What were the clues in the UK’s last Spring Budget as to post Brexit policy?
As he read his Budget speech, Chancellor Philip Hammond gave a sense of certainty and stability. There were relatively few new measures, compared with previous Budgets. But the Budget will be remembered most for the announcement—and then complete reversal—of an increase in tax for the self-employed.
As PwC’s Head of Tax Kevin Nicholson says, “with tax rises, it’s often not the level of increase but what it signifies that matters. A seemingly small increase in Class 4 National Insurance Contributions (NICs) marked a sea change in tax policy. It said the self-employed are on the target list for tax.”
The Budget announcement was also seen by some to have broken a manifesto commitment not to raise the three main taxes.
While the Government has not abandoned the idea of making changes to self employment tax, it has said it won’t increase NICs before the next election.
So if the Chancellor had wanted his Budget to give a message of stability, the reversal shows how volatile tax policy can be – particularly in the pre-Brexit political environment.
Further change could be precipitated by any US tax reform. Stella Amiss, Head of Tax Policy at PwC adds, “Regardless of what the UK Government chooses to do, US tax reforms could precipitate changes elsewhere—a domino effect. It would be wrong to underestimate the scale of change we could see, depending how things play out.”
Open for business
Keeping the UK tax competitive undoubtedly remains a priority. The Chancellor emphasised the UK’s business friendly credentials, with a reminder that the corporation tax rate will be coming down to 17%. In the longer term, we could see further movement in the rate – but the Budget itself gave little away on this front.
The Chancellor also revealed that he is keenly aware that, against the backdrop of Brexit, the ability for businesses to grow and respond to forthcoming disruptive technologies will require investment in both business and technical education for workers. To support the former, and to show “Britain is open for business,” the Government will spend £270 million to launch the Industrial Strategy Challenge Fund, which will support research at companies that are developing new technologies for artificial intelligence, robotics, energy, and medicine manufacturing. As for the latter, the Government is seeking to ensure that businesses will have access to the skilled workforce a 21st-century economy demands by investing £500 million in technical education for 16 to 19-year-olds.
“It was vital that the Budget laid the foundations for a much-needed boost to the UK’s productivity by investing in the pillars of good growth such as skills and infrastructure,” says Nick C. Jones, Director of Public Sector Research Centre at PwC. “But if there is to be a real acceleration in productivity, place-based growth needs to be prioritised, and ideas such as the RSA’s Inclusive Growth Investment Fund and further fiscal devolution must come into consideration. Indeed, it was an opportunity missed that alongside the Budget there appear to be few new devolution deals close to completion, or in the immediate pipeline.”
Promoting workforce diversity
A future boost to the UK economy is also hoped to be achieved by getting more women into the workforce and closing the gender pay gap. To this end, the Government announced it would invest £5 million to increase the number of returnships, which help get people back into employment after taking a career break, as some women choose to do when they take time off to raise young children.
Supporting businesses large and small
Of course, the 2017 Spring Budget wasn’t roses for all British businesses. Though the transitional arrangements the Chancellor announced for businesses losing Small Business Rates Relief was a welcome boost to small and medium sized business in London and South East, that a transitional arrangement was even needed laid bare the case for long-term reform. “While the rating system is not wholly broken, it does need reform to ensure that rates bills are more responsive to the property market whilst continuing to provide Local Councils with stable income to ensure they can provide valuable local services,” says Phil Vernon, Business Rates advisor at PwC. “Today’s announcements, whilst welcome, are just sticking plasters over this fundamental problem. The best way to make rates bills more responsive to the rental market is to have more frequent revaluations.”
Moving towards Brexit
And by this autumn, it’s possible other proposals introduced in the final Spring Budget will change. The two-year Brexit negotiations will be in full swing by then, and the economic outlook for the UK could be vastly different.
For businesses, Brexit will bring a host of new challenges, from potential new customs borders that could disrupt existing supply chain management to interruption to the flow of and access to skilled labour. But another big unknown is how the final Brexit deal will affect existing tax reliefs and exemptions for Britain’s businesses. Many of the current reliefs and exemptions on the statute books rely on the UK being a member of the EU. If those cease to apply when Brexit finalizes, it could have a material impact on companies’ bottom lines.
But any negative impact on existing tax incentives could be offset by fundamental tax reform in the UK post-Brexit, according to Andrew Sentance, senior economic adviser at PwC. “Certain taxes — particularly VAT and excise duties — are constrained by European Legislation. Outside of the EU, the UK can have more flexibility in these areas. For example, under EU law, only two rates of VAT are available: standard and reduced. Post-Brexit, the Government could set as many VAT rates as it wanted.”
Will that happen? It’s more likely to if businesses continue to voice their concerns about a post-Brexit trading world. Besides, the timing is ripe. “Our tax system is needlessly complicated and hasn’t undergone root-and-branch reform since the 1980s,” says Sentance. “We should try to use the flexibility we could have post-Brexit to make it much simpler.”
To learn more about how Spring Budget 2017 will impact you and your business, click here.
This article was produced on behalf of PwC by Quartz Creative and not by the Quartz editorial staff.