Autumn Statement 2016

Autumn Statement 2016 summary

Against a backdrop of fiscal constraint and significant economic uncertainty following UK’s vote to leave the EU, Philip Hammond has today delivered his first (and last, but more about that later) Autumn Statement following his appointment as Chancellor in July this year.

At Grant Thornton UK, we want to help shape a vibrant economy where businesses and people can flourish across the UK. With numerous references to creating an economy that works for everyone in all parts of the UK, it would seem the Chancellor shares our vision but how do the detailed announcements measure up in achieving this?

Certainty and stability for business?

The Chancellor acknowledged that certainty and stability are highly valued by business and looked to create this by confirming the government’s commitment to the business tax road map issued at Budget in March this year. This means that the corporation tax rate will fall to 17% by 2020 and the business rates reduction package will be implemented. In addition, and following consultation over the Summer, the government will make changes to the substantial shareholding exemption to simplify the rules by relaxing the investor requirement thereby providing a more comprehensive exemption for companies owned by certain institutional investors with effect from April 2017.

Recognising the public concern that the tax system is pitched in favour of large multinational groups, the Chancellor also confirmed plans to restrict tax relief for corporate interest expense and reform the way that tax relief is provided for historic losses will be implemented.

While the apparent commitment to provide certainty and stability is to be welcomed, we believe this was a missed opportunity for wholesale simplification and reform of the UK tax system.  The UK has one of the most complex tax regimes in the world. This needs to be addressed so that we have a tax regime fit for a digital age which helps to build a vibrant economy.

The Chancellor did announce a reform of the Budget process, moving the main fiscal event to the Autumn from 2017 and making a commitment to limit tax changes to this main event unless extenuating circumstances arise. This is welcome news as it allows more time for parliamentary debate and scrutiny of the measures announced before they become law.

A fair sacrifice?

Successive governments have expressed concern about the cost to the Exchequer from the use of arrangements where employees give up an amount of cash salary for one or more benefits that may be subject to less tax and/or NIC (often known as salary sacrifice arrangements). Following an announcement in Budget 2016, there was a consultation on proposals to tax employees on the cash forgone if this figure was higher than the tax value of the benefit in kind. At that time, all cars were going to be caught and Grant Thornton UK's response warned about the potential impact on the UK's car industry if the changes were brought in as proposed. We also suggested that, in the absence of details of the costs involved, the motivation for change might be that the government objected only to some benefits that were provided under salary sacrifice arrangements.

The Chancellor referred today only to these arrangements being unfair and said that employees will pay the same tax under salary sacrifice arrangements as everyone else from April 2017. However, the Chancellor said that in response to consultations with stakeholders the new rules will not apply where the salary sacrifice is for an ultra-low emission vehicle (ULEV), pensions saving, childcare and the cycle to work scheme. To ease the impact on employees who currently have car, accommodation and school fees benefits under a salary sacrifice arrangement, in place before April 2017 will be protected until April 2021. Other arrangements in place before April 2017 will be protected until April 2018.

It is questionable whether this change will be fair to all employees as there will, for example, still be some employers who offer benefits outside of a salary sacrifice arrangement and some who do not. While we welcome the change to allow ULEVs to be taxed on the current basis we remain concerned that the impact on the UK car industry in particular – and therefore the UK's economy –may be more profound than any perceived fairness that the change brings about.

Addressing avoidance?

Employee shareholder status (ESS) was introduced to allow employees to obtain shares in their employer's company under favourable income and capital gains tax (CGT) terms in return for giving up certain employment rights. The Chancellor announced today that the income tax and CGT advantages would be withdrawn on the basis that ESS is being used primarily for tax planning by high earning individuals. The change will be effective for employee shareholder agreements made on or after 1 December 2016 where the employees have been offered, but have not accepted, employee shareholder status as at 23 November 2016. This is said to meet the government's objective of sustainability and fairness in the system of tax reliefs.

While no detail has been announced, the Chancellor noted that more businesses are being incorporated and this is reducing the tax revenues generated from those businesses. This is to be expected where corporation tax rates are so much lower than tax rates for individuals. It is possible that we may see some changes in this area in subsequent budgets.

A system that works for everyone?

Despite economic uncertainty, the Chancellor today confirmed the Government's commitment to raise the income tax personal allowance to £12,500 and the threshold at which higher rate tax applies to £50,000 by the end of this Parliament in 2020.  These figures represent significant real terms increases in post-tax income for all individuals whose income is likely to exceed £12,500 by that time.  We are pleased that the Chancellor has followed through on this promise made by his predecessor to support the aspirations of lower and middle earners.

The Autumn Statement reconfirms the proposed reforms to the taxation of individuals domiciled outside of the UK (non-doms) from April 2017.  Non-doms have previously been able to pay tax on foreign income and gains only to the extent they were brought to the UK, and have also been able to mitigate inheritance tax on their assets in some circumstances. 

The reforms propose that non-doms will be treated as UK domiciled for all tax purposes once they have been resident here for 15 of the last 20 tax years, such that they will pay tax on worldwide income and gains irrespective of whether the funds are brought to the UK.  There are related changes ensuring that inheritance tax is payable on UK residential property owned by non-doms.

The Government is walking a tightrope here with the aim of both ensuring fairness in the tax system and encouraging wealthy non-doms to remain in the UK.  A major part of this balancing act will be the treatment of offshore trusts established by non-doms before the new rules come into effect, as the majority of the wealth of non-dom families is often held in such structures.

The Autumn Statement policy paper promises that foreign income and gains retained in such trusts will not be taxed, but there is much detail still to be considered.  It will be impossible to judge how successful the Chancellor has been in achieving his aims until the rules have been digested. 

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