Are we facing an economic Armageddon?
On 22 November the Chancellor of the Exchequer will stand up to deliver his second Budget of 2017 and perhaps this time the Chancellor might need a stiff drink, writes Fiona Hotston Moore – partner, Ensors Chartered Accountants (pictured above).
There are a number of storm clouds gathering above the UK and it will be interesting to hear how the Chancellor plans to deal with both the short term but more importantly the longer term challenges that recent Budgets have not addressed.
The UK’s inflation rate hit its highest for five years in September driven by food and transport price increases. The Bank of England recently decided to raise interest rates by 0.25 per cent and there is talk of further rises.
The last increase prior to the recent one was actually over a decade ago in July 2007 and before the financial crash. Economic growth however remains poor and the uncertainty over Brexit continues so the Bank of England decision was clearly a tough one.
With interest rates increased, mortgage holders (both home owners and businesses with borrowings) must, for the first time in a decade, need to find extra cash from already squeezed budgets to meet increased interest payments.
Another challenge to the Chancellor is how to finance the UK current account deficit. A fall in our UK credit rating could result in lenders increasing the cost of borrowing by the UK.
Theoretically pensioners will be celebrating a three per cent pension increase in April whilst others on benefits or working in the public sector will receive a mere one per cent increase; significantly less than the three per cent increase in the Consumer Price Index.
The income squeeze is becoming tighter and will again hit the poorest in our society disproportionately.
The gap between the ‘haves’ and ‘have-nots’ has been increasing at an alarming rate in the last decade with now seven million people in the UK having no assets or being in debt.
At the same time 20 million workers in the private sector have no pension provision and for the eight million workers that do have a pension pot the average will provide an annual pension of just over £1,115 per annum.
We have a generation approaching retirement who have no assets (and quite probably some personal debt), no pension provision and who are also likely to require more from the health service than previous generations.
In this Budget I would like to see the Chancellor finally acknowledge that our children will face huge financial challenges which will require a completely new approach to the UK Budgeting and not just a few tweaks here and there to appease the voters.
PS: Is it too late to reverse Brexit? I hope not …
Hopes for a boost to the M & A market
by David Scrivener – Corporate Finance partner, Ensors Chartered Accountants
The Spring Budget provided few changes that were of interest to the M & A sector and it is certainly possible that the upcoming Autumn Budget will continue this trend. However, despite the unusually short time between budgets, there are a few areas which may attract the Chancellor’s attention.
One significant event since the last budget was the triggering of article 50 on 29 March that formally began the process for the UK’s exit from the EU. This, together with the somewhat rocky progress of negotiations so far, has created an atmosphere of uncertainty for investors in UK companies. As such this Budget comes at a crucial time for the M & A market. Potential buyers will be looking for a confident and reassuring display from the Chancellor.
Initially it did not appear that the triggering of article 50 was having a significant effect on UK M & A deals. Transaction numbers and value for the second quarter of 2017 were only slightly down on the previous quarter and compared favourably with the same period in 2016.
However a recent report from Experian shows that deal numbers for the third quarter were down sharply on Q2, with year to date transaction numbers down 14 per cent overall (although deal value is up 30 per cent). This reflects the current uncertainty in the market caused by the snap election and Brexit negotiation difficulties.
It may be that the stability shown in Q2 was merely a continuing result of the devaluation of sterling and that the decline in Q3 will become the new normal.
The hope will be that Philip Hammond acknowledges this possibility and puts some kind of policy framework in place to boost the UK M & A market, both now and post-Brexit.
On a macro-economic level, the Chancellor’s prediction at the last Budget of two per cent growth for 2017 now appears to be unlikely following lacklustre growth announcements for Q1 and Q2 (both 0.3 per cent).
Economic confidence has been shown historically to directly affect M & A activity. Investors will therefore be looking to this budget for policies that encourage and foster growth in order to get the economy back on track.
Finally, always a concern in the M & A sector is any threat to ‘Entrepreneurs relief’, a tax relief that benefits many shareholders selling their shares in private companies by offering a lower (10 per cent) rate of capital gains tax.
