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Dividend tax rate hike: EY's Budget predictions

The accountancy firm believes we could see a rise in the dividend tax rate as it outlines its predictions for this month's Budget.

'This Budget, as the first one of a parliament, would normally be expected to be full of bold moves, where the chancellor builds a war chest to utilise later in the parliament,' writes EY head of tax policy Chris Sanger.   

'However, in this case, with a minority government, and business and citizens struggling to understand what the future of the UK will be following Brexit, the chancellor may seek to buck this particular trend.' 

With this in mind, the EY team reveals its predictions for this month's Budget...

 

'This Budget, as the first one of a parliament, would normally be expected to be full of bold moves, where the chancellor builds a war chest to utilise later in the parliament,' writes EY head of tax policy Chris Sanger.   

'However, in this case, with a minority government, and business and citizens struggling to understand what the future of the UK will be following Brexit, the chancellor may seek to buck this particular trend.' 

With this in mind, the EY team reveals its predictions for this month's Budget...

 

Employment/self-employment

 

'Bruised from the abandonment of the increase in national insurance on the self-employed at the last Budget, the chancellor might be more cautious this time,' says Sanger.

'However, one area of focus could be the extension of the off-payroll worker rules that currently only apply to public sector bodies. 'These rules move the obligations for operating the disguised employment rules (the so-called IR35 provisions, named after the Inland Revenue press release that first discussed them) from the personal service company up the contractual chain, potentially right to the public service body.

'The chancellor could consult on extending these rules to all companies, thereby including the private sector. The current rules are proving problematic to operate and are driving the wrong type of behaviour so we might expect a period of consultation and evaluation before the rules come into force, potentially in April 2019.

'Another tax increase under contemplation could be an increase in the dividend tax rate.  Whilst we saw a reduction in the allowance in the last Budget, the tax was introduced to offset the benefit of working through a company but the rate was not increased when the corporation tax rate was reduced.' 

 

Asset Management wish list

Gill Lofts, UK leader for wealth and asset management at EY, says: 'UK asset managers are currently facing a number of challenges – namely how they continue to service European clients amid uncertainty over delegation rights and the need for EU entities to fulfil Mifid II and Ucits responsibilities.

'The industry welcomes the recent establishment of a new investment management task force and it looks forward to seeing the positive impact that this will create. There are also a number of other initiatives it would like to see in the Budget to help boost international competitiveness.

'Firstly, asset managers will be keen that the Treasury reaffirms its commitment to the 17% corporation tax in 2020, to make it as easy as possible for international investors to do business with the UK.

'They would also like to see an announcement on the practical steps for allocation of the apprenticeship levy. Replenishing the skills required to maintain and build on the UK’s position as a globally leading investment hub will be key to its continued success.'

Personal tax 

David Kilshaw, private client services partner at EY, says: 'The election left the chancellor with some areas to address - something for which the tax system could be the easy tool.

'One of the key themes is “intergenerational fairness” so this may prove to be a “see-saw” Budget. Typically chancellors have used tax breaks to help the elderly, but this time the break may tilt towards the “new” or “next” generation.

'The chancellor could chose to do this in a number of ways. First, we could see the re-introduction of an “age-allowance” but instead of this being directed at the over 65s it could be for the under 30s. The allowance could taper away as income rises.

'In the alternative scenario, he may choose to readjust national insurance contributions for those under 30.' 

 

Financial Services

Jeff Soar, UK head of financial services tax at EY, said: 'The financial services sector has dealt with major tax reform in almost every Budget for the last few years, so will be hoping that this time they are spared any big announcements. With the ongoing market uncertainty Brexit has brought, a period of calm on the tax front would be welcome.

'One of the biggest concerns to the industry is that the corporation tax cut to 17% from 2020 could be reversed. Given it was legislated for in the Finance Act 2016, it would cause considerable upheaval and cost to unpick, and would be an unwelcome move that would see companies having to recalculate their deferred tax provisions, and would likely end up hitting their bottom lines.' 

Neil Harrison, UK banking and capital markets tax leader at EY, adds: 'The new rules on interest restrictions and loss relief represent substantial changes to the UK’s corporation tax code and, more importantly, increase the compliance obligations of business. It means that companies are grappling with very complicated calculations for how much interest they can deduct from their profits.

'We hope the chancellor will give these changes time to bed in before launching any more major changes. The UK needs a stable and straightforward tax environment now more than ever to ensure business prosperity.' 

Business tax

'With all the uncertainty, whether from the delayed implementation of the post-election Finance Bill, the complexity of the legislation being introduced to deliver on the G20/OECD Base Erosion and Profit Shifting (“BEPS”) project, or just Brexit, businesses are looking for some stability,' Sanger writes

'We can expect the chancellor to update on the Business Tax Roadmap, this time perhaps adding a bit more detail to how he wants the tax system to look at the end of the five year parliament.

'With the focus on productivity, the Budget might include some incentives for investing in capital, with increases in the rates of capital allowances or the Annual Investment Allowance (potentially reversing the recent reduction in the annual investment allowance from £500,000 to £200,000, providing the relief up front, something that is included in the latest plans for tax reform in the US). 

'More substantively, we could see a systematic review of the incentives that the tax system creates towards investment, which could give rise to restoring relief for spending on industrial buildings and potentially going further.'

Private client 

Some high net worth individuals are using companies to hold their investments so as to pay tax on their returns at the lower corporate tax rates.

The chancellor may move to restrict the tax advantages offered by such companies.

Housebuilding and property taxation

'Another area of concern has been the shortfall in housebuilding, but the chancellor has not yet felt the pain in his pocket,' Sanger added.

'So far the recent changes to stamp duty land tax (“SDLT”) have generated £8.6 billion in SDLT in 2016-17 on just over one million residential property transactions, 17% up on 2015-16.  However this increase disguises the real story.

'On the face of it, the recent stamp duty changes have been a success for the exchequer. However, digging deeper, the increase in revenue has comes from the additional 3% charge on second homes and buy-to-let properties, and disguises an 8% drop in transactions on average across the country. 

'With residential transactions now at their lowest level since before the financial crisis, the Treasury should be considering whether the current system is delivering the right support for the housing market both in terms of numbers of transactions and the delivery of new homes. '

Pensions

'Whilst pensions seems to be an area of constant tax reform, the 25% lump sum has so far escaped change,' said Jason Whyte, associate partner of life & pensions at EY.

'Any such change is likely to keep the lump sum for all past contributions, and hence the benefit of any change would only benefit future chancellors rather than this government.

However, if the chancellor wants to leave his mark, he might try to restrict the lump sum, knowing that future chancellors will thank him, even if taxpayers don’t.' 

Following the radical changes of prior Budgets, we don’t think there’ll be fundamental alterations, however, pensions tax relief could be in the firing line - currently worth just under £40 billion per year to savers.

A further reduction in the annual allowance has been mooted, but the more likely target is bringing the start of the annual allowance taper forward from earnings of £150,000 per annum to £120,000.' 

'Another potential change could be to Insurance Premium Tax which has risen from 3.5% to 12% in the last two years, with the most recent hike in June. It remains a tempting target as it’s the insurers who have to swallow the increase or pass the bad news on to customers.'

Reform to the bank levy

Richard Milnes, financial services tax partner at EY, says: 'Banks will be hoping that the government sticks to its plans to reform the bank levy by 2021 so that it only applies to banks’ UK operations.

'The sector is now very keen to see the legislation for this on the statute book. The right level of reform to the levy could be instrumental in ensuring the UK remains attractive as a place to do business, particularly in a post Brexit world.' 

Sharpening the focus on anti-avoidance rules

Richard Milnes, financial services tax partner at EY, says: 'The financial services sector as a whole continues to have significant concerns about the wide-ranging anti-avoidance rules on hybrid entities and instruments that came into effect in January 2017.

