Autumn Budget 2017: Hammond bears the bad news
Philip Hammond’s budget had to answer two questions. Have the Conservatives found an adequate response to Jeremy Corbyn? And has he done enough to resist the Brexiteers who are calling for his head?
The runes do not look good for Mr Hammond. He came to parliament today to talk about housing and productivity, but the worsening economic outlook given by the Office for Budget Responsibility, and disappointing productivity performance, will dominate the political picture in the medium term.
The grim backdrop limited the government’s room for manoeuvre. A few weeks ago this budget was billed as “transformative” and “spectacular”. The package announced today falls short of those adjectives. The Chancellor closed by promising £44bn in capital and loans to spend on addressing the housing crisis. This is a huge figure; but, even so, it is £6bn short of the £50bn figure that was mooted earlier in the autumn — and the policies appear to be aimed at delivering results well into the next decade rather than tomorrow.
The meat of the speech addressed Britain’s faltering productivity. The Chancellor announced an increase in the R&D tax credit to 12% to accompany the recently announced increase in R&D spending. There were further pledges on new generation technological infrastructure like 5G, the promise of an Investment Management Strategy to deliver better outcomes for investors and the UK economy, and a “regulator’s pioneer fund” to prepare Britain for a “world on the brink of technological revolution”. These pledges were accompanied by pre-announced measures on skills, particularly maths and computer science. There were also references to the forthcoming industrial strategy, new devolution deals in the West Midlands and North of the Tyne, and a £1.7bn Transforming Cities fund to support local transport projects.
This section of the speech was welcomed by the Tory benches, but onlookers waited in vain for rabbits to emerge from the Chancellor’s hat. Instead, they heard the Chancellor talk of a “balanced approach”, “making progress” on personal tax allowances, his determination to “lay the foundations” for the future, and his pleasure that the national debt is set to peak this year. This rhetoric was accompanied by a short burst of revenue raising measures, including a special levy on diesel cars, as the Treasury seeks to maintain control of the books.
None of this should come as a surprise. Philip Hammond’s conservativism has been evident since he became Chancellor after the EU referendum. But, even without Hammond’s native caution, the softening economy made it impossible for a conservative chancellor to meet the expectations that have been set in recent weeks.
This gap in expectations could do the government political harm in the short-term. Jeremy Corbyn responded to Mr Hammond by reiterating his vision for change — and Labour makes its case with growing confidence. The government will also come under attack from its own backbenchers, particularly Brexiteers who are opposed to handing over billions of pounds to the EU as part of the Brexit negotiations. This internal criticism is likely to come in two forms. ‘Blue collar’ Conservatives like Robert Halfon are already arguing that the money is better spent on schools, hospitals and public servants’ salaries. (These MPs believe that the Conservatives must change to counter Corbyn.) Others of a drier nature, including many of those who argue that the UK should set itself up as a Singapore-on-Thames after Brexit, say that at least some of the money should be handed back to taxpayers through tax cuts, and much of the rest should be used to prepare for a ‘no deal’ Brexit scenario beyond the additional £3bn which Hammond offered to that end today.
Criticism is already being aimed at Hammond and his team, who are blamed for failing to manage expectations. This is somewhat unfair because much of the ill-disciplined briefing emanated from elsewhere as various ministers auditioned for the Chancellor’s job.
A stronger prime minister might have quashed this opportunism. But, equally, there could be substance to the rumours of a deep rift between Theresa May and Philip Hammond; a rift reflected in Number 10’s public intervention in the hours before the budget when extra cash for maths teachers was announced, and Theresa May’s long-running opposition to the Treasury’s plan to release more of the greenbelt to housing development.
Philip Hammond was due to be sacked 6 months ago yet survived owing to Mrs May’s post-election crisis and the support of ministers and MPs. At one point in the summer he was even touted as a possible leadership candidate. That time is long past, and he is short of allies after a torrid autumn. Winter may bring more discontent for him. The domestic Brexit debate is becoming more pointed as the Brexit bill nears agreement and the EU Withdrawal Bill staggers through parliament. Mrs May will have to ask the Brexiteers to give some ground if progress is to be made. She does not have the luxury of making demands without offering concessions of her own. Losing a chancellor, especially a chancellor who is reasonably popular with business, is a serious affair for any prime minister. But Philip Hammond could be the sacrificial lamb.
On the other hand, Mrs May’s post-election crisis appears to be permanent. There are reports that may be forced to replace Damian Green, her closest political ally, due to the fallout from the Westminster sexual harassment scandal. If Green leaves the government, it will weaken Theresa May still further and possibly constrain her ability to reshuffle her pack. In this environment, Philip Hammond could well survive to deliver the next fiscal update in the spring.
