Mr Hammond has warned us not to expect another Budget for at least 12 months after the traditional Autumn Statement was done away with.
Consequently, this Budget must deliver on a number of fronts. Can the Chancellor help younger people while not penalising pensioners? Can he please both entrepreneurs and big corporations? Can he continue to pay down the deficit while giving public sector workers a pay rise?
Given the fragile state of the economy, and with Brexit uncertainty holding business investment back, Mr Hammond has very little room for manoeuvre.
Two of HW Fisher’s partners give their view on what the Chancellor might do on the taxation front.
Toby Ryland, corporate tax partner
Buy-to-let property investors have been feeling the pinch since April this year, when the government reduced the tax relief they can claim on their mortgage interest payments.
This tax relief is set to be reduced even further in coming years, but at present the cuts only affect investors who own the properties directly. There’s an exemption for properties that are owned by a company, which has prompted many buy-to-let investors to set up their own companies through which they hold and manage their properties – thus maintaining the previous rate of tax relief on their mortgage payments.
It’s now possible Mr Hammond will close – or at least tighten – this loophole by taking mortgage interest tax relief away from companies as well, thereby preventing professional landlords enjoying a tax relief that individual investors do not.
There’s another relief that Mr Hammond may also have in his sights. Entrepreneurs’ Relief allows those who have invested in a trading company to sell shares in that company after a year and pay just 10% Capital Gains Tax.
As the name suggests, this tax relief is designed for people who are actively involved in a company, either as an officer or director. But there is concern the relief is being abused by investors with stakes in multiple businesses which they do not help run.
It is estimated that such abuse costs the Treasury £3 billion a year. Mr Hammond may decide to increase the CGT that such entrepreneurs pay, or require them to work full-time for the company, rather than merely holding the 5% stake that’s currently the minimum requirement to qualify for Entrepreneurs’ Relief.
Elsewhere, the Enterprise Investment Scheme (EIS) provides tax relief of 30% to those who invest in small, unquoted businesses. The maximum someone can invest in a year is £1 million, but investors can deduct 30% of what they invest from their income tax bill.
During the financial crisis, EIS was used to encourage investors to put money into small businesses and fill the gap left behind by the banks who were unable or unwilling to lend.
But recently, as the economy has done better, and with interest rates still at historic lows, it has been viewed as a method of tax avoidance. So, it’s possible the Chancellor might reduce the generous income tax relief offered by the EIS – perhaps from 30% to 20% – to discourage some from using it simply to shelter some of their income from the taxman.
Jamie Morrison, private client partner
The Chancellor got his fingers burned in March over Class 4 National Insurance contributions – National Insurance for the self-employed – when he announced they would rise in 2018 and again in 2019.
In doing so, Mr Hammond broke a Conservative manifesto pledge, something that was quickly pointed out to him and which led to an embarrassing U-turn within a matter of days.
Since then we’ve had another election, and that previous manifesto pledge no longer applies, so it’s entirely possible he could revisit the issue of National Insurance.
Another area Mr Hammond could revisit might be personal service companies (PSCs). Such companies are used by self-employed contractors to reduce their tax payments.
They allow long-term contractors to act as self-employed workers and thus reduce their National Insurance contributions, by allowing them to pay class 4 National Insurance rather than being on a company’s payroll.
Public sector employers have already been banned from using PSCs, and it’s now possible the Chancellor could extend this requirement to the private sector as well. This would force hundreds of thousands of contractors to move onto their employer’s payroll and net millions in extra National Insurance contributions for the Exchequer.
Another area the Chancellor could revisit is Stamp Duty. It’s one tax that has been touted a lot in recent weeks as being ripe for reform, and one the Chancellor might use to show the government is on the side of millennials.
Mr Hammond may, as a result, reduce or even scrap Stamp Duty for first time buyers in order to prevent the housing market seizing up. He could recoup the tax revenue lost by increasing Stamp Duty on properties worth £925,000 – or by increasing the 3% surcharge on second homes
However, neither increasing the surcharge or Stamp Duty on high value homes are likely to be popular with traditional Tory voters, so it’s hard to see the Chancellor being brave enough to do this in the current political climate.
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