Home Economy Analysis: What the Spring Budget means for Scottish businesses
Reactions from around the UK business community
Low level of tax changes
“There are very substantial tax changes taking effect from April 2017, raising tax from companies, employers and public sector engagers of freelancers and from landlords,” says Garry Tetley, Tax Partner at Deloitte in Scotland.
“The flagship Making Tax Digital project will affect 5 million small businesses and landlords, starting from April 2018, with a one-year deferral for smaller businesses with sales or rent below the £83,000 VAT threshold.
“With this background, the Chancellor chose to focus mainly on increasing income tax/national insurance payable by the self-employed and those who provide their services through companies.
“Increasing Class 4 NIC (currently 9%) to 10% from April 2018 and 11% from April 2019 raises over £500 million and will cost individuals up to £720 pa in 2019. Cutting the dividend allowance from £5,000 to £2,000 from April 2018 will bring in over £800 million annually.
“The Chancellor also repeated that in summer/autumn he will release a consultation around all the issues of employment, self-employment and freelancers, following the Matthew Taylor review into working practices.
“This is one of the biggest issues for the UK economy as we see changing patterns of work.
“The key announcements and confirmations relevant to Scotland included:
“Confirmation that higher rate taxpayers in England and Wales will pay £400 less income tax than Scottish residents from April 2017 due to the higher rate threshold increasing to £45,000 in England and Wales, while it remains £43,000 in Scotland. The chancellor confirmed the intention to increase the threshold to £50,000 by 2020. However, in a break with usual practice, the income tax rates and bands for 2018/19 for outside Scotland were not announced today. Scottish taxpayers will, therefore, keenly await announcements from the Scottish Government on future higher rate thresholds.
“The Chancellor also announced a commitment to review how the tax system can be used to maximise the length and productivity of oil fields in the North Sea. While there was little detail, it is another step forward in the right direction for the industry.”
“While there was no further mention of the off payroll rules in the public sector in the budget speech, a policy paper published immediately afterwards suggests that the only change to the draft legislation is that it will be optional to take account of the contractor’s expenses when calculating the tax due, operating on the premise that contractors will be on the same basis as employees,” says Samantha Hurley, Operations Director at The Association of Staffing Companies (APSCo).
“Within this the government published an impact assessment with which we strongly disagree. It states that: ‘Affected businesses will incur one-off costs for familiarisation with the new rules’. In reality, costs will be on-going, which materially undermines the conclusions of this assessment.
“The government also states that ‘smaller agencies may be disproportionately affected by familiarisation costs if they provide workers to the public sector.’ Despite the fact that the Chancellor said today that he is ‘determined to make Britain the most attractive place to start up and grow a business’, the government actually admits that: ‘These costs to smaller agencies may be significant.
“We were disappointed that, despite press reports to the contrary, a Government review into how different workers are taxed failed to materialise. APSCo has been lobbying for a number of years for a complete review of tax and national insurance contributions for Personal Service Companies (PSCs) and the self-employed, rather than the ill-conceived bolt-on legislation such as the public sector off payroll rules.
“However, we eagerly await the results of the Matthew Taylor Review referenced by the Chancellor – and at which APSCo was invited to present evidence. We hope that the review will address the issue of differentiation between the professional and potentially vulnerable ends of the labour market, simplify employment status legislation and suggest a vehicle to allow professional contractors to work through whichever employment model they choose.
“However, we are very concerned that the Chancellor made clear that preliminary thoughts from the review suggest that the main drive for individuals to incorporate as companies is to maximise tax savings. In the professional sector this is simply not the case – these are bona fide business to business relationships where the individual has no guarantee of continuity of assignments, has genuine business risk and liability – and none of the benefits enjoyed by permanent employees.
“We welcome the T levels initiative and the commitment by Government to improving the technical skills base of UK PLC by getting young people into technical careers and improving the perception of their education – however our members would argue that the skills gap is very much here and now.”
“Today’s budget provides further evidence that small businesses remain the lifeblood of the UK economy,” says Jacyn Heavens, Epos Now, CEO.
“For many businesses, the three stages of tax relief outlined by Philip Hammond will act as lifeline for many and the discount on bill rates for 90% of UK pubs is essential to safeguard the future of pubs across the country.
“While these measures will provide some relief to the small business community, it is important that the government continues to focus on these businesses in favour of large corporations. To support this feeling, our research found that 92% of small businesses feel that the government favors larger enterprises over SMEs.
