Funding news - 08/03/2017
Impact of Budget 2017 on Business
The Chancellor of the Exchequer has delivered the Budget 2017 to Parliament.
Chancellor of the Exchequer Philip Hammond has presented Budget 2017 to Parliament, in a speech dominated by plans for business and designed "to prepare Britain for a global future". Addressing the overall health of the economy, the Chancellor declared that the UK was the second-fastest growing economy in the G7 in 2016, and that the Office for Budget Responsibility (OBR) has forecast GDP growth of 2.0% in 2017, 1.6% in 2018, and then 1.7% in 2019, 1.9% in 2020 and 2.0% in 2021.
Mr. Hammond also announced a short-term rise in inflation from 2.3% to 2.4% in 2017 and 2.3% in 2018, before falling back to 2.0% in 2019. Furthermore, the OBR expects that borrowing will fall to 0.7% of GDP by 2021-22, which is forecast to be the lowest level as a share of GDP in two decades, while debt is forecast to rise to 86.6% this year, before peaking at 88.8% next year, then falling to 88.5% in 2018-19, and 79.8% in 2021-22. Annual borrowing is expected to be £51.7 billion in 2016-17, £16.4 billion lower than forecast, then £58.3 billion in 2017-18; £40.8 billion in 2018-19; before reaching £16.8 billion in 2021-22.
Yet despite these medium-term improvements, the Chancellor stated that the UK still has debts of nearly £1.7 trillion, around £62,000 for every household in the country, and that the UK is spending £50 billion on debt interest a year. He therefore promised no giveaways and stated the Budget would ‘fund all additional spending decisions over the forecast period.’ This had a number of implications for business, with policies to benefit some areas offset by charges elsewhere.
Easily the most noteworthy and controversial of these changes was the move to increase the main rate of Class 4 National Insurance Contributions (NICs) for the self-employed. Class 4 NICs are paid on profits between £8,060 and £43,000, and they will rise from 9% to 10% in April 2018 and to 11% in April 2019. Coupled with the previous Chancellor’s policy to scrap Class 2 NICs from April 2018 - which are paid on profits of £5,965 or more - the move is expected to raise £145 million a year by 2021-22.
The Chancellor cited the fact that self-employed people now receive the same state pensions as employees as justification for the move. The move could see millions of self-employed workers paying an average of £240 extra per year, although Mr. Hammond stressed that the average cost to those affected would be just 60p a week, and that only a self-employed person with profits over £16,250 will have to pay more as a result of the changes.
The Chancellor also announced a £435 million package of measures to benefit firms affected by the business rates relief revaluation. This consists of the following three major approaches:
- Small businesses will benefit from a cap, meaning no business losing small business rate relief will see their bill increase by more than £50 a month next year, and the subsequent increases will be capped at either the transitional relief cap or £50 a month, whichever is higher.
- From April 2017, pubs with a rateable value up to £100,000 will be able to claim a £1,000 business rates discount for one year, covering 90% of all pubs in England.
- Local Authorities will be awarded a £300 million discretionary fund to provide relief to those businesses most affected by the revaluation. The formula for the distribution of this fund will be calculated in due course.
Some of the other key announcements from the Budget relating to business were as follows:
- A reduction in the tax-free dividend allowance for shareholders and directors of small private firms from £5,000 to £2,000. The measure will come into force in April 2018, raising £2.63 billion by 2021-2022.
- A tax avoidance clampdown - including action to stop businesses converting capital losses into trading losses and the introduction of UK VAT on roaming telecoms services outside the EU - is expected to raise £820 million.
- The personal allowance will rise to £11,500, and the higher rate threshold to £45,000. This will benefit 29 million people, with a typical basic rate taxpayer paying £1,000 less than in 2010. These thresholds will be increased to £12,500 and £50,000 respectively by the end of the current Parliament.
- The Government will provide an extra year, until April 2019, before Making Tax Digital is mandated for unincorporated businesses and landlords with turnover below the VAT threshold. This will cost the exchequer £280 million and provide these businesses with more time to prepare for digital record keeping and quarterly updates.
- The Government will unleash £5 million of new funding and with business groups and public sector organisations to identify how best to increase the number of returnships, which offer people who have taken lengthy career breaks a clear route back to employment.
- The Department for Education will invest £40 million by 2018-19 in lifelong learning pilots to test different approaches to help people retrain and upskill throughout their working lives.
- £16 million will be made available for a national 5G Innovation Network to trial new 5G technology, while £200 million will be released for local projects to build fast and reliable full-fibre broadband networks.
- A panel of experts will investigate the use of tax incentives to make it easier for operators to sell oil and gas fields, helping to keep these sectors productive for longer.
- The Government will launch a green paper to investigate ways to protect consumers from unnecessary costs and inefficiencies, including: preventing consumers being charged unexpectedly when a subscription is renewed or a free trial ends; making terms and conditions simpler and clearer including in digital contracts; and fining companies that mislead or mistreat consumers.
- The final rates of the soft drinks levy were confirmed as 18 and 24 pence per litre for the main and higher bands respectively.
- Vehicle excise duty rates for hauliers and the Heavy Goods Vehicle Road User Levy frozen for another year.
- No further increases on alcohol or tobacco duties on top of those previously announced.
- The Government will support the R&D sector by making administrative changes to the Research and Development Expenditure Credit, increasing the certainty and simplicity around claims and taking action to improve awareness of R&D tax credits among SMEs.
The business community generally welcomed many of the gestures and priorities of the Budget, although this was not without exception and reaction was relatively subdued. This muted response was reflected in the market, with the FTSE 100 index down a modest 4.38 at the close to 7334.61 and the pound trading at around 0.2 p lower against the dollar. The Chancellor did not mention Brexit in his speech, which is likely to feature much more prominently in the Autumn Budget later in the year, and there was a general sense that this Budget was more a steadying of the ship before the ramifications of the UK’s exit of the EU are felt.
This measured response was summed up by CBI director general Carolyn Fairbairn, who welcomed plans to address the nation’s relatively poor performance in skills but warned that measures to protect businesses from the business rates revaluation do not go far enough. She said:
"This is a breakthrough Budget for skills. There has never been a more important time for the UK to sit at the global top table of technical education for young people. Firms will be looking for ongoing partnership with the Government as they try to make the Apprenticeship Levy work. However, with inflation rising and the cumulative burden weighing on businesses’ shoulders, limited relief for firms hit hard by business rates falls short."
However, there was strong negative reaction to the plans to raise Class 4 NICs from political, media and industry figures alike. The mood was encapsulated by National Chairman of the Federation of Small Businesses Mike Cherry, who said:
"The National Insurance rise to 10% next year and 11% in 2019 should be seen for what it is - a £1bn tax hike on those who set themselves up in business.
"This undermines the government's own mission for the UK to be the best place to start and grow a business, and it drives up the cost of doing business. Future growth of the UK's 4.8 million-strong self-employed population is now at risk."
Yet the Institute of Fiscal Studies (IFS) backed the controversial changes, stating that the current system, which can tax self-employed people significantly less than employees performing a similar role, "distorts decisions, creates complexity and is unfair", and risks eroding the UK’s future tax base.
Yet the generally low-key response was summarised by Institute of Directors director general Stephen Martin, who said:
"Business leaders will applaud the long-term focus on improving technical skills and investment in research and development, but the business community will have hoped for much more support in the immediate term, especially amid such economic and political uncertainty.
"The business rates reliefs, while welcome, look distinctly modest at first glance, and there was very little in the Budget to provide incentives for business to invest today when they are already putting projects on hold."
Full details of the Chancellor's Budget are reported on the HM Treasury website.