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Spring Statement 2018

By the time Chancellor Philip Hammond rose to his feet in the House of Commons to deliver the first Spring Statement, he had already offered plenty of hints that this would be a low-key affair.

Gone was the primetime Wednesday slot after Prime Minister’s Questions, gone was the trailing of policy announcements in the days and weeks beforehand and gone was the set-piece photo call with the red box outside Number 11.

This was all carefully orchestrated. Mr Hammond could not have been clearer that there were to be no rabbits pulled from hats.

In line with the move towards a single fiscal event each year, this was to be a straightforward response to the Office for Budget Responsibility’s (OBR) updated economic forecasts, dispensing with the usual drama of Budget Day.

Indeed, Mr Hammond may well be relieved that he does not need to deliver a Budget until the Autumn. A year ago, his first Budget was widely seen as disastrous for the Government, with the Chancellor having to quickly backtrack on heavily-criticised tax rises for the self-employed, providing helpful ammunition for the opposition at the subsequent general election.

Nevertheless, being the first of its kind, the Spring Statement was still something of an unknown quantity and the business community was still curious to see what he might have to say as they waited for the cheers and jeers to quieten in the Commons.

As it turned out, the Chancellor stuck to his guns, saying at the start of the speech that the UK had been unique amongst major economies in making tax changes twice each year. He added the move to a single fiscal event is intended to give greater certainty to business.

The Economy

There was a strong emphasis on jobs in the Chancellor’s assessment of the state of the UK economy. He noted that the wages of the lowest paid have increased by seven per cent since 2015 and that there are three million more people in work since 2010. He told MPs that the OBR now predicts 500,000 more people will be in work in 2022.

The OBR revised up its GDP growth forecast for 2018 from 1.4 per cent to 1.5 per cent. This is then predicted to remain in line with previous predictions at 1.3 per cent in 2019 and 2020, before rising to 1.4 per cent in 2021 and 1.5 per cent in 2022.

Following the recent rise in interest rates, the OBR now expects that inflation will now return to its two per cent target over the next year, while wages are expected to rise faster than prices over the next five years.

The Chancellor said figures show that the manufacturing sector has enjoyed its longest period of expansion for half a century.


The Public Finances

Moving to the state of the public finances, the Chancellor noted that the UK has now had its first sustained fall in public sector debt for 17 years, saying that this represents a ‘turning point’ for the economy.

Debt as a percentage of GDP is expected to fall from 86.5 per cent in 2018-19 to 77.9 per cent in 2021-22.

Meanwhile, borrowing is now forecast to be £45.2 billion in 2018, £4.7 billion less than had been predicted by the OBR in November 2017.

In the wake of what he was eager to present as positive predictions, the Chancellor said that he is on course to increase public spending at the Autumn Budget, so long as the OBR’s predictions for the public finances are borne out.


Business measures

Mr Hammond said he was keen to support British business, before promising that the next business rates revaluation exercise will be brought forward by one year to 2021, meaning rates will better reflect current rental values.

He also said that there will be a review of how to tackle the problem of late payments, which are seen as an ever-increasing problem for SMEs in particular.

Continuing the theme, and appearing to go against the suggestion that there would be no spending commitments in the speech, Mr Hammond said the Education Secretary will make up to £80 million available to small businesses to take on new apprentices.


Consultations

As had been widely expected, Mr Hammond took the opportunity to announce a number of consultations on the future of the tax system.

Top of the Chancellor’s list was a consultation on ‘Reducing single-use plastic waste through the tax system’. He said the Government is inviting views on how to tackle the problem of plastic waste through the tax system.

He also set his sights on large multinational digital businesses, publishing a position paper on ‘Corporate tax and the digital economy’, including measures relating to VAT.

Maintaining the focus on the digital economy, the Chancellor announced a consultation on the role cash will play. He said the Government will seek views on how to support consumers and businesses to use digital payments, while ensuring those who need to can continue to use cash. The consultation will also seek views on the use of cash in tax evasion and money laundering.

Meanwhile, the Chancellor also said that the Government would consult on extending tax relief for employees and the self-employed who fund their own training.

Although not mentioned in the Chancellor’s speech, the hours following the Statement also saw the Treasury publish a consultation into the VAT registration threshold, suggesting that the current flat threshold disincentivises businesses from pursuing growth.


Summary

One of the biggest advantages a politician has in Government is the ability to set the terms of the political debate and to mark where the dividing lines should fall.

That is what the Chancellor appears to have aimed for with his first Spring Statement. He made a clear statement of intent on the Government’s direction of travel on tax and spending by hinting at spending increases in the Autumn Budget.