“Small Businesses entrepreneurial ideas and willingness to embrace innovation help fuel dynamic growth, which is why it’s so important that government continues to listens to their concerns and give them a chance to succeed.”
“UK beer drinkers, pubs and brewers have been let down by the Chancellor’s decision to increase beer duty for the first time in five years,” says Colin Valentine, CAMRA’s National Chairman
“The announced two penny a pint increase marks a return to the days when the much-hated Beer Duty Escalator contributed to 75,000 job losses, 3,700 pub closures and a 24% fall in beer sales in pubs. The rise in beer duty will ultimately hit consumers in their pockets and lead to pub closures across the country.
“The government’s U-turn on beer duty is a real missed opportunity to support consumers. The UK still pays one of the highest rates of duty across Europe, only consuming around 12% of the beer yet paying nearly 40% of all beer duty in the EU. Further beer duty increases will lead to unsustainable price increases in pubs. The decision completely ignores the pressures that are being faced by the beer and pub sectors.”
“The news could have been worse for the self-employed,” claims Old Mutual Wealth pensions expert Jon Greer
“A small increase to 10% and then 11% will still see the self-employed paying a lower rate of national insurance than their employed peers. But the dividend allowance cut was a surprise and will be really unwelcome for business owners and investors, effectively reducing the amount you can take free of tax from their business by 60%.
“The measure will also undoubtedly prove controversial and attract criticism from those that believe it breaches the government’s pledge not to boost personal taxes.
“The number of self-employed people in the UK has risen steadily over the last two decades, and has accelerated significantly since the economic downturn in 2008.
“The most recent ONS figures show well over 4.5 million people are registered as self-employed and the growth in self-employment has made a substantial difference to employment figures and economic recovery since the financial crisis.
“But it is estimated an NICs cross-subsidy of around £5 billion exists the self-employed and employed. These concerns will have been exacerbated by the rise of the so-called ‘gig’ economy, with online platforms creating an increasingly flexible workforce with more opportunities to work for themselves.
“By updating the national insurance system, Hammond has guarded the government’s coffers against the risk of a growing tax gap, but stopped short of completely equalising national insurance for the self-employed.
“Reducing the tax-free dividend allowance from £5,000 to £2,000 for 2018 will impact people who have direct holdings over £50,000. This mean people will be With the ISA allowance increase to £20,000, people would be wise to maximise ISA contributions if they aren’t already doing so.
“Despite this double-whammy tax change, pitched as a measure to ensure ‘fairness’ for the employed, it should not be forgotten that while the self-employed currently enjoy a reduced rate of national insurance, they also miss out on sick pay, holiday entitlement and other perks enjoyed by those in employment. However, the Government will consult on changes to Parental benefits in the summer.
“Also, later this year the government will review the pension reforms, known as auto-enrolment, which ensure all employees save by default for their retirement. They benefit from tax-relief and pension contributions from their employer in the process. But the self-employed are currently excluded from the private pension system unless they make their own arrangements. Today’s news strengthens the case for the government to address this imbalance and ensure the self-employed enjoyed a comparable opportunity to save for their retirement.”
Tackling tax avoidance
“The government needs to think more carefully about the impact its anti-tax avoidance tools have on those individuals affected,” warns Andrew Tate, president of insolvency and restructuring trade body R3.
“Tackling the abuse of the tax system is needed, but efforts to do so should not tar everyone with the same brush, while inflexibility can have disproportionate or unproductive outcomes. Attention should be given to how people can pay new tax demands, especially if their ‘avoidance’ is the result of a simple mistake, naivety, or poor advice.
“Penalties for tax avoidance won’t bring in extra money if people don’t have the money on hand to pay them.
“The receipt of an Accelerated Payment Notice (APN) can force people into bankruptcy if they have no means to pay the bill on demand. The government may need to be open to alternatives to bankruptcy, like IVAs, if people can’t pay bills when due.
“An understanding that not everyone who has been involved with, for example, a film scheme has been deliberately seeking to avoid tax would help. Some people have become involved in such schemes unwittingly or following what they believed to be professional and reliable advice.
“Businesses are also significant recipients of APNs, which can put jobs and livelihoods at risk.
In June 2016, 16% of respondents to an R3 member survey said they had offered advice to an individual who had received an Accelerated Payment Notice.
1.5% of respondents to the same survey said they had already been appointed as an Office Holder in an individual’s insolvency triggered by an Accelerated Payment Notice.
26% of respondents said they had offered advice to a business which had received an Accelerated Payment Notice.
12% said they had already been appointed as an Office Holder in a corporate insolvency triggered by an Accelerated Payment Notice.”