You can read the Autumn Budget 2017 in full here.
Sector specific announcements
The Government will:
- Create a new Centre for Data Ethics and Innovation to enable innovation in AI and data-driven technologies.
- Invest over £75 million to take forward key recommendations of the independent review on AI, including exploratory work to facilitate data access through ‘data trusts’.
- Create new AI fellowships, and initially fund 450 PhD researchers, to secure the UK’s leading position in the global AI market
- Establish a new £10 million Regulators’ Pioneer Fund. This will help regulators to develop innovative approaches aimed at getting new products and services to market.
- Invest £21 million over the next 4 years to expand Tech City UK’s reach and support regional tech companies and start-ups to fulfil their potential.
Research and development
- Allocate a further £2.3 billion for investment in R&D and increase the R&D Tax credit to 12%
- Replace European investment fund money if necessary.
- Publish an action plan for UK knowledge intensive scale up businesses.
- Introduce a new Advanced Clearance Service for R&D expenditure credit claims
- Change immigration rules to enable world-leading scientists and researchers endorsed under the Tier 1 (Exceptional Talent) route to apply for settlement after three years.
- Make it quicker for highly-skilled students to apply to work in the UK after finishing their degrees; and reduce red tape in hiring international researchers and members of established research teams, by relaxing the labour market test.
- Allow the UK’s research councils and other select organisations to sponsor researchers.
Online market place
- Legislate in Finance Bill 2017-18 to:
- Extend HMRC’s powers to hold online marketplaces Jointly and Severally Liable (JSL) for the unpaid VAT of overseas traders on their platforms to include all (including UK) traders. This extension will help tackle the UK hidden economy and eliminate the risk of overseas traders establishing a UK shell company simply to escape the existing JSL regime.
- Extend HMRC’s powers to hold online marketplaces JSL for any VAT that a non-UK business selling goods on their platforms fails to account for, where the business was not registered for VAT in the UK and that online marketplace knew or should have known that the business should be registered for VAT in the UK.
- Require online marketplaces to ensure that VAT numbers displayed for businesses operating on their website are valid. They will also be required to display a valid VAT number when they are provided with one by a business operating on their platform.
- Publish a call for evidence in spring 2018 to explore what more digital platforms can do to prevent non-compliance among their users.
- Invest £3.5 billion in capital by 2022-23, to ensure patients receive high quality, integrated care and improve efficiency and productivity.
- Provide an additional £2.8 billion of resource funding to improve NHS performance and ensure that more patients receive the care they need more quickly.
- Ensure that the Climate Change Levy exemptions for businesses that operate mineralogical and metallurgical processes remain operable after EU exit, the government will clarify the definition of the exemptions in Finance Bill 2018-19. The revised definition will also ensure that the exemptions work better in landlord-tenant situations.
- Ensure that the list of designated energy-saving technologies qualifying for an ECA, which support investment in energy-saving plant or machinery that might otherwise be too expensive, will be updated through Finance Bill 2017-18.
- Make draft legislation available in spring 2018 and the government will legislate to make transferable tax histories available from 1 November 2018.
- Launch a technical consultation on allowing a petroleum revenue tax deduction for decommissioning costs incurred by a previous licence holder. This will support transfers of assets where the seller retains the decommissioning liability.
- Legislate in the Finance Bill 2017-18 to clarify that all tariff income earned by petroleum licence holders is within the ring fence corporation tax regime.
- Reduce business rates by £2.3 billion over the next 5 years
- Consult on plans to legislate in Finance Bill 2018-19 to ensure that when customers pay with vouchers, businesses account for the same amount of VAT as when other means of payment are used, aligning the UK with similar changes being made across the rest of the EU.
- Increase the NLW by 4.4% from £7.50 to £7.83 from April 2018.
- Accept all of the Low Pay Commission’s recommendations for the other NMW rates to apply from April 2018. The recommendations include:
- increasing the rate for 21 to 24 year olds by 4.7% from £7.05 to £7.38 per hour
- increasing the rate for 18 to 20 year olds by 5.4% from £5.60 to £5.90 per hour
- increasing the rate for 16 to 17 year olds by 3.7% from £4.05 to £4.20 per hour
- increasing the rate for apprentices by 5.7% from £3.50 to £3.70 per hour
- Freeze duties on wines, spirits and beer
- Introduce a new duty band for still cider from 6.9% to 7.5% alcohol by volume (abv), to target white ciders. Legislation will be brought forward in Finance Bill 2018-19, for implementation in 2019, to allow producers time to reformulate and lower their abv.