Much of the debate in the coming months is likely to revolve around the question of who should benefit from any increases.

So while there were no specifics on tax and spending for businesses to take away from the speech, there were important indications about what may be to come for businesses and the economy.

Tax-Free Childcare launches for all parents of under-12s

A scheme, enabling parents of children aged 12 and under to benefit from up to £2,000 towards the cost of childcare, has now been extended to all working parents with children in the age group.

The scheme provides a Government top-up worth £2 for every £8 contributed by parents, up to a maximum of £2,000 a year.

Tax-Free Childcare can be used towards all registered childcare providers, including nannies, nurseries, childminders and after-school clubs.

In order to benefit from the scheme, parents need to sign-up for an online childcare account.

Liz Truss, Chief Secretary to the Treasury, said: “Tax-Free Childcare will cut thousands of pounds from childcare bills and is good news for working parents.

“More parents will be able to work if they want to and this demonstrates our commitment to helping families with the cost of living.

“All eligible parents with children under 12 can now apply through Childcare Choices and should take advantage of the available support.”

The Government expects that by the end of the Parliament, Tax-Free Childcare will support around one million families with the cost of childcare.

Link: Tax-Free Childcare opens to all parents with children under 12

SMEs invest three working weeks a year on tax compliance

A new study, prepared by the Federation of Small Businesses (FSB), has found that the UK’s average small business spends nearly three working weeks every 12 months complying with tax rules.

This costs SMEs around £5,000 a year on average, according to the survey of 1,000 small businesses.

Of the challenges they face, around half (46 per cent) say determining the tax rates at which they are required to pay is most difficult, while a further 40 per cent say that reliefs and exemptions are too confusing.

Payroll functions, such as PAYE and National Insurance (NICs), and VAT are deemed the most time-consuming by SMEs, with the average small business estimating that it spends around 95 hours a year on these tasks.

Specialist professional advisers are used by 77 per cent of SMEs to ensure their taxes are paid correctly, with almost all choosing the services of a qualified accountant.

Of the issues they face, 47 per cent say business rates have made it harder to grow their firm, with a similar proportion saying Corporation Tax has had a similar effect. Meanwhile, 44 per cent said that their plans had been stifled by employers’ NICs.

Mike Cherry, FSB National Chairman, said: “We hear a lot about the need to simplify the UK tax code.

“In fact, our priority should be simplification of the tax compliance process. Small firms, by and large, understand a tax like VAT, for example, but the sheer complexity of VAT administration means they spend 44 hours a year filing returns.”

When asked about changes to tax compliance, the majority (53 per cent) say the ability to pay in instalments would make the process less burdensome. Nearly half (52 per cent) also said that they would like an early estimation of their tax.

Of those asked, 40 per cent also said that the automation of tax calculations would be useful.

The Taxing Times report prepared by the FSB also revealed that 55 per cent of small firms are not aware of tax reliefs available to them, while 73 per cent had not heard of either the business rates relief offered to those based in enterprise zones or the enhanced capital allowance for clean technologies.

In comparison, 78 per cent were aware of, or had claimed, small business rates relief, while two thirds had used standard capital allowances. The majority (51 per cent) had also used the dividend allowance.

Mr Cherry added: “There are lots of useful tax reliefs out there but many small firms simply don’t know they exist or don’t have the expertise to access them.

“Lots of firms actually employ consultancies to help them apply for R&D tax credits, for example. When applications are complex, it is big firms, not time-strapped small business owners, which stand to gain.

“There needs to be a real push from local and central Government to ensure small firms are aware of all the reliefs available.”

Link: FSB Study

Does Nesquik attract VAT? It depends on the flavour, Revenue says

An apparently counterintuitive judgement was handed down last month by the Upper Tier Tribunal as it ruled VAT should be applied to the strawberry and banana flavours of Nesquik milk powder, but not to the chocolate equivalent.

The case arose after Nestlé, the manufacturer of the powders made a repayment claim to HM Revenue & Customs (HMRC), which was refused on the basis that the strawberry and banana powders are standard rated for VAT.

Nestlé appealed this decision but lost, before appealing that judgement at the Upper Tier Tribunal, where the claim was dismissed by Mr Justice Snowden and Judge Charles Hellier last month.

HMRC and Nestlé agreed that the chocolate version should be zero-rated on the basis that it includes cocoa butter, which is zero-rated.