Making Tax Digital
“Mr Hammond has reacted to widespread criticism of the unrealistic implementation timetable for quarterly digital tax returns,” says Bryan Finlayson, partner at Weightmans LLP.
“A one-year delay for small businesses with a turnover beneath the VAT registration threshold should give them more time to prepare but does not address the fact that the issues do not just relate to the size of the business.
“A lack of public awareness of the new requirements and the necessary IT infrastructure is also the real issue that needs to be addressed.
“Many individuals and businesses we have been speaking to are either not aware of the new requirements, or aren’t ready for the change. We’d call on the Government to do more to communicate what firms need to do to comply and prepare for the changes.”
“While it is great to see that the government has listened to the concerns of the business community with regard to business rates and the upcoming rollout of Making Tax Digital (MTD), ACCA is concerned that an increase in the NIC for the self-employed will be harmful for UK growth and entrepreneurship,” – Chas Roy-Chowdhury, head of tax at ACCA
“We welcome the Chancellor’s announcement of a consultation on business rates, as well as £300m fund for local councils to offer discretionary relief,” says Paul Kaye, Sales and Marketing Director at Close Brothers Motor Finance.
“However, as it stands there are car dealers across the country still expecting to foot the bill of an average 16% increase, which could have a serious impact on their bottom line. The rate hike comes at a time when a higher national living wage and pension auto-enrolment have already significantly reduced the profitability of some dealers.
“We work with many car-dealerships across the country and we understand the challenges they face on a day-to-day basis. As research from our Dealer Satisfaction Survey has shown, the majority of car dealers are optimistic about their business prospects for the year ahead. We hope that the business rates hike won’t dampen this positive sentiment, and would advise any dealers adversely impacted to consider their options for appealing.”
“The Chancellor announced today that business rates revaluation will take effect from April 2017 across England, along with a planned discretionary fund of £300 million for local authorities to support businesses hard-hit by business rates, which will undoubtedly be welcome news for businesses across the country facing closure as a result of these revaluations.
“For SMEs however, business rates can provide an unwanted burden on cashflow. A number of SMEs are relocating outside of the big cities as a result of rising commercial rents, but they will still face business rate burdens, particularly those with several property outlets. Whilst this £300m fund is a step in the right direction, small businesses are continuing to suffer from cashflow imbalances outside of their control, and require support from Government to resolve these issues and keep the economy afloat,” – Aamar Aslam, CEO of Funding Invoice
“Our latest industry report: 2030: Death of the High Street, warns that the impact of e-commerce could mean our High Streets reach a dead end by 2030, with nothing but nail bars and charity shops in some town centres. The planned changes to Business Rates threaten many High Street retailers with significant rate rises just as they are battling to take on online retailers. The cap of £50 per month for this year for businesses coming out of Small Business Rate Relief is welcome; but what happens to those businesses in two year’s time?
“Some city centres are saying their Business Rates are rising by around 50% while e-tailers such as Amazon may even see their rates fall on out of town distribution centres. More needs to be done to save the High Street and look at the disparity of taxes and rates between online and brick and mortar retailers,” – David Jinks MILT, Head of Consumer Research at ParcelHero
Investment in STEM subjects
“Investing £300 million in STEM subjects is one part of the solution we need to boost UK productivity and profit from post-Brexit opportunities,” says Ann Francke, Chief Executive of the Chartered Management Institute (CMI).
“But it dwarfs the £13 million the Chancellor pledged in his Autumn Statement for Sir Charlie Mayfield’s review to raising management skills.
“The government is right to state that innovation in skills is paramount to improving productivity: poor management costs the UK economy £84 billion a year in lost productivity. For this welcome investment to pay we’ll need skilled managers to lead the projects. Extending the investment in skills to supporting women returning from maternity leave, as well as young people, would be a welcome addition.”
“For the UK economy to punch above its weight post-Brexit we need to start ramping-up the number of young people entering the labour force with work-ready higher skills. That’s why CMI welcomes the Chancellor earmarking £500m a year to support 16-19-year olds in technical education.
“According to our research, one-third of 16-21-year olds in the UK aren’t confident of finding a job in the next few years. Alongside championing the Government’s apprenticeship agenda, we support this transformation of technical education that will lay clearer career paths for those leaving school. But to deliver the highly skilled workers we’ll need to compete post-Brexit, these technical routes must be developed with employers and aligned with the new breed of apprenticeships,” – Petra Wilton, Director of Strategy and External Affairs at the Chartered Management Institute
“Today’s announcement by the Chancellor that small businesses facing rate hikes will receive direct relief from the government in the form of an extra cap, as well as discretionary relief through their local authority, is a step towards supporting small retailers, many of whom have serious concerns as they struggle to factor in the rate rises,” says Alex Marsh, Managing Director at Close Brothers Retail Finance.
