Summer Budget 2015: EY comments

Stuart Wilkinson, tax partner at EY in Cambridge comments on the Summer Budget 2015.


Budget 2015: A ‘Michelangelo’ moment for the Chancellor as he re-sculpts UK’s tax system

“The Chancellor resembled ‘Michelangelo’ as he re-sculpted the UK tax system, taxing dividends, proposing changes to pensions, adding a new tax on banks, cutting corporate tax rates and restricting interest relief on buy-to-let investments. The Chancellor went well beyond what many expected, spanning the whole tax regime, from non-domiciles to Vehicle Excise Duty. He may not have listened to Lord Lawson's argument on abolishing the 45% income tax rate, but he clearly wanted to emulate his reputation as a man of principle and principled reform.”

No surprise today on pensions tax relief – but maybe a nasty one later

“As expected, the Chancellor made changes to IHT and pensions tax relief that amount to “save less now, inherit more later”; today’s high earners won’t be able to save as much on a tax-free basis, but will be able to inherit the ancestral home and the remains of their parents’ pensions intact. People might spend money that would have gone into their pensions on subsidising retired parents to preserve their pension pots. There’s also a big question about whether these changes, which bring tax revenue forward, will create a revenue hole for a later government.”

Merging pensions and ISAs: marry in haste, repent at leisure?

“While harmonising pensions and ISAs on the ISA model would simplify the tax regime it would mark another huge shift for savers, employers, the pensions industry and the future economy. If it goes through, he will receive a huge short-term windfall - unless consumers start saving less. But how much more change can savers take before they lose confidence in the system altogether? Can the industry and employers adapt when they are still reeling from the Chancellor’s 2014 changes?

“Perhaps most importantly, there could be a risk to the future economy. A generation who save through Pension ISAs will pay no further tax once they retire, while making ever increasing demands on the healthcare system. The tax revenue from their contributions will have been long spent. The scale of change contemplated is on a par with the Thatcher government’s reform of the housing market, so it is important that the government is going to consult through a Green Paper rather than just driving the change through.”

An extra £8bn for NHS but short term wins still needed to meet the 2020 target

“Despite the promise of an extra £8bn for the NHS to 2020, the huge challenge of savings will still be on the minds of NHS management.

“In the short-term, savings will be made through measures that are already being pushed, such as reducing hiring of temporary staff, but also through getting better value for money from buying hospital supplies. Many of these measure have been tried before and at best, will be mixed in terms of their impact. In the main, they will also fail to tackle the more fundamental issues set out in the NHS Five Year Forward View.

“We are now seeing many hospitals and wider health economies react by looking at how they can divert demand away from costly A&E, and towards other forms of care such as GPs. This will go a long way to meet the £22bn efficiency target, but more importantly should also give patients better quality of care and greater control over where they are treated."

Proposed changes to retail opening hours

“We live in a world where consumers demand convenience at all times and this forms part of a wider trend where consumers expect seamless flexibility across multiple channels. Retailers need to ensure that their opening hours are reflective of the changing demands from consumers so any move to extend opening hours on a Sunday will help retailers fulfil this need. However, this change will inevitably bring extra burden to retailers at a time when margins are already under significant pressure from the rise of discounters and online outlets.”

Budget 2015: Large company cash call

“Businesses were left with mixed messages from today's budget. The promise of cuts in corporation tax rate from 2017/18 was tempered by large business being the biggest funder of the Chancellors' budget through the requirement to pay taxes 3 months earlier. This measure alone gave the Chancellor almost £4.5bn in 2017-18 and echoes the change that Gordon Brown introduced in his first Budget, back in 1997.

“On a positive note, this cash flow raid also allowed the Chancellor to fund the rise in the Annual Investment Allowance to £200,000.”

Changes to personal tax allowance

“The Chancellor clearly wants to boost people’s pay packets… but it is a very small post-election thank you. We still have not seen an increase in the threshold at which National Insurance (NI) is paid, which would have been helpful to the lower paid. And there is now almost a £3,000 difference in the limit at which NI and income tax bite.

“The Chancellor announced an increase in the personal allowance to £11,000 with effect from 6 April 2016, rising to £11,200 by 2017/18.  The £11,000 personal allowance represents an increase of £400 on the current rate and £200 from the allowance announced in the March Budget. In total, this represents an annual tax saving of just £80 per year for a basic rate tax payer. Nothing to write home about but the change to personal allowances will grab the Chancellor some easy headlines.

“The Chancellor has also confirmed that he will raise the level at which individuals start paying tax at 40% from £42,385 per year to £43,000 for 2016/17 rising to £43,600 for 2017/18.  This, combined with the increase in the personal allowance, represents a further small saving for higher rate taxpayers in 2015/16.”

