UK Chancellor of the Exchequer Rishi Sunak unveiled his first annual Budget statement on March 11. This brought a number of moves designed to ease the economic effect of the Coronavirus shock for UK businesses and consumers in the months ahead, together with some permanent tax changes and some less clear indications of government plans for later years.
The immediate Budget day steps included some monetary moves by the Bank of England, alongside the fiscal changes in the Budget itself. The Bank Rate was cut from 0.5% to 0.25%. The Bank of England also removed the “counter-cyclical buffer” of additional capital requirements for UK banks.
The buffer is an additional slice of minimum capital on top of the permanent regulatory ratios of minimum capital to risk-weighted assets. As in other countries, it is applied at times when the national economy is considered currently strong, with the danger of excessive credit growth.
Up to Budget day, a 1% counter-cyclical buffer had been in force in the UK, and had been due to rise to 2% in December this year. It is now reduced to zero, and the Bank says that it is unlikely to be reintroduced for the next 12 months at least.
The Bank’s “term funding scheme” has also been rolled forward on more expansive terms for the next 12 months. Under this scheme the Bank offers to advance four-year loans to UK banks at a rate very close to Bank Rate, to fund set proportions of their UK customer loan books.
The scheme was introduced in the aftermath of the global financial crisis of 2008. It became clear then that unusually low market interest rates were likely to continue for some years, making it difficult for banks to compete strongly in deposit markets. Most, though not all, UK banks, find it advantageous to use the scheme.
Over the coming 12 months the term funding scheme can advance further 4-year loans to fund up to at least 5% of a bank’s stock of UK loan advances. Higher percentages will be available to banks with minimum proportions of advances to SME customers.
Although equipment leases as such do not count as loan advances for this purpose, the scheme does support bank lending to financial leasing companies, including those within their own corporate groups. Leasing activity is therefore supported by the scheme, although bank-funded lessors active in the SME sector will not benefit from the additional SME parameter in the scheme.
Among the temporary fiscal changes will be very significant reductions in business property rates for small premises in the retail and leisure sectors, amounting in some cases to a complete exemption. The business rate changes announced by the Chancellor will apply in England. The devolved administrations in other parts of the UK seem likely to take similar steps, though they will receive additional block grants pro rata to the English business rate concessions and will be free to use these as they choose.
There will also be a 'Coronavirus business interruption loan scheme'. The government will guarantee, for no fee, 80% of possible credit losses on bank advances of up to £1.2 million per customer, to SMEs whose business is significantly disrupted by the virus. The 'time to pay' rules allowing some deferrals of tax payments by distressed firms will also be extended during the virus period.
Workers, and small employers, affected by work absences due to the need to isolate through the virus factor, will benefit from some changes in statutory sick pay (an entitlement due from employers), and associated social security benefits for the self-employed and employees becoming redundant. The government will reimburse firms with less than 250 employees for their cost of the temporary enhancement of statutory sick pay.
Specific early tax changes
Among the major permanent tax changes with more or less immediate effect, the largest is a significant concession in the form of a major increase in the earnings threshold for National Insurance Contributions from April this year.
There is, however, also a significant increase in capital gains tax through the curtailment of 'entrepreneurs’ relief'. This provides for a concessionary 10% CGT rate on disposal of a qualifying business owned by the taxpayer.
The value of this provision, in terms of the maximum disposal proceeds eligible for relief within the lifetime of a taxpayer, is slashed from £10 million to £1 million with effect for disposals completed from Budget day onwards. It remains to be seen whether this will have an adverse effect on future business formation and development in the UK, by owners expecting to remain UK resident for tax in retirement.
The UK corporation tax rate will remain at 19% for the fiscal year starting in April. The proposals to continue reducing the rate, eventually down to 17%, announced in the 2015-16 period, have been scrapped for the foreseeable future.
The 100% first-year allowances (FYAs) for plant and machinery investment in enterprise zones, originally intended as a temporary move that would have expired by now, is to be extended for at least the next fiscal year. As with other FYAs for favoured asset categories, these are not available to lessors in the case of a pure equipment lease, but can be claimed by hirers under a hire purchase type contract where it is the customer who claims capital allowances (CAs).
The structures and buildings annual CA rate for non-residential property is increased from 2% to 3% from next month. It seems unlikely that such a rate would attract any equipment lessors into the real estate sector.
The new UK digital sales tax (DST) is to go ahead from this April. It will be charged at the rate of 2% on all online sales, including advertising, to UK customers by search engines, social media platforms and online traders above a £25 million annual turnover threshold.
This new tax is clearly targeted at the US tech giants. There have been threats of retaliatory import tariffs by the US against European countries following this course. Several countries have indicated an intention to do so, in the absence to date of any global inter-governmental agreement on a fair corporation tax solution for the major tech players.
However, the UK has now committed itself further to a unilateral DST type approach than any remaining EU countries. It remains to be seen how the US will respond, given that the UK hopes for early bilateral trade negotiations with the US following Brexit.
There is to be a relaxation of the restrictions on pension contribution tax relief for higher earners. Following the acute effects experienced by NHS medical staff in the past year, the “taper” whereby the maximum amount of annual relief is reduced above a defined earnings level is to be moved to a much higher level, affecting only annual earnings above £200,000, rather than £100,000 as at present.