“With more than a quarter of all retail SMEs in the UK citing high business rates as a one of their biggest challenges in competing with larger retailers – a figure which jumps to 38% among London-based retail SMEs – SMEs need to use all of the tools at their disposal to offset the cost of increases.
“On top of business rate increases, inflation is creeping back up and is adding a further challenge for retailers. Using customer data to increase loyalty and better tailor products and services to consumer needs has never been so critical and UK retailers must respond to this if they want to survive, let alone thrive.”
Long term strategy
Martin Bell, Head of Tax at BDO LLP in Scotland, looks at what was missing in the Budget and gives us some clues as to what the Chancellor’s long-term fiscal strategy looks like.
‘Digital real estate’ tax – “Business rates have caused a major headache for the Chancellor and businesses alike. He’ll be glad when the revaluation saga is over but hinted that the bigger problem has yet to be solved. His next job will be to tackle the unfair tax disparity of traditional and online retailers; an issue that is adding to the huge pressure already faced by high street retailers. I wouldn’t be surprised if the Government introduced some form of additional new tax on the ‘digital real estate’ of large online retailers.”
Annual Investment Allowance – “Hammond remained focused in his speech today on creating a system that supports innovation and productivity. Money is being set aside for Brexit jitters but once negotiations are over, say in Budget 2019, the Chancellor may look towards increasing the Annual Investment Allowance (AIA) to help increase productivity and unleash our manufacturing might. An increase to £5m over a five year period would be a game-changer. It would provide a significant incentive for businesses to invest in capital assets – such as plant and machinery – that will drive future growth and automation, and give businesses the confidence to plan ahead.”
Non-payroll labour – “I’m surprised the forthcoming clampdown on public sector employers using non-payroll labour has not been extended to the private sector. As the changes within IR35 take effect next month, there are reports that contractors are already moving away from public sector contracts. If the private sector was subject to the same regime, it would limit the public sector’s ‘brain drain’ concerns while addressing another tax imbalance. I’m sure this will be on his future list of things to do.”
Who are the winners and losers in business?
Hammond wants to build a “stronger, fairer, better” Britain. The challenge with being ‘fairer’ is that there are inevitably going to be winners and losers, says Martin Bell.
“Gig economy workers who are self-employed have been hit with a phased 2% tax rise. Although bad news for those individuals affected, it does level the playing field. Aligning NIC takes tax out of the decision-making process for people choosing whether to be employed or self-employed. And it will give a £2bn boost to the Treasury’s coffers to 2022.”
Small businesses come out on top, says Bell. “The Government focuses on small businesses being the life blood of the UK economy, supporting them with business rate reliefs and a delay to digital quarterly reporting for those under the VAT threshold.
“Although welcomed by start-ups and small business owners, it is frustrating that mid-sized businesses – those that grew faster and created more jobs than small or big firms last year – were once again largely ignored by policymakers.”
Infrastructure investment to boost to productivity
“Almost half (43%) of businesses believe investment in infrastructure would boost productivity and help put the UK in its strongest position for Brexit.
“Investment in smart, connected infrastructure is about getting from A to B – both physically and digitally, in both production and automation – in the most efficient way possible. For every £1 invested in infrastructure, there’s a reported £3 return for the economy. This would be a good place for Hammond to put his money.”
“While we welcome the indications by the Chancellor of future action and additional funding for the Scottish Government, SCDI is disappointed that there was a lack of clarity and urgency over UK Government support for key areas of the Scottish economy. This includes plans for the oil and gas sector and further city and regional growth deals in Scotland.
“While, overall, a safety first approach is understandable in the context of Brexit and the extra funding for UK innovation was positive, the Chancellor missed some opportunities to improve Scotland’s competitiveness as the UK embarks on the process of leaving the EU. SCDI hopes that making progress in these areas is now given a high priority as the Industrial Strategy is developed.
“The measures announced on self-employment highlight a very significant structural change for the economy in employment practices, particularly due to new technologies, and SCDI will be discussing these issues with the Taylor Review as it develops its recommendations. This is sure to continue to be a major focus of discussion for future Budgets and the modernisation of employment law,” – SCDI Director of Policy & Place, Claire Mack