This relief has been crucial for M & A in privately owned UK companies and drives succession which is good for the economy. It seems unlikely that the Chancellor would risk attacking this relief in the current climate but it cannot be ruled out given the pressure on him to increase public spending whilst continuing to follow the Conservative policy of balancing the budget by 2025.
Tax: What’s in store for the individual?
by Nick Edgley – tax manager, Ensors Chartered Accountants
Shortly we have the Government’s second budget in 2017. I’ll be thankful we go back to one a year from 2018.
How the autumn budget will affect an individual is difficult to predict; the economy appears to be slowly ticking along (or not – depending on who you listen to!) so no giveaways expected. But how to raise some taxes without creating a furore like the pasty tax?
The election result means a direct income tax increase of some kind should not be high on the agenda.
As seems to be the case, every year pension tax relief rears its head.
Rumours persist that the Chancellor is plotting a raid on older workers to fund tax breaks for younger people.
Generally you currently receive tax relief at 20 per cent, 40 per cent or 45 per cent depending on your highest rate of tax; although in some very specific circumstances it is possible to obtain higher rates of relief.
We did in fact see the ‘lifetime ISA’ introduced a few years ago which effectively gave the under-40s a set amount of tax relief for saving for a first home or for retirement.
If the Government made this scheme applicable for retirement savings to all then they would save about £13 billion a year. Recently pension relief was debated in the House of Commons as calls continue to be made to reform this area so, although this never seems to come to pass, this year could be the year it does.
Although a set rate sounds simpler, company contributions would need looking at as well. This could have unintended consequences.
If your employer currently pays into your pension pot and this relief needs restricting, so you incur tax charges, you may wish them to make lower contributions.
The Government has to be careful here as they need to encourage individuals to save for retirement but such a move is likely to have the opposite effect.
The attractive tax relief on the Enterprise Investment Scheme for investing in startups is also rumoured to be on the hit list: Perhaps a reduction in relief from 30 per cent to 20 per cent and making it harder to retain reliefs on a sale of EIS shares.
Stamp Duty Land Tax (SDLT) reforms are also rumoured; this adds a deterrent to home movers. The Chancellor appears to be considering no SDLT for first time buyers or a reduction for older home earners to encourage downsizing.
I would also like to see a commitment to an overall tax simplification programme. The UK tax code is one of the longest in the world and grows each year despite the Office of Tax Simplification.
With Brexit still taking the headlines, and with all the uncertainty, a period of no or few changes will assist individuals with budgeting, planning and offer some stability in the tax world.
Will our engine rooms be filled with fuel?
by James Francis – partner, Ensors Chartered Accountants
With inflation rising, the Bank of England finally increased interest rates by 0.25 per cent earlier this month. I think this will be the first of a few rate rises, albeit small ones.
What this does for the owner manager with debt is clearly increase debt interest repayments. However, what the Government must do is continue to balance the books, so I have a feeling that SMEs’ bad news will continue in the Budget.
I suspect that pension reform will continue, meaning less tax benefit for owner managers making substantial contributions to their pensions. This is in keeping with changes made in previous years.
There is also a big question mark over whether the corporation tax rate will move from the current position of 19 per cent to the previously announced 17 per cent by 2020.
I would not be surprised if this is delayed or increased to perhaps 18 per cent as even at 19 per cent it is one of the lowest rates in Europe, with whom there will be further competition in the next few years.
With income tax rates untouchable I think that dividend rates will continue to creep up to the standard income tax rates of 20/40/45 per cent. Whether there is a full jump from the current rates of 0/7.5/32.5/38.1 per cent or a planned equalisation over a period of time, it will be interesting to see.
I hope Research & Development tax credits continue to be available so that innovation continues to be rewarded accordingly. Alongside this, I hope Innovate UK continues to be given funds to support companies, with grants continuing to be made to those companies researching and developing new technologies etc.
All in all, I know that the Budget has to be balanced (however, in the last 60 years there has only been a Budget surplus eight times) but I hope there are still incentives for innovation and entrepreneurship.
The SMEs are the engine room of the economy so I hope they continue to have opportunities for growth – just not at the expense of more tax due.
