The Chancellor does a U-turn on Tax Credits, but how will he pay for it?
The chancellor did a U-turn in the 2015 Autumn Statement: the planned cut to tax credits was scrapped and instead, tax credits will phase out gradually with increase in wages. The chancellor will cut other benefits, for example housing benefit; and pensioners living abroad for more than one month will no longer be able to claim pension credits or housing benefit. The chancellor also announced a levy on large businesses to build an apprenticeship fund, incentives for hiring apprentices, and the devolution of councils from central government, hand-in-hand with extending the small business-rate relief scheme for another year. Among everything, the chancellor hit second-home owners the hardest. In contrast, the government was softer than feared on contractors working through personal service companies and umbrella companies.
Highlights of what the chancellor announced
- No change to tax credits
- Second homes to attract 3% higher stamp duty
- Apprenticeship levy on large businesses
- Contractors, left alone for now concerning intermediaries legislation
- Devolution of councils; extending the small business-rate relief scheme
- The digital revolution, digitizing tax
- New single-tier state pension at £155
- £10,000 extra for help with childcare costs
- £10bn increase in education
The chancellors U-turn on Tax Credits was made possible, in part, by a £27bn gain from lower national debt-servicing costs. Some of this saving will be spent on investing in infrastructure and borrowing £8bn less, with the budget deficit otherwise falling faster than expected over the next four years. Stamp Duty on second homes is a very hard hit for buy-to-let investors The bad news first: another way the chancellor clawed back some cash for his Tax Credits U-turn was through higher stamp duty on buy-to-let properties from April 2016. New rates of stamp duty will mean that buy to let and second homes, will attract 3% higher stamp duty. This will raise the Treasury £1bn by 2021.
With the stamp duty increase is buy-to-let an unprofitable investment?See our articles about just this point: the spotlight has been on buy-to-let all year. The Chancellor first moved to take the heat out of the market earlier this year, when he announced that tax relief on buy-to-let would be limited to the lower rate tax rate. This second attack on the market means that property purchases for investment may no longer make such good financial sense. Capital gains tax on property new collection rules Collection of Gapital Gains Tax on residential property will be accelerated to get the cash from this source of revenue to the government many months earlier. It moves the payment of CGT closer to that of Stamp Duty Land Tax, that is, payable after 30 days.
Carrots for small business and working parents
Business Rates / corporation tax
"Businesses need competitive taxes", the chancellor said, "I’ve already announced a reduction in our corporation tax rate to 18%." Uniform business rates are to be scrapped, the chancellor announced, saying: "Our overall review of business rates will report at the Budget, but I am today helping 600,000 of our smallest businesses by extending our small business rate relief scheme for another year."
Has the chancellor given councils more money to support businesses?I think in a way, government is placing business and councils hand in hand. Councils will receive 100% of revenues from business rates instead of the previous 50%. They will also have the power to cut their own business rates. When councils sell assets, they will be able to keep the revenue to enable them to improve the services they provide. Yes, this is a boost to small business.
Contractors, personal service companies, and working through umbrella companies
The chancellor reminded contractors working through personal service companies that their tax relief on travel and subsistence expenses will be restricted, as it will for umbrella contractors, but this was already known.
is there a downside for contractors?Many contractors working through personal service companies or umbrella companies were very concerned about the announcement of proposed intermediaries legislation, which would force many onto the payroll. The chancellor mentioned nothing about it, but for the reminder about the restriction on tax relief on travel and subsistence expenses Osborne did warn that further changes on employment intermediaries legislation will follow, together with more announcements around issues of ‘disguised remuneration’, which is likely to affect the whole freelancer and contractor market.
Working parents and education
- Free 30 hours of childcare for three and four year olds to be available from 2017, only to parents working more than 16 hours and with incomes of less than £100,000.
- Nursery sector funding to increase by £300mn.
- Investment of £23bn in school buildings and 600,000 new school places, with 500 new free schools and University Technical Colleges.
- National Citizens Service to be expanded to 300,000 places.
