UK Chancellor of the Exchequer Philip Hammond presented his Spring Statement on economic and fiscal matters on March 13. As suggested previously, there were no immediate tax changes at this time.
The government has now moved back to a single main annual Budget statement to be made in November each year, comprising firm changes in taxation (mainly to take effect from the following April) as well as public expenditure plans. The Spring Statement, however, includes some new longer-term consultative tax proposals alongside updates of the official economic forecasts.
The government has issued a further consultation paper on the corporate taxation of international businesses in the “digital economy”. The main focus of this current exercise appears to be on social media networks and search engines.
Though individual companies are not officially identified, Facebook and Google are understood to be the principal targets. Yet a number of other businesses could well end up within the scope of any action taken.
This is more narrowly targeted than the wider concerns about the taxation of international companies (such as those using low tax jurisdictions for the location of intellectual property rights). At this time, however, the proposals for digital businesses are still very much at a formative stage. The main idea is to devise gross-revenue-based determinants of taxable profits, e.g. starting from the amount of advertising revenue generated by a platform from the UK.
The end product would be a special corporation tax computation for these platforms, based on notional UK profit, rather than a pure turnover tax on top of the existing VAT system. It is, however, probably in large part because of VAT factors that the authorities are focusing currently on the digital platforms.
International companies in other sectors, even if they are relatively lightly taxed on their profits, will generate considerable UK VAT revenues from their sales to final consumers. By contrast the main business model of the major digital platforms is to provide services free of charge to retail consumers, while earning their revenues from commercial advertisers. The latter will mostly be VAT-registered businesses, able to recover the “input VAT” on their advertising costs against the “output VAT” on their own sales.
The next step will be more clearly defined proposals in this year’s November Budget statement. Given progress to date it seems possible that yet another consultative stage could then follow, with legislation perhaps to take effect from April 2020. Even then it might be regarded as an interim UK solution, pending inter-governmental consultations on a more co-ordinated corporate tax approach in this area.
Other new consultations
There is also a new consultation paper on “cash and digital payments in the new economy”, with the ideas being again very much at the formative stages. The focus here is rather more on business-to-consumer (B2C) transactions than on business-to-business sectors like equipment leasing and fleet finance. Yet B2B sectors are certainly not excluded from its scope.
The government’s principal intention here is to encourage the move away from ready cash towards digital payments, with a view to limiting the opportunities for tax evasion. Views are invited, for example, on whether the UK should follow some other countries in prohibiting the use of cash altogether for exceptionally large payments.
Further early stage consultations are issued on several other tax matters. These include new VAT collection mechanisms for online sales; how online platforms can more generally help their users to pay the right amount of tax; anti-evasion moves ensuring that HM Revenue & Customs can ultimately collect VAT paid by consumers; and possible vehicle excise duty (VED) concessions for vans with the lowest exhaust emissions.
Outside the tax field, there is a further call for evidence on possible new moves to curb late payments of invoices (focused on B2B sales from SMEs, mainly to larger businesses).
No further news is to be expected just yet on HMRC’s proposals last December for legislative changes on the tax treatment of equipment leasing as a consequence of the new global lessee accounting rules. The consultation period ended only on February 28.
The outlook there remains generally positive, however. The latest proposals were broadly in line with earlier representations from the leasing industry, and seemed broadly favourable for both the larger lessees who will be directly affected by the new IFRS 16 rules, and the bulk of SMEs who will continue to use UK GAAP for lease accounting purposes for the foreseeable future.
The economic background
The overall fiscal policy environment is one where the UK has been making a long and slow recovery from the decimation of tax revenues after the 2008 banking crisis. The overall world economy is currently buoyant, with a strong upturn in the US and a clear return to strength also across the Euro zone economies – all of which helps the UK in spite of commercial uncertainties around the Brexit process.
The UK’s official (but semi-autonomous) Office of Budget Responsibility now forecasts that following the 1.4% real growth in gross domestic product (GDP) in 2017, annual growth will remain positive but modest. GDP is projected to grow within the range of 1.3% to 1.5% in every year of the current forecast period up to 2022.
The UK’s current growth performance is towards the bottom of the range among the G20 countries – significantly better than was widely expected immediately after the Brexit referendum vote in June 2016, but rather more sluggish compared with the period before that.
The UK’s annual public sector borrowing rate, which went up to nearly 10% of GDP after the 2008 crash, is down to an estimated 2.2% in the fiscal year ending this month. The reduction followed significant increases in the VAT rate and in personal income tax in 2011, and a prolonged squeeze on many areas of public spending over all the years since 2010.
While the general corporation tax rate has been cut to a highly competitive 19% rate during this period, the rate for banks (including the parent companies of many equipment lessors) has been kept at the higher rate of 28%.
Public borrowing is now forecast to fall to 0.9% of GDP by 2022/23. This prospect represents a distinct deterioration compared with the projected progress two years ago, when a surplus had been expected by 2019/20.
In his Spring Statement, Hammond made clear that the current GDP growth forecast would (if sustained) give him some flexibility in next November’s Budget statement; but implied that if so, this would be used for some relaxation on the public spending side rather than net tax concessions or a faster reduction in the deficit.
Following the high borrowing levels of the past nine years, the outstanding level of UK national debt has roughly doubled in real terms. However, given the current growth forecasts the debt is now forecast to peak at 85.1% of GDP in 2019/20, and to fall to 77.9% three years later.