Later tax changes
From April 2021, the capital allowances (CAs) and associated provisions for business cars are in general being tightened. The 100% first year allowance (FYA) for the lowest emission category will now be continued until 2025, but from next year this will be available only for zero emission models.
Two other changes in this area will be of some concern to the fleet finance sector. The very low CA rate of 6% for the least favoured emission category will from April next year apply to all cars with CO2 emissions above 50 grams per kilometre, rather than 110g/km as at present.
The 15% disallowance of lease rentals as a revenue expense for the lessee, which represents a clear case of discrimination against both finance and operating leases as a method of finance, is also being extended. Here too, the emission threshold for the restriction is cut from 110g/km to 50 g/km from April 2021.
Motor fuel tax rates will remain frozen for this year. However, the heavily reduced rate for off-road “red diesel” will be removed as from April 2012 for all currently eligible users except for the agricultural sector. The construction sector, and retail distribution in respect of refrigeration motors, seem to be the main losers from the change.
Vehicle excise duty rates will be unchanged this year except for an annual increase in line with the retail price index. However, the government has launched a consultation on possible major changes to be made later. A possible extension of green vehicle incentives, mainly effected at present through a penal first year registration charge for high emission cars, to the ongoing rates throughout the lives of vehicles, is something that Ministers clearly have in mind.
The Chancellor has taken advantage of Brexit to add new VAT zero rating rules that would not be permitted under current EU harmonisation rules, from around the end of the year when the Brexit 'implementation period' is due to end.
All digital publications will from December 1 this year benefit from the VAT relief always enjoyed by printed publications from the inception of VAT.
As part of the green energy initiative, gas supplies to business users will be hit by an increase in the Climate Change Levy from April 2022. Electricity supplies will not be affected, reflecting the steady moves to renewal power sources.
Also targeted for implementation from April 2022 will be a new excise duty on plastic packaging material containing a less than 30% recyclable content. There is to be an immediate consultation on possible details.
Following the temporary concessions in business property rates announced for this year, an early consultation is also to be launched on possible more far reaching changes to that tax. For the retail sector in particular, there is of course widespread concern on the effects of this tax as 'bricks and mortar' traders face competition from online sales.
The fiscal outlook
The public sector’s financial deficit has been considerably reduced since the aftermath of the global financial crisis which had lasting effects on tax revenues from the UK financial sector. From 10.2% of gross domestic product (GDP) in 2010, the deficit fell to 1.8% of GDP in 2018/19.
However, this deficit-to-GDP ratio is now creeping up again, to an estimated 2.1% in the fiscal year now ending, and a forecast 2.4% next year – staying in the range between 2.8% and 2.2% in the following four years.
As in all countries, the Coronavirus shock will clearly make a major dent in economic activity over the coming months. While an early recovery from that can reasonably be expected by 2021, the independent Office of Budget Responsibilty is now cautious about the UK’s medium term growth prospects in the light of the poor performance of productivity growth for some years past together with an expected reduction in net inward migration. Its Budget day forecast is for annual GDP growth to be in the range between 1.1% and 1.8% per cent in all the years up to 2024.
The government has nevertheless committed itself to a major expansion in public spending in this period. The strongest growth is planned for capital expenditure, including both road and rail infrastructure projects.
The Chancellor announced that total public spending programmes are planned to grow at 2.8% a year over the next four years, twice as fast as the forecast GDP growth. He has nevertheless forecast that total national debt will be reduced from 79.5% of GDP currently to a stable level of around 75% over the four fiscal years from 2021/22. This seems difficult to reconcile with the annual deficit forecasts.
The official assumption now is that interest rates will remain very low throughout the coming years, whereas earlier forecasts had assumed that public debt interest payments (not included in the main planning totals for spending) would be rising in that period due to a return to more historically normal borrowing rates. It seems questionable whether this factor alone can make rising expenditure commitments compatible with the forecasts for modest annual deficits and a stable national debt, unless heavily increased tax revenues can be obtained from so far undisclosed sources.
More details to come
Budget statements are now usually scheduled for the autumn period. This latest one was delayed as a result of the general election in December, so there will be a further annual Budget in around eight months’ time.
In the meantime a comprehensive spending review, to be finalised in July, will add more details to the medium term public expenditure plans.
The Finance Bill to implement many of the early tax changes announced in the Budget will be published on March 19. This may be accompanied by further details of changes that have not so far been outlined in full by HM Revenue & Customs.
There are still no details as yet on the new VAT arrangements for Northern Ireland consequent on last year’s EU withdrawal agreement, and in particular how these will affect the treatment of goods moving between Great Britain and Northern Ireland. These are due to be implemented by the end of this year, and it is difficult to see how they could all be effected without new primary legislation.
In addition to the fiscal announcements, the Chancellor announced that by 2024 the government plans to increase the adult minimum wage to two-thirds of UK median earnings levels. The next increase in the minimum wage is already going ahead next month, at the height of the Coronavirus disruption. There could be adverse effects on some asset finance customers in the SME sector.
The UK minimum wage to date is widely regarded as a successful innovation, given that numbers in work have continued to expand. However, some critics note that its effects appear to include shifting a large number of lower earning workers into 'gig economy' self-employed work or reduced hours contracts.
The target plan for 2024 is qualified by a condition – 'provided that economic conditions allow'.