With Brexit on the horizon, a changing digital world and continued demand for greater employee rights, Chancellor Philip Hammond had his work cut out for this year’s Autumn Budget.
But what does it mean for you? Here’s our tax marvel, Philip Rogers, who in a short, punchy video, covers all the big news hot off the press.
Watch the video
Autumn Budget 2018
On Monday we’ll tune in for the second UK Autumn Budget, following Philip Hammond’s decision last year to bring it forward from the traditional spring slot. This gives Parliament more time to consider draft legislation before the enactment of next year’s Finance Act.
It should also mean that very few, if any, major changes will take immediate effect. But we’re not ruling out any surprises. Based on recent reports and other murmurings, here are some things to listen out for when the Chancellor gives his speech on Monday.
Entrepreneurs’ Relief – potential reduction?
Entrepreneurs’ Relief was introduced in 2008 to allow people to benefit from a capital gains tax rate of 10% on the disposal of qualifying shares and businesses. The Relief was initially subject to a £1m lifetime limit, but this has gradually increased to £10m. By claiming Entrepreneurs’ Relief, HMRC estimated that individuals benefitted from tax savings of £2.7bn in 2016/17.
The Resolution Foundation – a thinktank focussing on improving living standards and reducing inequality – has challenged whether such a generous and costly relief can be justified at a time when more than £20bn is required for the NHS funding boost. The Foundation cited that the direct benefit of Entrepreneurs’ Relief is enjoyed by a tiny proportion of the population, making it, in their eyes, “the worst tax relief in the UK”.
The Office of Tax Simplification (‘OTS’) has also suggested that Entrepreneurs’ Relief, or at least what is intended to achieve, should be given a closer look. And given this, changes to Entrepreneurs’ Relief should not be ruled out.
The complete removal of the Relief would be a major surprise. That’s because there’s been a long history of capital gains tax savings for disposals of qualifying shares and business interests. Perhaps a reduction in the lifetime allowance is more likely, with this being delayed until next Spring or later. Such a change may give business owners a reason to bring forward any exit plans and prompt an increase in trade sales and private equity transactions.
‘Employee’ vs. ‘self-employed’ and off-payroll working
PThe rise of ‘zero-hour contracts’ and other new models of working has led to a number of high-profile employment status cases. People have argued that they are ‘employees’ or ‘workers’, rather than ‘self-employed’, and should be entitled to the appropriate rights and protections. These changes in working practices have also provoked a wider debate as to whether the current categorisation of engagements is fit for purpose.
Employment status for tax purposes determines how payments made to an individual are taxed (i.e. whether they are subject to PAYE and NIC). Tax differs from employment law in its categorisation of working relationship and it has its own substantial body of caselaw.
In February this year, HMRC published a consultation document which requested responses to how the current tax law may be improved. The document highlighted the complexity and ambiguity in the current law. It suggested the difficulty in resolving disputes as potential areas for reform. The 2018 Autumn Budget may include an update on this process. But any legislative change is likely to be a way off.
HMRC also has individuals providing their services through ‘Personal Service Companies’ (‘PSCs’) in their sights. The current law, ‘IR35’, was introduced in 1999. This requires an individual providing their services through a PSC to decide whether they would be an employee of the end client but for the imposition of the company. Where this is the case, deemed payments from the company to the individual are effectively taxed as employment income.
IR35 puts the compliance burden on the individual, who may lack the knowledge or resources to make an accurate decision. In April 2017, IR35 was changed for individuals providing their services through a PSC to public sector clients. And, it is now the responsibility of the public sector end user to operate IR35. This means that the end user decides whether a particular arrangement is within IR35 and then deducts tax from payments as appropriate.
It wouldn’t be surprising if the Chancellor chooses to align the operation of IR35 for private sector arrangements with the updated public sector rules. Such a change should, in theory, put the compliance obligation with the party who has the greatest available resources and is therefore more likely to apply the rules correctly. There is, however, the risk that some end-users might take an overly cautious or standardised approach to operating IR35. This could then lead to workers being unduly out of pocket.
The digital world and a changing economy
The Digital Economy is also a key focus for the Treasury. Recent publications have highlighted shortcomings in existing tax principles when applied to digital business models. For example, current tax law does not readily lend itself to the taxation of ‘remote sales’, being those made by businesses without a physical presence in the UK.
Existing transfer pricing principles have also struggled to keep up with the digital economy, with user-created value not being recognised as a ‘value driver’ when allocating the profits of a multi-national entity across different territories.
The US has already made headway in addressing these issues. The US Supreme Court found that the long-established ‘physical nexus’ approach for levying Sales Tax in a particular State was “unsound and incorrect”. This has prompted a move to an ‘economic nexus’ approach. The UK may take a little longer to formulate and implement its response to the tax challenges posed by the Digital Economy.
There is no doubt that the 2018 Autumn Budget will include frequent references to the digital world and a changing economy, but the complexity and international nature of the issues are likely to mean that any meaningful changes will take some time.