However, while Nestlé held that both strawberry and banana Nesquik should be zero-rated because they encourage the drinking of milk and milk itself is zero-rated for the purposes of VAT, the Tribunal rejected the arguments.

It found that the three powders should not be treated the same for VAT even though they are essentially the same and also that the banana and strawberry versions should not be zero-rated just because they create a new beverage that would itself be zero-rated.

The ruling stated: “it does not seem to us that the anomalies which arise on the basis of the First Tax Tribunal decision require any answer other than that Parliament has chosen to zero-rate certain foods, generally because they were everyday foods, tax on which would be ‘particularly sensitive’ for much of the population, and has chosen not to zero-rate others.”

Link: VAT ruling on fruit-flavoured Nesquik leaves sour taste for Nestlé

Only a third of EIS taken up by companies outside London

New data from HM Revenue & Customs (HMRC) shows that businesses in London and the South East account for 66 per cent of the Enterprise Investment Schemes (EIS) uptake.

Despite accounting for 62 per cent of the UK economy, businesses outside London and the South-East only account for £610 million out of nearly £1.9 billion of EIS investments.

The report shows that since the EIS was created in 1993/94, 26,355 companies have received investment worth almost £16.2 billion.

In 2015-16, the last year for which data is available, 3,470 companies raised a total of £1.88 billion of funds under the EIS scheme.

In comparison in the year before some 3,370 companies used the EIS, 100 less than the following year, but they managed to raise £1.92 billion of funds – £41 million more.

The EIS is designed to help small businesses raise finance and offer appealing incentives for investors who purchase new company shares.

The scheme offers Income Tax relief of up to 30 per cent, as well as possible Capital Gains Tax exemptions and deferral to investors who buy new shares in the company.

Data from HMRC also showed that one sector, in particular, dominated the use of EIS. Companies from the business services sector accounted for over £800 million of investment – more than 40 per cent of all EIS investment – in 2015/16.

The latest data also looked at the Seed Enterprise Investment Scheme (SEIS). This can carry more risk than the EIS, but there is substantial tax relief available to offset potential losses. Investors may invest up to £100,000 per tax year and claim back 50 per cent tax relief regardless of their marginal rate of Income Tax, which makes it particularly useful for those wanting to put in larger sums of money.

Key findings for SEIS data from HMRC include:

  • In 2015/16, 2,360 companies received investment through the SEIS and £180 million of funds were raised.
  • In comparison 2014/15 saw 2,365 companies raise a total of £180 million.
  • Over 1,800 of these companies raised money under SEIS for the first time in 2015/16, representing £154 million in investment.
  • The tech and business services sectors made up 68 per cent of all SEIS investment received.

Link: Enterprise Investment Scheme Seed Enterprise Investment Scheme and Social Investment Tax Relief

Cash payments plunge as digital payments become the default for many consumers

New research from finance and banking trade body, UK Finance, has found that debit card transactions will overtake those made with cash this year.

Meanwhile, ATM usage peaked several years ago, with more than 2.9 billion transactions taking place in 2012, falling to 2.7 billion in 2016, which amounted to £6 billion less than in the previous year.

Underscoring the scale of the change, figures from the Bank of England show that the volume of cash in circulation is increasing at its slowest rate in 46 years.

An important driver of the trend towards digital payments is likely to be the rise of contactless debit and credit cards, as well as mobile phone payments.

Figures from UK Finance show that the number of contactless payments has increased from 17.8 million in March 2014 to 469.6 million in June 2017 (the most recent month for which figures are available). This is equivalent to a 2,500 per cent increase over a three-year period.

Over the same period, the value of contactless transactions has increased from £116 million to £4.3 billion.

This trend is echoed by statistics from the industry body, showing a dramatic fall in the proportion of payments made using cash from 62 per cent in 2006, to 40 per cent in 2016.

Cash payments are expected to continue to fall into the next decade, dropping to 21 per cent by 2026.

However, while this might be welcome news for some, questions have been raised about the impact on cash-reliant businesses and vulnerable individuals.

Speaking to the Guardian Lady Tyler, Chair of the House of Lords Select Committee on Financial Exclusion, said: “I’m really concerned about this move toward a mainly cashless way of doing things. These changes might suit people who are very digitally competent, they might suit banks who can reduce their costs, [but] I really don’t think they are thinking about more vulnerable groups.”

Link: Revealed: Cash eclipsed as Britain turns to digital payments

Chancellor calls for Inheritance Tax review to make regime “fit for purpose”

The Chancellor, Philip Hammond, has asked the Office of Tax Simplification (OTS) to undertake a review of the Inheritance Tax (IHT) system to ensure that it meets the needs of modern households.