Are storm clouds gathering for the medical sector?
by Jan McLean – Medical partner, Ensors Chartered Accountants
Following Philip Hammond’s March statement I mentioned that he delivered a light touch budget, light heartedly as the nights became lighter and mused whether storm clouds would build before we reach the autumn edition foretelling a heavier read for the sequel.
Politically the clouds blew in within a week forcing the Chancellor to quickly reverse his National Insurance reforms for the self employed. Meteorologically we have been battered in recent months by storm Aileen in September with ex hurricane Ophelia and storm Brian hitting us in October. We now await the impact financially in November of the second Budget this year.
As ever rumours are swirling that there are plans to reduce yet further the maximum pension investment Annual Allowance from £40,000 to £30,000 per year and advance the impact of tapering of the Annual Allowance down to £10,000 for those with income in excess of an upper limit which currently stands at £150,000 and is mooted to possibly be reduced to £120,000. In essence, if enacted, individuals will be allowed to accumulate less pension wealth tax efficiently.
These rules can punish a member of a defined benefit arrangement such as the NHS Pension Scheme as the Annual Allowance measurement is calculated, not by the amount deducted from employee earnings or superannuation paid by self-employed GPs, but by multiplying the increase in the growth of their pension entitlement for the year, in some cases by as much as 19 times for those members still in the 1995 section of the NHS Pension Scheme for example.
For those in the 1995 section of the NHS Pension Scheme, whereas as an increase in an individual’s pension expectation currently could be as much as £2,105 in a year, the above move would reduce this increase allowance to £1,579 a year.
Members in the 2015 Section of the NHS Pension Scheme are also subject to similar restrictions. Additional pension growth secured above these levels triggers an immediate assessment to an Income Tax charge on notional income which has not actually been received by the taxpayer.
For members fully affected by the tapered Annual Allowance reduction to £10,000, the maximum increase in their pension which can be obtained each year is just over £526, again an example for those members in the 1995 section of the NHS Pensions Scheme.
More people will therefore potentially fall foul of this rule which will increase HMRC revenue at the expense of the unwary. Sadly many may be faced with a decision as to whether to remain in these types of schemes or not.
As ever, professional, independent financial advice should always be sought when considering such decisions.
Christmas wish-list for charities!
by Helen Rumsey – Charities partner, Ensors Chartered Accountants
Nothing much seems to change for the charity sector. Every year I comment on the difficulties that the sector is facing, with increased demand, limited funding and increasing costs and red tape. Sadly, this year is no exception. And Brexit may mean that charities are called on to do even more.
So what would the sector like to see to improve their lot? Here are some of the changes that bodies representing the not for profit sector would like to see Philip Hammond deliver.
The VAT system was never designed with charities in mind, and its application to charities is unduly complex. The majority of charities are not registered for VAT and as a result VAT increases their cost base.
It is estimated that irrecoverable VAT costs the sector approximately £1.5bn a year. Eliminating this cost would significantly increase the resources available to support the sector’s beneficiaries.
Whilst rebate schemes exist for specific types of charities, such as hospices and search and rescue charities, the widening of this approach would be a welcome move. Or perhaps the zero rating of supplies to charities could be extended.
Currently it is estimated that UK charities receive £300m a year from the EU. Whilst the Government has announced its plans for replacing this funding, it is essential that not for profit organisations receive their share, preferably in the form of grants rather than contracts.
Sustainable funding is crucial for the sector. Substantial funds remain within dormant assets, together with unallocated monies from LIBOR fines.
These funds could be endowed to create ongoing funding for organisations and as a result, lasting support for their beneficiaries.
There are also opportunities to reduce other costs incurred, perhaps by the elimination of insurance premium tax for charities or increasing business rates relief.
The Government is currently considering the impact of backdated pay demands on the sector arising from the application of the national minimum wage to overnight sleep-in shift workers.
Whilst this generally impacts on the social care sector, rather than all charities, support from the Government for these entities may be crucial to their survival and hence their beneficiaries.
And finally, there is a call to strengthen the sector, with training programmes in such areas as fundraising, technology, cyber security and financial management; basically helping the sector to help itself.