It would be deceptively easy to dismiss the tax impact of Philip Hammond’s first and last March Budget statement. Containing only 14 new tax measures and running to a relatively slender 64 pages, hardened Budget commentators might regard it – perhaps with a sense of relief following some of the Osborne-era monster Budgets – as lightweight. And despite this morning’s tide of opposition to the NIC changes, seen by some as implying that the Conservative party was somehow turning on its own supporters, the average cost of 60p per week does not look insuperable.
That would be to disregard the scale and nature of some of the changes. Here are top three changes measured by additional tax yield in the years 2017/18 to 2021/22 inclusive:
- Reduce dividend allowance £2,630m
- Increase Class 4 NICs £2,060m
- Anti-avoidance measures £820m
At around £5.5 billion, these three tax increases together raise about as much as:
- a one percentage point rise in all rates of income tax, or
- a one percentage point rise in all employee and self-employed NIC rates, or
- a one percentage point rise in the main rate of VAT (source: IFS 2015).
If the chancellor had raised taxes by pursuing any of these options the reverberations would continue for months, so it’s worth considering the implications in more detail.
The first relates to fairness. Without a doubt, a tax system should be fair, and recognised as such by those who fall within its scope. But with the chancellor finding himself having to police the boundary between high rates of income tax and NIC on employment earnings on the one hand, and low rates of corporation tax on the other, I felt uneasy as I listened to him repeatedly describe as ‘unfair’ the direct consequence of government policies enacted and operated as intended by Parliament. My colleague Andrew Hubbard explores this latest manifestation of fairness in taxation in his own inimitable style, below.
Beyond the Class 4 NIC increase for the self-employed is a healthy recognition that a wider debate is required as to how work is taxed. In part, much will turn on the results of the Taylor review which includes in its scope the gig economy, employment and self-employment, and the incompatible definitions embodied in employment law and practice on the one hand, and in the tax system on the other. We encourage this process of reflection and modernisation as being long overdue. Indeed, there is a strong case for asking separately how the UK should tax the results of investment in tangible assets, in intangible assets, and all the other results of human endeavour currently encompassed in a tax system which has its roots in the 17th century.
Back to the present and the £5,000 dividend allowance, first available in 2016/17, will be cut to £2000 in 2018/19. Now you get it, now you don’t. Worryingly, although the slashing of the allowance was introduced in the name of fairness, to prevent entrepreneurial director shareholders from replacing employed or self-employed income with company dividends, the cut will apply to all dividend income. This raises serious questions for people who, having relied on George Osborne’s assurances, have organised their affairs to reflect the availability of the tax relief. My colleague Gary Heynes discusses the issues here, and suggests actions which might be considered.
Shirley McIntosh looks at the way PAYE will operate now that the English and Scottish 40 per cent rate bands are different. It’s entirely possible that an English taxpayer and a Scottish taxpayer, doing the same work for the same employer in the same place, will now have different take-home pay.
And on the subject of what’s left when the taxman has taken his share, David Wilson reflects on the likely outcome of the consultation on alternative methods of collecting VAT related to online sales.
Whatever your views of the Budget, we will all be feeling its impact for many years to come.
For more information please get in touch with George Bull or your usual RSM contact.