Tax repercussions of Tory landslide
By Donald Drysdale for ICAS
17 December 2019
Given the decisive outcome of the general election, Donald Drysdale wonders what tax developments will follow. The views expressed are his own and not necessarily those of ICAS.
Reactions to victory
The appointment of a new Conservative administration with a strong parliamentary majority has calmed the markets and brought a measure of reassurance to business, at least for now, but many questions about how Brexit will proceed are still unanswered.
Behind the scenes, the Chancellor of the Exchequer must be sketching out a programme and timescale within which tax-related manifesto pledges will be honoured, and the immediate tax and benefit measures to be brought forward in the forthcoming Budget.
Manifestos, of course, are rarely observed as gospel, and it might be a mistake to assume that all the Tory pledges will be met. Any government with a majority of as many as 80 seats in the House of Commons can expect to be free to do more or less what it likes.
Manifesto tax pledges
In practice the Conservatives made relatively few specific tax promises in their election manifesto, ‘Get Brexit Done: Unleash Britain’s Potential’. In cases where they did say what they proposed to do, they were often fairly vague and short on detail.
Business taxes
The manifesto stated that corporation tax would stay at its current rate of 19%, thus abandoning the 2% cut which had been planned and which might have given the UK an extra degree of competitive edge.
It confirmed that devolution of corporation tax to Northern Ireland would go ahead. This is currently ‘on hold’ because of the political stalemate at Stormont.
The manifesto undertook that “the digital services tax” would be implemented – implying a unilateral UK DST rather than the OECD’s international approach. President Trump might be concerned (as he was with regard to France) about how this would impact on US-based technology giants.
The R&D expenditure credits rate would be increased from 12% to 13%, and the definition of R&D would be reviewed so that important investments in cloud computing and data, which boost productivity and innovation, would also be incentivised.
In other changes, entrepreneurs’ relief – which allegedly “hasn’t fully delivered on its objectives” – would be reformed. Structures and buildings allowance, a relatively new tax relief, would go up from 2% to 3%.
The manifesto confirmed that the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS) would continue. Support for creative sector tax reliefs would be maintained.
According to the manifesto, the government would look at how to improve the working of the apprenticeship levy. This could be fraught with difficulty, since the levy is reserved to Westminster while apprenticeship policy is devolved.
Commitment on tax rates
The Tories have promised not to raise the rates of income tax, VAT or NICs. This was offered as a “tax guarantee” across the next Parliament, which may be expected to last until May 2024 if the Fixed-term Parliament Act applies.
Much can change in five years – especially among all the uncertainties through which we are currently living. Furthermore, many countries are seeing a gradual shift from direct to indirect taxes such as VAT.
A commitment not to increase specific tax rates may have sounded good to voters, but the honouring of it might impose severe restrictions on a Chancellor’s ability to manage the economy to best advantage – particularly through any Brexit-related crisis.
National insurance contributions
The manifesto pledged to raise the NIC starting threshold from £8,632 to £9,500 in 2020/21, with the aim of lifting it ultimately to £12,500 – though no timescale was put on this latter aspiration.
Any general raising of NIC thresholds might prejudice lower earners, given that employees currently earning between the lower earning limit (£118 a week) and the primary threshold (£166 a week) receive free NIC ‘credits’ towards state pension and certain other benefits.
There would be a one-year reduction in employers’ NICs for firms hiring ex-service personnel.
There was no mention of the Prime Minister’s sweeping ambition to raise the UK higher rate income tax threshold from £50,000 to £80,000. However, it’s worth remembering that NIC thresholds are generally aligned with those for income tax, so consequential hikes in NIC might lie ahead.
Employment allowance
Eligible employers (including most businesses, charities and those employing care workers) are entitled to the NIC employment allowance, which reduces their employer’s NICs by up to £3,000 a year – although from 2020/21 certain large employers are to be excluded from this.
The manifesto undertook to increase the employment allowance for small businesses. The supporting costing indicated that the allowance would increase to £4,000 a year, but it was unclear whether any changes would be made to the eligibility rules.
Wages and pensions
The national living wage (NLW) for workers aged 25 and over is £8.21 an hour and in April it is expected to rise to £8.67. The manifesto said that, for those over 21, the NLW would rise to two-thirds of average earnings, estimated at £10.50 by 2024.
Workers earning below £12,500 a year in ‘net pay’ pension schemes have been missing out on tax relief for their contributions when compared with those in ‘relief at source’ schemes. The manifesto pledged to conduct a review to consider how to fix this issue.
It also undertook to hold an urgent review to address the ‘taper problem’ in doctors’ pensions, which has caused many to turn down extra shifts for fear of high tax bills. Distortions caused by the taper rules are not restricted to doctors, so I fear that issues of unfairness will emerge.
Maintaining the pension triple lock for uprating the state pension might prove an empty promise, given the inescapable arithmetic involved. In 2017 the Institute for Fiscal Studies (IFS) described the triple lock as unsustainable.
More recently, the House of Lords Select Committee on Intergenerational Fairness recommended that the triple lock should be replaced by simple uprating in line with average earnings, with protection for pensioners against any unusually high periods of inflation in the future.
Anti-avoidance
The new government would consolidate existing anti-evasion and avoidance measures and
powers, and introduce further measures to avoid profit-shifting by multinational companies to avoid paying taxes.
A “single, beefed-up anti-tax evasion unit in HMRC” would be created on a statutory footing to cover all duties and taxes, from individual errors to deliberate non-compliance. The inclusion of errors in the same breath as evasion may cause some concerns.
Other possibilities
The Tory manifesto committed the new government to proceeding with the proposed stamp duty land tax surcharge on non-resident buyers. There seems little likelihood (at least for now) of any fundamental reform of SDLT in England and Northern Ireland.
And finally, what about inheritance tax? There was no mention of IHT in the manifesto but, as recently as October, Chancellor Sajid Javid admitted that he was attracted by the idea of cutting or even abolishing IHT. That, indeed, might turn out to be a radical step.
Article supplied by Taxing Words Ltd