- Sixth form colleges to be allowed to become academies (meaning they won’t have to pay VAT)
- Part-time students eligible for maintenance grants and loans
Is this good for working parents?This is certainly good for working parents working more than sixteen hours and with income below the high-rate tax threshold. Long-term, the chancellors emphasis on education and building skills for the future, are prudent steps for the UK to develop its skills base to compete in the global economy, particularly in industries where the UK falls behind.
Is there a downside to the devolution of councils?
Councils with responsibilities for social care will be able to levy a new precept of 2% on council tax to fund care services.
Will councils raise council tax?Yes, almost certainly councils will raise council tax by the maximum allowed of 2% to held fund their responsibility for social care.
Carrot and stick of apprenticeship funding
The chancellor announced an "apprenticeship levy" set at 0.5% of employer’s wage bill, with £15,000 allowance for eligible firms. This will pay for three million apprenticeships, he says.
Is government making larger businesses pay for training?In a way, the government is reminding large business of their social corporate responsibility. However, at the same time as the levy, he’s also announced an allowance for firms that do hire apprentices. The UK needs people qualified in all sorts of ways, so this new drive for apprenticeships along with extra funding for education is probably a prudent move.
Pensions and benefits
The Chancellor has confirmed that the basic state pension will rise by £3.35 to £119.30 a week from April. He boasted that this was biggest rise for 15 years and announced that the starting rate for the new flat-rate state pension will be £155.65 from April 2016. He said that pensioners who leave the country for more than one month would not be eligible for pension credits or housing benefit.
Did government hit pension credits and benefits?Yes, the government did hit pensioners in two ways: first that workers who contracted out of the top-up S2P and Serps schemes over the years will get less and secondly that pensioners who live abroad will no longer be eligible for pension benefits.
The chancellor told the House of Commons that £5bn had been raised from measures against disguised earnings and tax evasion and that he was making more funds available to HMRC’s office for tax investigation. He also announced that he had managed to make £12bn of government cuts so far, and confirmed that regional tax offices were to close, but not to worry because he was hailing in the digital revolution! Tax administration will start going digital from April 2016, with 50 million individuals and small businesses able to see and manage their tax affairs online, making the annual rush to file your tax return history. The chancellor had already outlined a radical overhaul of the self-assessment system in the Budget.
Is this a boost for the self-employed and those needing to file tax returns?The digital tax policy will be set out later this year, with five million small businesses and ten million individuals expected to come on board by early 2016, according to the Budget document. Taxpayers will be able to settle taxes throughout the year and change their tax codes rather than dealing with the hassle of paper or online filing deadlines. But is the chancellor really doing this to help small businesses? In terms of the "ease" to file and pay your tax, definitely, online filing and payment does ease the whole process, but some say that this is the government’s push to get the taxpayer to do more of the work (HMRC’s resources are to be squeezed by 5% cuts, ongoing). However, this is not the only downside, as this announcement has everything to do with the battle against non-compliance, as this will give HMRC instant access to more of our data, probably eventually in real time, and is also in preparation for universal tax credits.
The chancellor also announced reforms to "compensation culture", which should cut £1bn from the cost of motor insurance and save motorists £40 to £50 a year. There was also some good news for businesses using diesel vehicles, the chancellor announced that, "The development and sale of Ultra Low Emission Vehicles will continue to be supported – but in light of the slower than expected introduction of more rigorous EU emissions testing, we will delay the removal of the diesel supplement from company cars until 2021."
To conclude, the biggest kick was to investors in the buy-to-let market; but the chancellor did appease businesses slightly by offering businesses potential investment by councils who hold more funds from business rates, councils with powers to lower business rates, plus the extension of the small-business rate relief scheme. Osborne seemed to put the tax credits row quietly to bed, for now at least, but he’ll have the chance to revisit the issue on the back of the digitization of self-assessment tax and the run-out of universal credit. All the digitization will bring huge benefits to the government, but maybe less so to taxpayers, as taxpayers who pay income tax through self-assessment will come under greater scrutiny. Anti-avoidance as well as intermediaries legislation and other very powerful government incentives to raise revenue from tax fraud and unlawful tax avoidance will all be tied up nicely in the spring, I’m sure, with the digitization of all tax matters. Investment in childcare, education, training, and apprenticeships is a good move. The removal of the diesel supplement I would expect to be welcomed by many businesses, but I imagine will be less popular with the green lobby.