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INSIGHT: A U.K. Budget of Firsts on March 11, 2020?

Feb. 3, 2020, 8:01 AM

After a decade weighed down by the need for austerity and years of “dither and delay” following the EU referendum, 2019 was the first year for well over 100 when there was no formal Budget announcement in the U.K. But there will be a Budget this spring and I’m hoping that it will also be a Budget of other economic firsts.

It will clearly be the first for Chancellor Sajid Javid. It will also the first one based on the new economic rules for measuring success of spending policies that were previously effectively weighted against spending in poorer areas. It is the first under the Chancellor’s new fiscal rules of balancing the current budget by 2022–23 while allowing for national borrowing for capital projects to rise dramatically, taking advantage of the historic low cost of borrowing—up to 3% of GDP rather than the long-term average of 1.8%.

Politically, it is the first Budget of the new parliament and the first for a number of years that is likely to be pushed through without much amendment by a government with a large majority.

Early term Budgets are traditionally ones where the government has the political capital to make radical changes and, for Prime Minister Boris Johnson, it is the first real chance to repay those voters who he sees have lent him their vote and to prove that his “One Nation Conservatism” is more than an election slogan.

“Supercharging the Economy”

When he was campaigning for the Conservative Party leadership, Mr Johnson talked of “supercharging the economy” before Brexit—a message that accords with our New Economy report, that looks at policies that will support Britain’s businesses through Brexit and beyond.

If that is the task the Chancellor has been set, we hope to see a plethora of spending announcements for investment in what we call “shovel-ready” regional infrastructure to ensure that business across the country can operate efficiently. We are expecting this to include upgrading the TransPennine railway and would also want to see local road repair and building programs announced, which deliver more significant economic benefit than people often realize.

For every 1 pound ($1.30) spend on repairing potholes, our economic analysis shows that it returns 14 pounds in economic benefit—significantly better than some of those headline grabbing infrastructure projects being planned. It will be interesting to see how controversial projects such as HS2 (High Speed 2 is a high-speed line project between London and the Midlands, the north of England and possibly later the central belt of Scotland) and the third runway at Heathrow are addressed—will the need for growth outweigh cost-effectiveness, economic returns and environmental concerns? Just think how many of the 40 promised hospitals could be built with the 106 billion pounds projected cost of HS2.

During the election campaign, Mr Johnson announced that the new government would stop the planned reduction in the U.K. corporation tax and keep it at 19%—already low by G-8 standards.

This might not seem like a business-friendly move but, if the funds it releases are used to invest in infrastructure or spent on improving public services, it may end up helping to boost the economy: significant investment in the National Health Service (NHS), including upgrading, extending and building new hospitals across the country will be welcomed by the construction industry.

Similarly, the proposed digital services tax on internet multinationals could raise useful funds for public investment to reinvigorate high streets—although cynics might see it as little more than a bargaining chip to use in trade negotiations with the U.S.

As well as government investment in infrastructure and the health service, now is a pragmatic time for government to encourage U.K. businesses to make a step change in their invest activities: a recent CBI survey showed that business optimism had risen by 67% from October to January.

In line with our New Economy report, I’d like to see capital allowance annual investment allowance rise to 5 million pounds for at least two years to help kick start business investment and help to try and solve the U.K.’s productivity conundrum.

Increasing the rate of relief for the new structures and building allowance (a 3% rate has been promised but higher would be better) and boosting the Research & Development Expenditure Credit to 13% to support and boost U.K. R&D activities would also be well received by U.K. business.

However, for a quick boost to the economy, there is nothing like a vibrant property market. Cutting stamp duty land tax heavily ought to have a positive economic impact far beyond house prices and changing local authority funding rules and possibly planning regulations to boost social house building would help lock this in.

Looking at the rebalancing of the U.K. economy, creating wealth and opportunity away from London and the South East; the government has confirmed that it will allow the Northern Ireland assembly to set its own corporation tax rates and it will be interesting to see if more regional initiatives are forthcoming.

Will local authorities and mayors in the “northern powerhouse” get more powers and funding? The Conservative manifesto contained a pledge to create 10 new free-port areas in the U.K., which in my view would certainly boost investment in the chosen regions.

However, we must all hope that the Chancellor resists hastily creating new tax reliefs—history suggest that they usually prove more costly and less effective than planned. For example, Entrepreneurs’ Relief (ER) was created in a hurry (to replace Taper relief) and the government now says it is not a cost-effective way to encourage investment. However, ER is of great value to many business owners, so it would be fairer to reform and refine it into a longer-term incentive than to abolish it.

The U.K.’s tax legislation is notoriously complicated. These complexities are an inhibitor to growth and enterprise, as the rules often hit those companies and business that can least afford the advice needed to navigate them appropriately.

Tax simplification or, at least, restricting changes to the bare minimum, has to come onto the Chancellor’s agenda soon, if he is serious about supporting U.K. business. His stance on disalignment from the EU may help, as this could remove a lot of EU-based rules and regulations pertaining to state aid rules, if allowed to through the negotiations on our future Free Trade Agreements this year.

We already know that the plastic packaging tax will go ahead and more headline grabbing green measures may also be announced—maybe we could follow Kenya’s example where they have banned the use of plastic bags outright and did it very quickly. Few would now argue against more support for the development of battery technology and boosting the use of low carbon vehicles in the U.K.—will the Chancellor finally make the big investments in terms of both spending and tax reliefs that are needed to move the industry forward at the pace environmentalists say is necessary?

Of course, the Budget won’t just be about growth: the Chancellor will also seek to help struggling businesses. Short-term cuts to business rates have already been promised for smaller businesses pending a more radical long-term review of the levy and should help the struggling high street. Similarly, the promised review of air passenger duty could help all U.K. domestic airlines.

Outlook

At BDO we believe the government should follow policies to create a strong, balanced new economy across the entire U.K. if it is to ensure we have a successful exit from the EU and beyond.

For the first time in a long time the chances of rebalancing the economy seem positive, thanks in part to the need to repay those northern voters who have put their faith in a Conservative government for the first time. But if this is to be achieved quickly, we will have to hope that the Chancellor’s actions are as bold as his bosses’ rhetoric.

Stuart Lisle is a Tax Partner at BDO LLP. He may be contacted at stuart.lisle@bdo.co.uk.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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