically, given the above, the Office for Budget Responsibility’s forecasts for the government deficit over the period to 2022/23 were better that those forecast at the time of the 2018 Spring Statement and the 2017 Autumn Budget. In this Budget, the OBR forecast that the deficit for 2018/19 would be £25.5bn, down from £37.1bn in the 2018 Spring Statement. There were smaller reductions in the public spending for each of the following years up to 2022/23. The expected outturn for 2017/18 also improved. At the time of the Spring Statement, it was estimated to be £45.2bn, which was itself down from £49.9bn in the 2017 Autumn Budget. A year on, and this deficit has been reduced further, this time to £39.8bn. Forecasting is not an exact science and these figures show an improved position over the past year, but how all this reconciles with the spending commitments remains an enigma that the code-breakers at Bletchley Park might struggle to crack.
It seems difficult to believe this was the Chancellor’s fourth proper Budget. Given that it was delivered at a time of considerable uncertainty, he struck a positive ‘steady as she goes’ tone, which was probably about the best he could manage in the circumstances. But the reality is that this was really a holding Budget. Attention is now on whether we will have a 2019 Spring Statement or a full-blown Emergency Budget. Hopefully by that stage we may have some clarity about how the UK will be leaving the EU and on what terms. Pending that, the fall-out from Brexit is likely to have a far-reaching impact on Budget decisions and revenue and spending projections that might well dwarf those seen this time around.