Autumn Budget 2018 – The end of austerity?
Philip Hammond delivered his final Budget exactly 5 months to the day before Brexit concludes. But is his budget the real deal for business?
There was actually very little mention of the Brexit negotiations within the Budget speech, though the Chancellor remained confident that a deal would be reached. However, Hammond continued to plan for all scenarios and confirmed an additional £500 million of funding for preparations to leave the EU.
This extra funding means that the government will have invested over £4 billion in preparing for EU exit since 2016. On this topic we will just have to wait and see what March 2019 brings, and we still may see an emergency Budget being released in the next few months.
The headline of this Budget was the end of austerity that Theresa May had declared during the Conservative Party conference, however Philip Hammond mentioned on more than one occasion that it had not ended but was coming to end! Much more conservatism coming from the Chancellor.
The speech moved on to paint a positive picture of the UK since the Conservatives took office 8 years ago and focused on the efforts of the ‘hard-working’ families of Britain. Unemployment is at an all time low since the 1970’s with 3.3 million more people being back in work since 2010 and a further 800,000 jobs planned by 2023. He talked about real wage growth and announced increases to the National Living Wage.
There was huge support for the NHS and defence with significant levels of funding being committed to mental health projects, and he linked commemoration of the centenary of World War One, with further mental health funding for service personnel.
There was a surprise increase to the personal allowance. We all knew this increase had been committed by the Tories for 2020/21 but the Chancellor confirmed that this increase would apply from April 2019. This is great news for over 2.4 million people, meaning that basic rate taxpayers will be better off by £130 per year. Higher rate taxpayers will save over £800 per year and additional rate taxpayers will save £600.
We’d all agree this is an extremely positive place to be.
But how is this all being funded?
Largely this appears to be coming from the £13 billion windfall arising from the better than expected government borrowing figures.
‘Fiscal Phil’, as the Chancellor described himself, claimed that the budget deficit was significantly down to only 1.4% of GDP, and that he forecasts that this will fall. He also predicted that he will continue to lower the levels of borrowing that the originally forecast, which will be offset by the growth of the economy.
The Chancellor continued to build on the UK’s position as a world leader in innovation and new technologies, and this year’s Budget also announced a £1.6 billion investment in science and innovation, including investment in Artificial Intelligence (AI), quantum computing, future manufacturing, and nuclear fusion.
The government is backing business and entrepreneurship by increasing access to finance for private sector investment and helping people who want to start and grow businesses. This includes action to unlock pension fund investment in growing firms and policies to raise business productivity.
R&D tax credits
The main announcement in relation to R&D tax credits came under the avoidance, evasion and unfair outcomes section. Not a great start, but upon further review this announcement is targeted at aggressive tax planning arrangements which would fall foul of the legislation and is not designed to affect the genuinely innovative and creative businesses. It does highlight once again the need for expertise and experience when preparing a claim under this scheme. With ten years’ experience our clients have confidence in our accurate and compliant claim performance, which has so far delivered over £150 million in R&D tax credits.
The measure is designed to prevent the abuse of the payable tax credit which we know offers valuable funding to many SMEs across the UK. From 1 April 2020 the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. There will be a consultation process for this change which we will follow closely.
This follows HMRC’s identification of fraudulent claims worth £300 million.
The government remains committed to tackling tax avoidance and has introduced over 100 measures to crack down on avoidance and evasion since 2010. Our own experience shows that where we perform our own check for clients who are already claiming, 91% of those contain errors.
We feel that this measure is a strong statement by the government, showing that they continue to back innovative industries in the UK, especially in a post-Brexit economy, but want to ensure that this incentive is targeted at genuinely innovative business.
Business Growth/Enterprise opportunities
The Budget showed massive support to business enterprise and announced that the Annual Investment Allowance would be increased to £1 million for two years for investments made in qualifying plant and machinery. This is a huge benefit to SMEs wanting to invest and grow their manufacturing capabilities. Paired with this was a commitment to increase the loans and grants available to SMEs, to allow growing businesses to invest more in plant & machinery.
To build upon this backing of entrepreneurs and boost the UK’s reputation as one of the best places to start and grow a business, the government will extend the funding of the British Business Bank’s Start-Up Loans Programme to 2021.
There was then a whole host of other measures in this area, all designed to support and stimulate business investment and growth. All very welcomed by MPA.
A new Structures and Buildings Allowance (SBA) was introduced for new non-residential structures and buildings. These will now be eligible for a 2% capital allowance where all the contracts for the physical construction works are entered into on or after 29 October 2018.
This addresses a significant gap in the UK’s current capital allowances regime and will improve the international competitiveness of the UK’s tax system.
The Chancellor spoke about the rumoured removal for Entrepreneurs’ Relief and how the government could not build a stronger fairer economy without encouraging entrepreneurs. He put these rumours to bed and retained the generous tax relief. He did, however, extend the minimum qualifying period to 2 years from the previous 1 year. Again, this is aimed at ensuring that it is in the benefit of genuine entrepreneurs.
Philip Hammond committed to continuing this support following the completion of Brexit and in the event of a ‘no deal’ relationship, the government will provide the British Business Bank with the resources to enable it to make up to £200 million of additional investment in UK venture capital and growth finance in 2019-20.
There was also support for the Intellectual Property Office to offer support for companies to use their Intellectual Property to access finance. Whether this be through a high-quality valuation or through the use of the Patent Box, we welcome this announcement.
We did see a further attack on the self-employed under the off-payroll working rules known as IR35. We have already had restrictions to the these for those working the public sector and therefore it has been expected that restrictions would follow for the private sector workers. Good news however that these restrictions will only apply to medium and large organisations from April 2020.
Corporate Tax changes
There was a strong theme throughout the whole Budget creating a tax system which secures business investment and the location of business activity in the UK, ensuring that the tax paid is fair.
Philip Hammond introduced a new Digital Services Tax which is intended to apply from April 2020. The tax will be 2% of revenues of certain digital businesses to ensure that the amount of tax paid in the UK is reflective of the value they derive from their UK users. This however, is aimed at the global multi-nationals, to ensure they pay what the government sees as ‘the right amount of tax’ in the UK.
We saw some further restrictions to the use of Capital Losses again ensuring that large companies pay the right amount of tax when they make significant capital gains. MPA expects 99% of companies in the UK to be unaffected by this.
There was a welcome update to the Intangible Fixed Assets (IFA) regime in the form of a targeted relief for the cost of goodwill in the acquisition of businesses with eligible intellectual property from April 2019. With effect from 7 November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangible assets such a patents or other types of intellectual property.
MPA is greatly encouraged by the measures promoted by the government to back innovation in the UK, and the support that has been given to SMEs. We feel that although some of the headline measures may look to limit the support available, the government’s aim is simply to reduce the wastage within the system. By using MPA, we can maximise your claims for R&D tax credits or Patent Box, in a way that rewards you for the work that you do. This will not be changed by the latest Budget.
Lisa Baum, Senior Tax Specialist at MPA