- The abolition of stamp duty on homes with a value up to £300,000, and exemption from the first £300,000 for homes with a value up to £500,000.
- A new homes target of 300,000 net additional homes a year on average by the mid-2020s
- An urgent Review to look at the gap between planning permissions and housing starts.
- £34m to boost skills in the construction sector.
- One million new homes for the Cambridge-Milton Keynes-Oxford corridor by 2050.
- An increase of the Targeted Affordability funding by £125 million over the next two years
- A £1.5bn Home Building Fund to help smaller housebuilders to build homes
- Giving Local Authorities the power to charge a 100% council tax premium on empty properties
- Corporation tax – No change in the overall taxation level
- Corporate indexation allowance – Frozen from 1 January 2018. No relief will be available for inflation accruing after this date in calculating chargeable gains made by companies
- Position paper: corporate tax and the digital economy – Alongside Budget the government has published a position paper setting out the challenges posed by the digital economy for the international corporate tax framework and its proposed approach for addressing those challenges.
- Carried interest – To prevent the avoidance of legislation designed to ensure that asset managers receiving carried interest pay CGT on their full economic gain, the government will remove the transitional commencement provisions with immediate effect.
- Double Taxation Relief – From 22 November 2017 a restriction will be introduced to the relief for foreign tax incurred by an overseas branch of a company, where the company has already received relief overseas for the losses of the branch against profits other than those of the branch.
- Requirement to notify HMRC of offshore structures – The government will publish a consultation response on the proposed requirement for designers of certain offshore structures, that could be misused to evade taxes, to notify HMRC of these structures and the clients using them. This work will be taken forward in conjunction with the OECD and EU.
- Extending offshore time limits – Assessment time limits for non-deliberate offshore tax non-compliance will be extended so that HMRC can always assess at least 12 years of back taxes without needing to establish deliberate non-compliance, following a consultation in spring 2018.
- Intangible fixed assets: related party step-up schemes – The Intangible Fixed Asset rules will be updated with immediate effect, so that a licence between a company and a related party in respect of intellectual property is subject to the market value rule, and to ensure that the tax value of any disposal of a company’s intangible assets is correct, even if the consideration is in something other than cash
- Depreciatory transactions – The government will remove the 6-year time limit within which companies must adjust for transactions that have reduced the value of shares being disposed of in a group company. This will ensure that any losses claimed are in line with the actual economic loss to the group. This change will take effect for disposals of shares or securities in a company made on or after 22 November 2017.
- Investment Management Strategy – The government will publish a new long-term strategy to ensure that the UK asset management industry continues to thrive and deliver the best possible outcomes for investors and the UK economy. This will include actions, to be taken forward in close collaboration with the industry, on skills, harnessing financial technology solutions, mainstreaming innovative investment strategies, and continuing a coordinated programme of international engagement.
- Support for challenger banks - The Prudential Regulation Authority will also make capital requirements more proportionate for eligible smaller banks, helping them compete more effectively in the market
- British business bank - extending the British Business Bank’s Enterprise Finance Guarantee to March 2022 and expanding the programme to support up to £500 million of loans per annum.
- Securities deposited with financial institutions liable to 1.5% charges – The government will not reintroduce the Stamp Duty and Stamp Duty Reserve Tax 1.5% charge on the issue of shares (and transfers integral to capital raising) into overseas clearance services and depositary receipt systems following the UK’s exit from the EU.
- Financial institution bail-in exemption – The government will legislate to exempt certain transfers of shares and land from stamp taxes when resolving failing financial institutions. The exemption will be limited to transfers to public bodies and affected creditors. This will help simplify and strengthen the process of resolving a failing financial institution and help to ensure that the “no creditor worse off” principle is upheld.
- Starting rate for savings – The band of savings income that is subject to the 0% starting rate will be kept at its current level of £5,000 for 2018-19.
- Individual Savings Account (ISA) annual subscription limits – The ISA annual subscription limit for 2018-19 will remain unchanged at £20,000. The annual subscription limit for Junior ISAs and Child Trust Funds for 2018-19 will be uprated in line with CPI to £4,260.
- Lifetime allowance for pensions – The lifetime allowance for pension savings will increase in line with CPI, rising to £1,030,000 for 2018-19.
- Save As You Earn scheme – Employees on maternity and parental leave will be able to take up to a 12 month pause from saving into their Save As You Earn employee share scheme, increased from 6 months currently. The change will take effect from 6 April 2018.
- Life assurance and overseas pension schemes – From April 2019, tax relief for employer premiums paid into life assurance products or certain overseas pension schemes will be modernised to cover policies when an employee nominates an individual or registered charity to be their beneficiary.
For more details, please contact: