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Simplify tax and support HMRC, industry urges Chancellor ahead of the Budget

21/11/2017 Beth Abel

Chancellor Philip Hammond is “not good at pulling the rabbit out of the hat”, tax partner Paul Falvey of BDO told eprivateclient ahead of the Autumn Budget tomorrow.

BDO is “not expecting fireworks”, Mr Falvey said, noting that Mr Hammond’s “hands are tied by economic circumstances and a wafer thin majority”. However, he highlighted that BDO is hoping for some level of simplification with regard to the nation's tax system.

According to a BDO poll, 62 percent of businesses would support a simplification of the UK tax system even if it meant up to a three percent increase in taxes.

Mr Falvey said this statistic is “quite significant”, however people recognise that “less complexity would mean taxes were raised in a more rational way”. He added: “The Government should stop tinkering with tax law and need a much more coherent, strategic approach. Politicians create uncertainty by dealing with things on a short-term basis.”

One of the biggest issues facing the tax system is intergenerational fairness, Mr Falvey stated. BDO expects a ‘raft’ of measures aimed at helping younger voters and closing the intergenerational gap, which may include a possible cut in National Insurance rates for younger workers, but “is more likely to mean pension auto-enrolment extended to workers below the age of 22 and more concessions on student loans”. However, if the Chancellor mishandles this he “may be accused of creating a ‘tax on age’”, Mr Falvey pointed out.

BDO also predicts that the new rules introduced in April to put the onus on the local authority ‘employer’ to operate PAYE will be extended to cover private sector organisations as an anti-avoidance measure, instead of only affecting the public sector, leading to contractors preferring to work in the private sector for tax purposes.

“We expect the Chancellor to even up the playing field and extend the rules to private sector companies too to increase tax take, correct an imbalance in employment tax legislation and avoid a brain-drain from the public sector,” Mr Falvey said.

Finally, BDO expects that the switching of the measure from RPI (at 3.9 percent) to the lower CPI (2.9 percent) announced in spring 2017 could be brought forward to create more certainty and fairness by legislating for more frequent valuations every three years. “Britain’s high street has been struggling for some time, with stagnant wage growth limiting spending power while online retailers have attracted what disposable income there is.”

As well as tax simplification, “one of the major obstacles of growth”, BDO is hoping that the Government tackles the shortage of long-term investment, or ‘patient capital’. There have been rumours that Enterprise Investment Scheme (EIS) relief could be reduced or withdrawn for lower risk or asset backed investments, but Mr Falvey hopes that no changes are made as “it has been successful”, or at least for any tightening of the rules “to be kept to a minimum”.

Options to increase the lack of patient capital would be to maintain the 30 percent relief for businesses advancing tech IP and reducing it to 20 percent for other businesses, or to increase the required holding period for EI from three to five years to align with the patient capital policy objective, BDO noted. While Mr Falvey is “not an advocate of robot tax”, less employment means something has to be done about the lost revenue, of which circa 53 percent is raised through income tax and national insurance.

BDO also hopes the Budget provides more resources for HMRC to support British businesses, a sentiment shared by 27 percent of those businesses who took part in BDO’s poll and want the Government to create no more rules and allow HMRC to continue with what it is currently doing. Meanwhile, 36 percent want it to follow through on all OECD proposals to deal with avoidance by multinational companies. There is a “general consensus amongst business that HMRC is making positive inroads in its determination to tackle tax avoidance”, Mr Falvey concluded.

Senior tax partner at RSM, George Bull, is also expecting more resources for HMRC to tackle tax evasion from what may be a “big, bold Budget”. Mr Bull also predicts that the Budget may include an overall increase in taxes; restrictions on cherished tax reliefs; new anti-avoidance measures following the ‘Paradise Papers’; first steps to reform VAT; and an indication of the direction of travel for future workplace tax and NIC changes following the Taylor review.

The UK tax system “is at a crossroads”, Mr Bull said, with the question as to who should pay how much tax on what “more important than ever before”. The role of the tax system in the housing market, tackling social inequality and intergenerational issues, as mentioned by Mr Falvey, has also come under question. These issues require “a major public debate followed by the framing of proposals for consultation and then a considerable expenditure of Parliamentary time in enacting new law”, Mr Bull said.

“With Brexit dominating the Parliamentary programme, time is one thing the Chancellor does not have. Another commodity in short supply is the Chancellor’s room to manoeuvre.” Mr Bull concluded that there is pressure on Mr Hammond to deliver a Budget which restores voter confidence, reflects the fiscal and economic needs of the UK and imparts a sense of control and order to Government “which is perceived to be riven by divisions”.

On the topic of Entrepreneurs’ Relief, tax director at MHA MacIntyre Hudson, Steven Tebbett, stated there is a growing expectation that it will be ‘attacked’, “an unpopular move with business owners and aspiring entrepreneurs”. According to Mr Tebbett, a change of this nature might appeal to younger generations “who feel that wealthy business owners shouldn’t benefit from such a generous tax saving measure”.

The Government has introduced ‘anti-phoenixing’ rules to combat business owners abusing the relief by extracting profits through liquidation, “only to resume the same business, sometimes multiple times or even ad infinitum”. However, Mr Tebbett notes there is a number of planning opportunities the Government could look to limit or close, including amending legislation so that qualifying conditions have to be met for, for example, five years rather than the current one year which generally applies.

“This would immediately make it more difficult to structure disposals in advance of a sale to secure Entrepreneurs’ Relief, as business owners looking to sell would have far less opportunity for eleventh hour planning,” he said. “Such a change would help ensure that only business owners meeting the conditions over a substantial period qualify for relief.”

Mr Tebbett continued that the Government may also increase the personal shareholding requirement, which is currently that a shareholder must hold five percent or more of a company to qualify for relief on the sale of those shares.

Chancellor Philip Hammond is due to deliver his 2017 Autumn Budget tomorrow (22 November) at 12:30pm. eprivateclient will provide live updates throughout the speech as well as detailed post analysis. 

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