Chancellor’s Budget and How It Affects You

What follows is a summary of Chancellor Philip Hammond’s Budget speech today, and the impact of the tax changes. Private investors were particularly concerned about the impact of tax reliefs in the VCT/EIS schemes following the Patient Capital Review but these are in fact relatively minor (see end of document).

This is a summary of the key points he announced:

  • The Chancellor said we are on the brink of a technological revolution, we must embrace it. Britain is at the forefront, but we must invest to secure it.
  • Regrettably our productivity performance remains disappointing.
  • Our debt interest is too high. OBR expects debt to peak this year and fall thereafter.
  • He maintained his commitment to fiscal responsibility but will use the headroom to prepare Britain for the future.
  • The strategy is to raise productivity and employment in all sectors of the economy. A white paper will be issued on this within a few days.
  • Following the Patient Capital Review an action plan will be published which commits to more funding of the British Business Bank, including £2.5 billion of Government seed funding (to co-invest with private firms). But there will be some restrictions on EIS tax relief (see later).
  • First year VED on cars that do not meet the latest emission standards will be increased. However there will be no “benefit in kind” from the provision of free electric charging of vehicles at work.
  • There will be more support for maths teaching including specialist schools. More maths for everyone! And there will be a tripling in the number of computing teachers. There will also be more “distance learning” support.
  • Universal credits will be paid more quickly and there will be easier access to advances to overcome complaints in this area.
  • The National Living Wage will rise by 4.4% from April (Comment: this will obviously impact employers of large numbers of low paid staff such as retailers and hospitality firms).
  • The Personal Tax Allowance will rise to £11,850 from April and the Higher Rate Threshold will also increase to £46,300, in line with inflation.
  • Taxes on beer, wine and spirits will be frozen (apart from cheap cider). A Merry Christmas to all. Fuel duty will also be frozen.
  • An additional £10 billion of capital investment will go into NHS frontline services. That includes £7.5 billion this year and next, plus there will be a review of staff pay.
  • There will be more attacks on tax evasion. In addition, the anomaly of the indexation of capital gains for companies (but not individuals) will be removed.
  • The VAT registration threshold will be reviewed but it is not intended to amend it from the current £85,000 level for at least two years.
  • There will be amendments to business rates to help smaller businesses.
  • There will be a review of international taxation arrangements. Royalties paid to low tax countries will be taxed and on-line marketplaces will be jointly liable for the sellers VAT.
  • Councils will have powers to tax empty properties, plus the Government will look at barriers to long tenancy agreements.
  • The Chancellor said house prices are getting out of reach. Successive Governments over decades have failed to meet the demand for housing (comment: surely nobody can dispute that). He committed £45 billion in capital and loans to boost the supply of skills, resources and building land. Plus there will be reforms of the planning process/laws. There will also be an inquiry into why plots with planning approval are not built.
  • Seven new town developments are planned with 1 million new homes in the Cambridge, Milton Keynes, Oxford corridor. The plan is to build 300,000 new homes per year.
  • Stamp duty will be abolished on the homes up to £300,000 in price for first time buyers and the same allowance available for homes up to £500,000 in price.

More details on taxation changes.

Changes additional to those mentioned above include:

  • The IR35 rules allowing contractors to avoid being taxed as employees may be tightened further (to follow through changes in the public sector to the private sector).
  • There will be a consultation on reform of the taxation of trusts to make them simpler, fairer and more transparent (Comment: surely a positive move).
  • Individuals operating property businesses will have the option of using mileage rates to simplify their tax affairs.
  • ISA subscription rates will remain unchanged (£20,000 for 2018-2019).
  • Lifetime allowance for pensions will be increased by inflation to £1,030,000.
  • Carried interest transitional arrangements will be removed with immediate effect (so pity those asset managers who will now pay full capital gains tax rates).
  • The restriction of relief on VCT investments sold within six months where VCTs merge will no longer apply to mergers more than two years after the subscription or where they do so only for commercial reasons. This will avoid a trap that investors can accidentally fall into.
  • VCT and EIS schemes tax relief will need to ensure they are investing in assets subject to “real risk” rather than those simply aiming for “capital preservation”. Certain “grandfathering” provisions that enable VCTs to invest funds under older rules will be removed from April 2018.
  • VCTs will need to invest 30% of new funds raised to be invested within 12 months.
  • VCTs will need to have 80% of their funds as “qualifying” investments (currently 70%) from April 2019, but they will have 12 months to reinvest the proceeds of disposals (currently 6 months). This presumably might enable them to smooth dividend payments somewhat when currently they often have to pay out the result of realisations rapidly.
  • EIS rules will double the limit on the amount an individual can subscribe in a year to £2 million, but any amount over £1 million must go into “knowledge intensive” companies. Comment: I await some simple definition of what they might be. Such companies will also have the limit on annual EIS and VCT investments raised to £10 million

I have only included what seem to be the most significant changes in the above. In general there seems to be a policy to avoid rapid and abrupt changes to taxation (which thwart people from planning their tax affairs) which is to be welcomed.

Whether the VCT and EIS tax changes will have significant impact on those vehicles remains to be seen although some of the changes had already been indicated and threats of major changes that had been rumoured seem to have been avoided. This writer expects that the managers of those funds will adapt as they have already been doing. Encouraging investment in riskier assets may increase the risk profile of those companies but might also increase the returns and a large size and diverse portfolio will provide a hedge against the risks.

The full report on the Patient Capital Review consultation has also been published and is available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/661398/Patient_Capital_Review_Consultation_response_web.pdf

I may provide further comments on that after reading.

In summary I view this budget positively with no unexpected surprises or likely perverse outcomes from unintended consequences we have seen from the surprises announced by previous Chancellors. But it would be interesting to get readers comments – please add.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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