Budget 2018 predictions

With less than two weeks to go before the eagerly awaited 2018 Budget, Lindsay Pentelow, tax partner at the international accounting and advisory firm, Mazars, says that there are many uncertainties in the run up to this year’s Budget, and the extent to which the Government can effect change will depend on what fiscal response is required as a result of the outcome of Brexit negotiations.
Business and employment
•    The Treasury has announced there will be no abolition of class 2 NIC in this Parliament (abolition was previously planned to happen on 6 April 2019).
•    Mazars responded to the consultation on extending IR35 assessment responsibilities to employers in the private sector (employers in the public sector are currently required to make such assessments).  We said that if the measure was introduced:
I.    the accuracy of the first time results from HMRC’s CEST (check employment status for tax) tool would need to be improved to provide greater guidance to employers as to whether their workers fall within the IR35 provisions;
II.    there would need to be a longer lead time in implementing this measure for the private sector than was available for the introduction of the measure to the public sector;
III.    the rules for the public sector would need to be adapted for the private sector, and possibly use of thresholds below which private sector businesses would be outside the scope.  

•    Business visitors to the UK head office from an overseas branch of that UK company have potentially more onerous UK PAYE/NIC and self-assessment obligations than similar visitors to the UK parent of an overseas subsidiary of that UK company.  Mazars responded to a consultation on options for reform in this area.  Aligning the treatment of non-UK branch visitors with those from non-UK subsidiaries was our preferred option and Mazars did not see that this reform would create significant exchequer cost.  There may well be double tax treaty issues to resolve with any such reform, but it will be interesting to see what the Government’s response to this will be.  
•    From a date to be specified, intermediary and agency financial service transactions will be excluded from the scope of supplies to non-EU jurisdictions which generate an entitlement to input VAT recovery in the UK. Depending on the Brexit negotiations there may be further reforms in this area to limit the Treasury’s exposure to reduced VAT revenues.
•    The Government issued a VAT technical note on preparing for a ‘no-deal’ Brexit. The changes envisaged included changing the system for accounting for import VAT so that it is accounted for on the VAT return rather than at the point of entry.  The note also indicated a number of other possible changes.  Whether these feature in the Budget will depend on the Brexit negotiations.
•    The EU has an initiative to simplify the VAT regime for SMEs, which includes a €100,000 threshold below which VAT may not need to be accounted for.  While the UK is in the process of exiting the EU, this may influence the UK Government response to its recent call for evidence on VAT registration thresholds and how to reduce the distortive effect of that threshold on growing businesses.  Although resulting in increased complexity, the Office of Tax Simplification’s proposal for staged introduction of VAT as the threshold is breached does seem to offer a possible solution.
•    The UK has already announced its intention to remove the finance exemption from its controlled foreign company (CFC) rules from 1 January 2019.  By the time of the Budget the EC may have concluded on its state aid investigation into the UK CFC finance exemption and there may be further clarity of the consequences of that decision.  
•    Following a December 2017 consultation, we have yet to see any draft legislation on a royalty withholding tax in respect of payments to connected parties not resident in the UK.  At the September 7/8 meeting of ECOFIN, there was broad support for preparing further measures in this area where payments for digital services are routed through no-tax and low-tax systems.  It seems likely that this will feature in the upcoming UK budget.  As recently as 11 September, Financial Secretary to the Treasury indicated that the OECD will be advancing the date of its report into digital tax to 2019, and that the UK is prepared to take unilateral action on taxing the digital economy if that is appropriate.
•    The tax treatment of intangible fixed assets for companies is complicated by the fact that some assets may be dealt with through the capital gains (CG) regime, while others may be dealt with through the intangible fixed asset regime (IFA).  The IFA regime has seen a number of changes over recent years and could be described as out of line with similar measures in other jurisdictions.  It will be interesting to see if the CG and IFA treatment of intangibles assets and goodwill will be aligned, whether amortisation of newly acquired goodwill and customer intangibles is restored and the IFA tax depreciation rate is modernised.
Plastics tax
•    The Government’s call for evidence on the introduction of a plastic tax produced over 162,000 responses, the highest ever to a consultation.  The 18 August 2018 response document indicates Budget 2018 will announce policy to take the response ideas forward.  These may include: using tax to shift demand to recycled plastic inputs; using taxes to encourage design of plastic products that are easier to recycle; taxes or charges on commonly littered plastic products; and taxes to encourage greater waste recycling.  There is clearly a lot of interest in this area, so it should be prominent in the Budget measures announced.
The following topics may also be raised:
•    Possible measures to finance care for the elderly.  This is clearly a demographic issue for a population such as the UKs where individuals’ life expectancy continues to increase (and there is a proposal to consider a social care levy in Wales).
•    Possible increases in income taxes to raise funds for NHS (again, there is a suggestion that Wales may introduce a hypothecated income tax charge to fund the NHS in Wales)
•    Whether the liability for SDLT should switch from the purchaser to the vendor in property transactions.  This could be a complex change to manage in our view (particularly as some existing owners will have been subject to SDLT twice if this change were to implemented), without any certainty that pricing, willingness to sell or ability to buy in the property sector would change significantly.
•    Consideration of the system for taxing capital and wealth and the method of determining the threshold before which IHT is due.  We do not foresee significant change in this area during this parliament.
•    Comprehensive review of the UK’s dividend regime, although the recent response to corporate governance in which this was issued did not specifically mention tax.
•    Notwithstanding the recent consultation on its relaxation in the case of company share issues, restriction of entrepreneurs’ relief or even its total abolition has also been as a possible way of creating extra funds for the NHS.  The Government has not indicated at this stage it will radically alter any of the existing or planned tax reliefs and tax rates, but what actually happens may depend on the form of Brexit deal agreed.
The extent to which the Government can introduce change in any of these areas may well depend on what fiscal response is required as a result of the outcome of Brexit negotiations.


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