March 8, 2017
On Wednesday Philip Hammond delivered his first Spring Budget as Chancellor and the last Budget which will be delivered in the Spring. With Article 50 set to be triggered next week, Brexit overshadowed much of the session, with “Spreadsheet Phil” aiming to strike a positive, optimistic tone. He even cracked a few jokes. FTI Consulting takes a look at the key announcements.
A year ago, George Osborne MP published a Budget which was at the time seen as his launch for the Conservative Party leadership following an anticipated victory for the Remain camp and the stepping down of David Cameron from No.10. How times have changed.
Today’s Budget was just 64 pages compared to 146 pages last year. Much of what the Chancellor announced had been previously trailed and he was confident enough in his rhetoric to litter the speech with jokes, even referring to his “Spreadsheet Phil” nickname. Getting Brexit out of the way early in his speech, the headlines will be dominated by news of an extra £2bn for adult social care, the expected handouts for small businesses impacted by changes to business rates and changes to taxation for the self-employed. The latter may well come to dominate.
Whether Conservative voters will be entirely happy with today’s announcement remains to be seen. While eye-catching announcements made on funding for new grammar and free schools as well as skills may appeal, Tories are likely to be perturbed by an increase in the taxes paid by the self-employed and a reduction in the tax free dividend allowance, particularly given the manifesto commitment the party made on personal taxation.
As he said at the start of his speech, the last Chancellor to announce the “last Spring Budget” and move the statement to the Autumn was Norman Lamont. Ten days later he was sacked. At present, nothing points to this being the fate of the current inhabitant of Number 11 Downing Street.
Responding to the Chancellor, Leader of the Opposition Jeremy Corbyn MP accused the government of “utter complacency about the state of our economy”. He took the opportunity to cover a whole range of topics, including housing which was entirely absent from Hammond’s comments. Notably absent however was any forensic analysis of the budget measures or identification of anything hidden in the figures.
Taking to his feet, an uncharacteristically-cocksure Chancellor of the Exchequer Philip Hammond reported that the economy has “confounded the commentators” with ongoing growth, a labour market with record employment and a deficit cut by two thirds.
These factors, the Chancellor argued, provide a strong and stable platform for Brexit negotiations with the UK economy growing faster than that of the US, France and Japan in 2016 – a figure that places the UK second only to Germany in the G7. Indeed, the Chancellor repeatedly sought to frame the Budget in a “global” sense – a clear reference to Britain’s future outside the European Union.
Reflecting recent economic strength, the Chancellor reported that the Office for Budget Responsibility (OBR) has upgraded the UK’s growth forecast for next year from 1.4% to 2%. He added that, since 2010, the employment rate has risen from 70.2% to 74.6% – with a further 600,000 people predicted to be created in the period leading up to the 2021/22 financial year.
The inflation rate is expected to stand at 2.4% this year to 2% in 2019, albeit real wages are forecast to continue rising.
The OBR has substantially revised down short-term forecast for net public sector borrowing since the Autumn Statement last year, with forecast borrowing standing at £16.4bn lower next year than the £51.7bn forecast in the autumn, falling to £16.8bn in 21/22 (£51.7bn in 2016, £53.8bn in 2017, £40.8bn in 2018, £21.4bn in 2019, £20.6bn in 2020 and £16.8bn in 2021). Debt will peak next year at 88.8% next year, falling to 79.8% in 21/22.
On business rates, the Chancellor appeared to acknowledge the toxic political effect of the revaluation process which has led to huge rate rises for certain businesses – particularly in the Tory shires. In order to head off a potential backbench revolt, the Chancellor announced that any business coming out of small business rate relief will see their rate increase capped by more than £50 a month and that a £300m fund will be provided for local authorities to provide discretionary rate relief for businesses struggling to pay increased rate costs. Taken together, the Chancellor argued the policies represented a £435m cut in business rates across the UK.
For businesses with turnovers of below the VAT threshold, the Chancellor will delay the introduction of quarterly reporting by a year at a cost of roughly £280m.
Since 2010, £140bn has been raised by the government from tackling tax evasion and non-compliance issues. From July, a new financial penalty will be introduced against financial professions that propose tax avoidance measures that are successfully challenged by HMRC. The UK will also introduce UK VAT on roaming telecoms services and seek to target the abuse of foreign pension schemes in order to avoid tax. Overall, this clampdown is projected to raise £820m in government revenue.
On income tax, the Chancellor was keen to note that the top 1% of taxpayers pay 27% of income tax – more than under the previous Labour Government. The National Living Wage will rise to £7.50 per hour in April; a figure that will see its average recipients better off by £1,400. In line with the pledge delivered by his predecessor George Osborne, Philip Hammond recommitted the government to reaching its target of a £12,500 income tax threshold by the end of the 2020 parliament. In line with this, the personal tax-free threshold will be increased to £11,500 with the amount where the higher rate of tax has been raised to £45,000 – a figure expected to rise to £50,000 by 2020.
Noting the modal shift that is taking place in the UK economy that is seeing increased rates of self-employment, the Chancellor announced changes to self-employed tax status. Noting that an employee earning £32,000 a year will incur more than £6,000 in national insurance contributions, while a self-employed individual will pay only £2,300, the Chancellor expressed concern at the £5bn cost of such a disparity on state finances. Given that that many of the previous benefits those in employment enjoyed over those in the self-employment sector enjoyed in respect of pensions were negated by reforms to the system, the Chancellor announced that from April 2018 national insurance contributions will rise for the self-employed by 1% to 10% – around 60p per week per self-employed worker.
In keeping with reforms to the national insurance regime governing the self-employed, the Chancellor announced moves to address the “unfair discrepancy” between the overall tax paid by an employee and an individual who has set up their own company. From April 2018, the tax-free dividend allowance for directors and shareholders will be reduced from £5,000 to £2,000.
On the issue of skills policy, the Chancellor was keen to trumpet the ongoing success of apprenticeship schemes that saw 2.4 million people commence vocational training in the 2010-2015 parliament, with a further 3 million expected by the end of 2020. In order to eliminate what he described as a “disparity” in perceptions of apprenticeships and traditional academic qualifications, the Chancellor announced the introduction of ‘T-Levels’, which will pair back 13,000 qualifications to just 15 in an effort to professionalise the sector.
Finally, since taking office as Prime Minister, Theresa May has placed a significant emphasis upon clamping down on what she and many of her senior ministers view as unscrupulous, untoward and anti-consumer behaviour on the part of corporate entities. The Chancellor continued in this vein today arguing that “markets can fail people”. As such, he announced the publication of a forthcoming government Green Paper in order to protect consumers from unexpected charges and clauses, to simplify terms and conditions, and to give consumer bodies greater enforcement powers to push back against poor corporate behaviour. Such remarks could be interpreted as not-so-subtle dig at major players in the utility industry – long the target of government ire – who today hiked energy prices by 9%.
The financial services industry avoided the spotlight of the pre-Budget briefings and will be relatively content with today’s Budget statement. The key thing for the industry is of course deliberations on the UK’s future relationship with the EU, and the fact that the Chancellor did not introduce any significant policies impacting key players will be a relief at such a time of uncertainty. That the industry was not given a separate section of the supporting documents shows the extent to which avoided focus by the Chancellor.
That’s not to say that regulatory consultations and deliberations do not exist for multiple segments of the industry – they most certainly do – more that government is not willing to add further expected pressure via new excise and tax rates. This could be taken as another sign that the Chancellor is going to be a useful ally for the sector over the coming years.
The little that did focus on financial services looked at personal finance – with a reconfirmation to the lifetime ISA and disclosing the rate of the NS&I Investment Bond that was announced at Autumn Statement 2016. The Investment Bond will offer a rate of 2.2% over a term of 3 years and will be available for 12 months from April 2017 with a minimum investment limit of £100 and a maximum investment limit of £3,000. It was also re-confirmed that government will increase the standard rate of insurance premium tax to 12% from 1 June 2017. The announcement that the tax free dividend allowance for company directors and private shareholders will be reduced from £5,000 to £2,000 from April 2018 will likely prove unpopular with investors.
The upcoming publication of the Consumers and Markets Green paper will be keenly watched by the sector though as it could have far reaching implications for many retail and wholesale aspects of financial markets.
Those looking for tones of encouragement for the industry will have to look at the supporting documentation providing the Chancellor’s general recommendations for the Financial Policy Committee, the Prudential Regulatory Authority and the Financial Conduct Authority – it’s the only sign in this Budget that government is looking to encourage competitiveness of the sector, and competition and innovation within.
With the Autumn Statement of 2016 dominated by infrastructure and housing focused announcements, the Budget was notably light on any new initiatives – the Chancellor instead referring back to the £23bn National Productivity Investment Fund (NPIF) and the government’s progress in allocating these funds. New measures came in the form of £690m of the Fund being competitively allocated to local authorities to tackle urban congestion – with £490m to be made available by early autumn 2017 – and £220m to address ‘pinch points’ on the strategic road network, with details of individual schemes to be announced by Department for Transport shortly.
The government’s emphasis on devolution and regional growth continued, with the announcement that government has agreed a Memorandum of Understanding on further devolution to London. This will see the Mayor, Greater London Authority (GLA) and London Councils work together to explore the scope for locally-delivered criminal justice services; action to tackle congestion; and a taskforce to explore piloting a new approach to funding infrastructure. The agreement also commits to explore options for devolving greater powers and flexibilities over the administration of business rates and greater local influence over careers services and employment support service. London also looks set to assume greater responsibility for health and social care, whilst Greater Manchester is likely to take further control of transport funding.
In terms of real estate, the government announced a delay to the reduction in the filling and payment window for Stamp Duty Land Tax until 2018-19, and a consultation on proposal to redesign rent-a-room relief so it better supports longer-term lettings. Plans to amend legislation to ensure all profits realised by offshore property developers developing in the UK are subject to take from today were also announced.
Finally, the Budget detail seemed to show that the Department for Communities and Local Government may well bear the brunt of the government’s target to cut an extra £3.5bn by 2020.
Building on the recently announced Digital Strategy, the Chancellor announced a raft of measures designed to bolster the digital sector, placing specific emphasis on investing in technology infrastructure and digital skills.
Citing a desire to remain at the cutting edge of the global economy, the Chancellor announced upgrades to several key pieces of technology infrastructure, including a new National 5G Innovation Network as well as a dedicated facility that will run trials to test the technology in cooperation with various research institutions. In parallel, a large investment was made in a programme of local projects to assist the rollout of full-fibre networks. This program will be supported by various schemes such as connection vouchers for businesses and utilising public sector assets to assist the program’s deployment. A significant investment of £270m has been made this year to develop disruptive technologies in biotech, robotics and driverless cars as part of the Government’s Industrial Strategy Challenge Fund.
The government’s commitment to enhancing the UK’s digital skills base received a considerable amount of attention in the Chancellor’s speech and indeed the document itself. Canvassing the challenges that technology is bringing to future generations, the Chancellor stressed the importance of upskilling and retraining in the labour market. To this end, £300 million was announced along with pilot programs to study learning over the course of one’s career. £500 million has been put towards technical training with 1,000 new technical PhD places announced along with additional resources dedicated to technical students between the ages of 16-19.
Interestingly, the digital sector also features prominently in relation to tax reform in this Budget in which he stressed the need to develop a “better way of taxing the digital part of the economy”. The Chancellor thus announced the intention to develop a digital tax system for which there will be extensive consultation.
In continuing to distinguish itself from the Labour frontbenches, the government’s theme of “listening to industry and businesses”, spilled over into the energy sector. The Chancellor answered further calls by the North Sea Oil and Gas industry and Scottish Government for fiscal, tax-based support for the transfer of late-life assets. In determining the best approach, the government will publish a formal discussion paper alongside the Finance Bill on the case for allowing transfers of tax history between buyers and sellers.
In order to scrutinise proposals for the maximisation of North Sea assets, the government will establish a new advisory panel of industry experts tasked with delivering a report at Autumn Budget 2017. In a very difficult market, the sector will be watching closely to see whether this is just another state-backed talking shop or if it will yield much needed results.