'The current scope is too wide when compared with the objectives of BEPS Action 2, and is creating significant compliance burdens and catching innocent transactions and structures within its net.

'Further guidance is eagerly awaited, but the sector really wants to see the law change to address these concerns. We hope the chancellor will take note and focus these rules only on truly abusive situations.' 

Oil and gas

Derek Leith, EY’s head of oil and gas tax, comments: 'There is widespread recognition across the UK oil and gas industry that UK tax law must change in order to support more transaction activity and drive further investment into the UK Continental Shelf (UKCS).

'With this in mind and noting recent collaboration between HM Treasury and industry to explore possible options we should perhaps expect a significant statement in relation to oil and gas on November 22.' 

'The question is less about whether there will be new legislation for the oil and gas industry, and more about what the specifics will be, when it will be announced and when it will be implemented.' 

'The chancellor could announce new policy for immediate implementation but given the complexity of the legislative landscape and the importance of ensuring any change being suitably robust, the Treasury may be loath to rush something through in this year's Budget.

'It is more likely the chancellor will acknowledge the need for legislative change and give an indication as to how industry input is helping to shape this.' 

 

Betting and gaming

Grant Humphrey, director in EY’s betting and gaming team, comments: 'Given the recent launch of the government’s review into betting and gambling machines, we don’t expect a huge amount of additional policy to be hitting the sector.

'The Treasury, however, may have its eye on increasing the ‘point of consumption’ tax for online gaming businesses. This may help to offset any potential revenue losses arising from measures to tackle fixed odd betting terminals.' 

Hospitality and leisure

Christian Mole, director in EY’s hospitality and leisure team, says: 'As a heavily labour intensive industry and with the post-Brexit availability of labour the sector’s biggest current concern, pubs, hotels and restaurants will be looking to the chancellor for respite in the face of rising wages - in part influenced by the national living wage, auto-enrolment increases and the impact of the Apprenticeship Levy.

'One measure the chancellor could consider is targeted business rates relief for these sectors as reforms introduced to date are viewed as not going far enough.

'Pub landlords will additionally welcome a respite from the rises in beer and alcohol duties seen in recent years, as they continue to battle competition from cheap supermarket alcohol, which has contributed to the continued high rate of pub closures.' 

Tax traps

'There has been recent press coverage on three bands – removal of child benefit, removal of personal allowance and higher rate restriction on pensions,' said EY.

'Notwithstanding the press coverage, these are deliberate recaptures and the last two in particular hit high(er) earners so don’t expect action here.' 

Nom-doms and anti-avoidance

'Further anti-avoidance measures to deal with taxation of offshore trusts – we will see the last of the nom-dom changes from the last Budget,' the house said.

Raising personal allowance

 

'Further progress towards raising the personal allowance to £12,500 and higher rate tax threshold to £50,000 by 2020,' said EY

Charities

EY said: 'A scheme to allow charities to recover a portion of VAT incurred in the preceding year may be considered (similar to the scheme to be introduced in Ireland).' 

Fuel duty stabiliser

'Since its introduction the stabiliser hasn’t been used (since the formation of the Coalition government in 2010). An increase in fuel duty by retail price inflation at 3.9% would be expected to cost just over £1 billion in 2018-19,' said the house.

VAT recovery for Scotland’s emergency services 

'Will there be moves to introduce VAT recovery for Scotland’s emergency services?' the accountacy asked. 'This would require the introduction of different rules from those in the rest of the UK.' 

VAT split payment modification 

 

'The chancellor may consider a draft provision on split payment modification for VAT purposes for online sales, to target retailers who piggyback off online retailers,' said the house.

Non-resident landlords 

 

'Non-resident corporate landlords are likely to be brought within the scope of UK corporation tax (rather than income tax) in order for the government to be able to apply certain corporation tax-only rules to such entities,' EY concluded.

'These rules include restrictions on loss relief, interest deductions and loan relationships.'   

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