Budget Spring 2016 – You Won’t Need Sugar to Sweeten this Pill

The Chancellor appeared to be in a buoyant mood delivering his budget speech today even though he noted that the global economy is weak and financial markets are turbulent. He reported a fast growing UK economy and lots of personal tax cuts. Indeed he emphasised that with 1% of the richest taxpayers contributing 28% of all income tax, this was proof “that we are all in this together” in case you did not realise it! But the wealthy certainly won’t be suffering as a result of this budget.

Here’s some brief notes on the content of his speech before there is time for a more extensive analysis:

As forecast there will be a limit of 30% on the deductibility of debt interest against earnings for large companies. He will also be strengthening withholding tax regulations, restrict past loss allowances for larger companies and in other ways tackle the problems of companies evading tax. He expects to raise £9bn in extra taxes in this way.

To offset that, Corporation Tax will be reduced by April 2020 to a rate of 17%. “Let the rest of the world catch up”, he said. But he will be taking steps to stop foreign internet sellers who stock and deliver goods into the UK from avoiding VAT.

Small business rate relief will be increased. Some 600,000 businesses will pay nothing in future, and 250,000 will see a reduction. He said this was a “£7bn tax cut for a nation of shopkeepers”. London will also be able to keep business rates paid in the capital.

Commercial stamp duty will be made more progressive (i.e. in staggered “slices” rather than abrupt changes) and 90% will pay less. But large property companies will be hit by the increase in the top rate of stamp duty from 4% to 5%.This theoretically could reduce the value of large properties by 1% although the reality might be different. Note though that most listed property companies are unlikely to be impacted by the change in deductibility of interest mentioned above – see the latest ShareSoc Informer Newsletter for an examination of that issue.

The oil/gas industry will be helped by the Supplementary Charge being halved to 10% and Petroleum Revenue Tax will be abolished.

There will be more Government investment in transport projects including HS3 and Crossrail2.

Fuel duty will be frozen, and duties on beer/cider frozen to help pubs. Whisky and other spirits will also be frozen but all other alcohol duties will rise with inflation.

There will be a new “sugar levy” on the soft drinks industry to begin in 2 years time to combat obesity particularly in children, although natural fruit juices and milk based drinks will be exempt. Shares in AG Barr, Britvic and Nicholls might be affected as a result. This tax will apply to manufacturers apparently so what will stop people simply importing such drinks to get around this tax? The detail announcement says that the levy will also apply to “importers” of soft drinks, but how can that be reconciled with Common Market law one wonders where the free movement of goods is a paramount principle? Although it is claimed it will raise over £500 million each year, it seems likely to turn into one of those political gestures rather than a serious attempt to improve the nations health as there may be many ways to avoid it. The producers of such products suggested consumers could find an easy way around it – just eat chocolate and sweets instead.

Class 2 National Insurance contributions paid by the 3 million self employed will be abolished.

The headline rate of Capital Gains tax will fall from 28% to 20%, and the rate paid by basic rate taxpayers will fall from 18% to 10%, from April this year. There will be a new rate of 10% for long term investments in unlisted companies. However the existing rates will be retained for properties and for “carried interest” – yes the Chancellor is still discouraging buy-to-let investors and hedge funds.

Annual ISA contribution limits will rise from £15,240 to £20,000 in April 2017, and young people under 40 will be able to take out a new “Lifetime ISA”. Up to £4,000 per year can be contributed to such an ISA up to the age of 50 and the Government will add £1 to every £4 put in. This is designed to encourage long term saving. Existing ISAs can be rolled into the new Lifetime ISA. As forecast, the Chancellor seems to have backed off from more wholesale reforms to pension/ISA arrangements. Though older investors might wish to complain about the age discrimination aspect of this proposal.

Tax free personal allowance will rise to £11,500 and the higher tax rate band will rise to £45,000 from April 2017.

Some initial comments: The reduction in Capital Gains Taxes and increase in ISA limits will be greatly appreciated by wealthy investors so it may well please many Members of ShareSoc, but relatively few people nationally either pay capital gains tax or will be able to take full advantage of the new ISA limits. The impact on tax take may therefore be relatively small and lower capital gains tax rates might actually encourage more payment of that tax. For example, long standing holders of assets may be more willing to sell them and there may be less temptation to invest in tax relief schemes such as EIS to avoid tax. But the reduction in Corporation Tax and Business Rates will have a wider positive impact. Likewise the abolition of Class 2 National Insurance contributions and freezing of fuel and some alcohol duties may have wider appeal to middle England. The “Lifetime ISA” will also be very attractive to “millenials” no doubt.

Stock market investors might see some impact from the attempt to recoup more tax from large, multinational corporations. But surely on the whole investors will be pleased with this budget. Perhaps the only slight negative is the addition of yet more complexity to the tax system. Yes the Chancellor and his advisors could not refrain from “tinkering” as forecast in my editorial in the latest ShareSoc Newsletter which is just being published.

Postscript: The budget was criticised by some as diverting money from disabled people to finance tax cuts for the wealthy. Indeed Ian Duncan-Smith, Work & Pensions Secretary, resigned soon after while indicating he had been pressured into excessive cuts to welfare benefits. But the exact position is not entirely clear. The controversy seems to surround the introduction of Personal Independence Payments (PIPs) which replace Disability Living Allowances. The Chancellor in his budget speech said that the “disability budget will still rise by more than £1bn”, but when you look at the details of the budget announcement you find that there is a claimed reduction “from previously announced measures” of over £1bn per annum in Government expenditure from 2018 onwards on PIPs. This arises from changes to the PIPs proposals after consultation. The exact impact on those receiving such benefits is not at all clear at this point in time.

Roger Lawson