In a letter to the OTS, an independent branch of the Treasury, Mr Hammond said that the current system is “particularly complex” and that he wants the OTS to find new ways of simplifying it.

He wants the review to look at the technical and administrative issues that make IHT so complex and wants the OTS to see if changes can be made to the process of submitting returns and paying any tax due to aid estate planning and disclosure.

Mr Hammond said: “I would be most interested to hear any proposals you may have for simplification, to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.”

The Chancellor’s letter also singled out the current gifting rules and how they relate to the wider IHT system.

In the 2016/17 tax year, HM Revenue and Customs received £4.84 billion in IHT. In recent years its take of IHT has grown as property prices have risen, but in 2017 new rules –  the Residence Nil-Rate Band – were introduced to allow a larger proportion of property wealth to be passed on to direct descendants.

Some experts are concerned that unless the Government reduces the amount it collects in IHT – which they feel is unlikely – they may instead make certain allowances/exemptions less generous under the guise of simplification.

Link: Chancellor requests OTS review of Inheritance Tax

Remain-supporting former minister strikes optimistic note on post-Brexit economy

Former Conservative Treasury Minister, Lord Jim O’Neil has told the BBC that gloomy predictions for the post-Brexit UK economy are likely to be ‘dwarfed’ by global growth figures surpassing expectations.

He said: “I certainly wouldn’t have thought the UK economy would be as robust as it currently seems.

“That is because some parts of the country, led by the North West, are actually doing way better than people seem to realise or appreciate.

“As well as this crucial fact, the rest of the world is also doing way better than many people would have thought a year ago, so it makes it easier for the UK.”

Meanwhile, speaking at the World Economic Forum in Davos, Stephen Schwarzman, CEO of Blackstone Group, said: “It’s a time of enormous ebullience, part of which was created by really good economic growth.”

However, also at Davos, Barclays CEO, Jes Staley warned against excessive optimism about the state of the global economy.

He said: “Equity markets are at an all-time high and volatility is at an all-time low – that is not a sustainable proposition”.

Link: UK growth upgrade could ‘dwarf’ Brexit hit

Millennials set for ‘inheritance boom’… but not until the 2030s

A new report from think-tank, the Resolution Foundation, predicts that so-called ‘millennials’, those aged between 17 and 35, will receive the biggest inheritance of any post-war generation from their baby boomer parents and grandparents.

The think-tank estimates that the average value of inheritances will more than double over the next two decades, peaking in 2035. By this point, the average age of beneficiaries would be 61.

In contrast, only approximately one in three adults born in the 1930s received an inheritance.

According to the Resolution Foundation, around two in every three young adults have property-owning parents.

Thirty-year-olds today are only half as likely to own their home as baby boomers were at the same age.

Laura Gardiner, senior policy analyst at the Resolution Foundation, said: “Older generations have benefitted hugely from the big increases in household wealth in Britain over recent decades.

“While the millennials have done far less well in accumulating their own assets, they are likely to benefit from an inheritance boom in the decades ahead.

“This is likely to be very welcome news for those millennials, including some from poorer backgrounds who in the past would have been unlikely to receive bequests.

“They have the good fortune to benefit from the luck of the baby boomer generation.”

Link: Millennials to secure ‘inheritance boom’

Ban on passing credit card fees on to consumers hits small businesses in the pocket

A ban on passing on charges from credit card providers to consumers, which came into effect last month, is hitting small businesses in the pocket.

Businesses are now faced with the option of either increasing prices for all customers to cover the charges or taking a hit to their own bottom lines.

Before the ban came into force, the Government said the “rip-off card charges” were “unfair for millions of people across the country.”

Estimates from the Treasury show that such charges cost UK consumers a total of £166 million in 2015.

However, the Federation of Small Business (FSB) expects the impact on small businesses to be short-lived.

Lorence Nye, Policy Adviser at the FSB, said: “The most optimistic outlook is that businesses will have to shoulder a higher cost in the short term, but that will drive more innovation and new kinds of payments that allow them to reduce costs.”

The new rules, which are now in effect across Europe, are already spurring innovation in peer-to-peer payment apps, including Barclays Pingit in the UK.

The same rules have also prevented HM Revenue & Customs (HMRC) from passing on credit card charges to personal taxpayers, leading the Revenue to take the decision to stop accepting payments made in this way.

Link: Small businesses complain at new credit card rules (original source)

Link: Card surcharge ban means no more nasty surprises for shoppers (alternative source)