Finally, long awaited details about what form the Levy Control Framework might take post 2021, will still have to wait. The mechanism established to set a cap for the forecast costs of government-funded energy policies which are ultimately paid for by consumers, is due “a new set of controls”, now set to be published later in the year.
With the focus on political wins in health, social care and business rates policy and an emphasis on “no unfunded spending”, it is unsurprising that there were no further defence spending commitments.
The UK will continue to meet the NATO defence spending target of 2% in a commitment that will offer reassurance to President Trump following his promise to hike military spending in the US while demonstrating that the UK wishes to continue to have an important international presence on foreign policy and defence issues after Brexit.
In a clear bow to his party’s victory in last month’s Copeland by-election, the Chancellor proudly stated the Conservatives are the “party of the NHS. However, his announcements on the NHS and adult social care signalled an about-turn from his Autumn Statement when he was severely criticised for barely mentioning the NHS or the social care crisis. In the ensuing debate, he repeatedly insisted there was no need for a bailout of the social care system but the pressure from local authorities, the NHS and his own backbenchers have clearly proved too great.
The Chancellor looked to head off the looming crisis in adult social care and subsequent pressures on the NHS with a commitment to spend £2bn on social care over the next three years. Reiterating the party line that “this is not only about money” – he noted that twenty-four local authorities have a particularly poor record with hospital discharging rates – accounting for over half of late discharges throughout the entire NHS. Alongside social care funding, additional measures to support joint working between local authorities and NHS to tackle patient discharge will be made available, and a further £100m for making GPs available in Accident and Emergency departments in English hospitals by next winter.
In a party political snipe, Hammond said the government would not “exhume” Labour’s “hated death tax” – an aside back to 2010 when the last meaningful cross-party talks on adult social care broke down. The government has, however, committed to a Green Paper which will be published later in the year.
The £100m injection into the NHS is a trivial amount compared with what the NHS hierarchy say is needed. However, allocating money for a specific reform fits with No 10’s strategy of asking the health service to work more efficiently, and £325m of capital resources have been earmarked to fund the 44 Sustainability and Transformation plans.
The tobacco, gambling and alcohol sectors are quite often targeted for revenue-raising commitments during Budget announcements but this year the Chancellor did not introduce any unexpected proposals or pull Osborne-esque surprises out of the Treasury hat.
For alcohol, and in line with previous forecasts, duty rates and bands will increase by RPI inflation from 13 March. In addition, the government will consult (important to note that this will not be a retroactive move) on the introduction of a new duty band for still cider below 7.5% abv, as well as on the impact of a new duty band for still wine between 5.5% and 8.5% abv. In relation to the UK pub industry, which faces its own challenges in terms of closures and shifting consumer behaviours, the Chancellor announced that those establishments with a rateable value below £100,000 will receive a £1,000 discount in their business rates; not necessarily a substantial concession, but an assuredly welcome move nevertheless.
Despite rumours of an introduction of a tax on e-cigarettes, the Chancellor brought forward expected proposals. The long-anticipated Minimum Excise Tax (MET) rate, referenced in the 2016 Autumn Statement and first developed by the Chancellor’s predecessor George Osborne MP, is to be set at a pack price of £7.35 or £268.63 per 1,000 cigarettes and will come into effect from 20 May. Described by the Chancellor as a means of promoting “fiscal sustainability”, the MET is intended to target low-cost brands and cheapest packs of cigarettes. While it has been noted that the MET has the potential to disproportionately impact individuals on lower incomes, the government is evidently determined to pursue its introduction in conjunction with the rises in tobacco duty rates already announced in last year’s Budget.
Finally with regards to the gambling industry, the government did not announce any significant or game-changing policies other than for casino operators, which will face an indirect increase in gaming duty bands due to changes to measuring gross gaming yield (GGY), which from 1 April will be measured in line with inflation.
There were few ripples in the financial markets following the Chancellor’s Budget this afternoon. Ahead of the announcement Sterling dipped below $1.22 against the Dollar, only to recover slightly in the aftermath of the speech. Little change took place across the FTSE 100 and FTSE 250 indexes, with the FTSE 100 broadly unchanged following the conclusion of the Chancellor’s speech, suggesting by contrast the markets were far less jittery about Hammond’s statement today than they were about May’s Brexit speech last month.
The CBI has said this is a ‘great breakthrough budget for skills’ highlighting the government’s commitment to technical education.
Opposition politicians have considerably criticised the government in the aftermath of the speech over two policies in particular; the National Insurance hikes for the self-employed, with Liberal Democrat Leader Tim Farron saying it belies the Conservatives lack of commitment to actually help the ‘Just About Managing’s’, and the funding commitments to tackle social care, which many have criticised for being insufficient in size.
National Living Wage will rise to £7.50 per hour in April.
The personal tax-free threshold will be increased to £11,500 with the amount where the higher rate of tax is applied raised to £45,000.
Tax-free dividend allowance for shareholders to be reduced from £5,000 to £2,000 from April 2018.
From April 2018 national insurance contributions will rise for the self-employed by 1% to 10%.
A £300m discretionary fund for small businesses worst impacted by raises in business rates.
A new financial penalty will be introduced against financial professionals that propose tax avoidance measures that are successfully challenged by HMRC.
Action to prevent businesses converting capital losses into trading losses.
Introduction of UK VAT on roaming telecoms services outside the EU.
Minimum excise duty on cigarettes to be introduced based on a packet price of £7.35.
No further increases in alcohol or tobacco duties in addition to those announced recently.
Starting in 2021-22, the governmentwill target a total carbon price and set the specific tax rate at a later date.
New controls/price cap for the Levy Control Framework to be published later in 2017.
Publication of a formal discussion paper and establish panel to consider proposals for taxation support for North Sea Oil and Gas assets which will report at Autumn Budget 2017.
£690m competition for local authorities to tackle urban congestion.
£220m to address ‘pinch points’ on the strategic road network.
Further powers to be devolved to the Mayor of London.
Midlands Engine Strategy to be published tomorrow.
£350m for Scottish government and £200m for Welsh government.
£115m for incoming Northern Ireland Executive.
Delay to the reduction in the filing and payment window until 2018-19 for Stamp Duty Land Tax.
Amended legislation to ensure all profits realised by offshore property developers developing land in the UK, including those on pre-existing contracts, are subject to tax, with effect from 8 March 2017.
Consultation on proposals to redesign rent-a-room relief, to ensure it is better targeted to support longer-term lettings.
NS&I Investment Bond at a rate of 2% over a term of 3 years.
Publication of the Consumers and Markets Green paper.
Additional £2bn to councils in England over the next 3 years to spend on adult social care service.
An additional £100m to the NHS in England in 2017-18 for capital investment in A&E departments.
£325m over the next three years to support the capital investment needed for STPs.
Administrative changes to the R&D Tax Credit Regime to improve awareness of R&D tax credits among small businesses.
£200m for local projects to get private sector investment in full-fibre broadband networks.
The introduction of UK VAT on roaming telecoms services outside the EU.
A National 5G Innovation Network, the first phase of which contains an investment of up to £16 million in a facility to trial 5G applications.
£200m investment in a programme of local projects to accelerate the delivery of full-fibre broadband networks.
£400m investment in the Digital Infrastructure Investment Fund to be launched in Spring 2017.
£300m investment to develop the UK’s research talent, including creating 1,000 new PhD places and fellowships on STEM subjects.
An increase of over 50% in the number of hours training for technical students including a 3-month work placement for every student.
£40m in pilot programs to study lifelong learning.
A new digital tax system to be developed with extensive public consultation.
The Minimum Excise Tax (MET) for tobacco will be set at £268.63 per 1,000 cigarettes and will come into effect from 20 May.
A consultation on the introduction of a new duty band for still cider below 7.5% abv, as well as on the impact of a new duty band for still wine between 5.5% and 8.5% abv.
Pubs with a rateable value below £100,000 will receive a £1,000 discount in their business rates.
Casino operators will face an increase in gaming duty bands due to changes to measuring gross gaming yield (GGY), which from 1 April will be measured in line with inflation.
© 2017 FTI Consulting, Inc. All Rights Reserved.