Non-dom budget changes: more “Boomerangs”

“It is encouraging that the Chancellor has recognised the contribution made by non-doms and has not abolished the regime. However, the non-dom status will become “time barred”. These changes will drive new behavior. We may see an upsurge on “boomerang non-doms” such as those who go overseas for five years to refresh their domicile status and then return to the UK.

“For those born to British parents the Chancellor has made domicile part of your DNA. A person born to a British father can no longer go offshore for a few years to acquire non-dom status. Goodbye to Gulliver’s travels.”

Inheritance tax change – “The Home Counties Inheritance Tax (IHT) band”

“The headline grabbing change - no IHT on homes up to £1 million - will rightly be welcomed by homeowners. But these changes are complex.

“The Chancellor’s changes conjure visions of “Addams’ family mansions” passing down the generations but the real monster here is the complexity. The present system is simple and works – the changes mark an unnecessary level of complexity. A straight forward £1 million inheritance tax exemption would have been preferable.

“For most people the changes will have little impact given house prices across the UK. In reality the Chancellor has simply introduced a “Home Counties IHT band”. The very rich will not benefit, due to the cap on the relief, and nor will many homeowners where their house is below the existing limits.

“The key message to homeowners in the £1million band is make a Will today if you want to ensure your home passes tax efficiently upon your death.”

Net-Business contributes ½ billion to the Chancellor’s budget

“The good news of the two percentage point cut in corporation tax rate by 2020 was booked by the Chancellor as costing just over £6½ billion over the six year period.  However, even with an increase in the Annual Investment Allowance, the total giveaways for companies of £10billion is £0.5billion less than the tax rises from the acceleration of tax payment, the changes to the Bank Levy (including the new 8% extra tax rate) and the restriction of relief for goodwill.  

“The Treasury had previously said that no further corporate rate reduction was possible until it dealt with personal tax, so the cut to below the lowest of the G20 is only possible due to the reform of the dividend taxation.

“On the Annual Investment Allowance, the Chancellor has set this permanently at £200,000, above the £25,000 that this allowance was due to drop to, but still £300,000 less than its current level. So this may be booked as a cost to the government, but is far less generous than what we have today.

“In fixing the rate at £200,000 permanently, the Chancellor has finally brought this yo-yo to a stop. This will allow companies to plan but will be of little benefit to those contemplating large infrastructure projects, for which this allowance will be but a drop in the ocean.”

Private equity managers’ pockets have been picked, but the industry is still globally competitive  

“The proposals are aimed at eliminating a tax benefit that UK private equity managers have enjoyed over many years, which will not be that popular, but importantly for the industry’s competitive position, it has preserved the basic principle that carried interest gains are taxed under Capital Gains Tax. So while private equity managers’ pockets have been picked, the industry in the UK is left on the same broad footing as the US and other countries.”

Benefits to outsourcers from inclusion in VAT refund scheme still unclear

“Shared services providers will have to wait a little longer to find out exactly which additional public sector entities will benefit from inclusion in the VAT refund scheme. VAT is often a barrier to outsourcing in the public sector as it is ordinarily an additional cost, as such it can reduce and sometime remove any savings that can be achieved. The VAT refund scheme helps to ensure that this additional cost is neutralised.

“The anticipated extension of the type of public sector bodies eligible for this scheme has been delayed until a future Finance Bill. However the legislation will be backdated to April 2015, so the reliefs are in effect available now. Non departmental public bodies should now be considering whether they should apply for the VAT refund scheme. This provides outsource providers with greater scope for working with these types of entities, helping them to deliver services.”

Gambling in productivity to re-balance the economy

“The OBR's forecasts show the gamble implicit in the Chancellor's Budget. With a fiscal squeeze - albeit slower than forecast in March - no expectations of a boost from trade, and a slowdown in consumer spending growth as welfare cuts bite, the Chancellor needs productivity to accelerate to drive growth. The OBR's scenarios show that if productivity remains at the level of recent history, GDP will grow a third more slowly than under the base case of improving productivity.”

No sign of the £1 trillion Exports target

“The OBR forecasts export growth of around 4% a year for the rest of this decade. UK exports might reach £650 billion with a following wind but it will be a long way short of the magic trillion pound target.”

Will higher Insurance Premium Tax mean more uninsured drivers?

"The rise in Insurance Premium Tax (IPT) was unexpected, and while a headline rate of 9.5% doesn't sound significant, it is in fact an increase of more than 50% of the standard rate. As ever with rate rises, the most prominent concern is that it will drive a number of consumers to forego buying insurance, which increases their personal risks, and in the case of motor insurance could mean a rise in illegal drivers.

“UK insurers will now need to pay particular attention to policies and premium payments that extend beyond the deadline, if they don’t want to be caught out.”

Learning from Ministers past

“The Chancellor sought to fashion himself on Lord Lawson, reshaping the tax system, but this didn’t stop him from acting like a magpie and stealing ideas from outside his party. First, he took the new 8% supplementary tax on banks from Danny Alexander. Then he went further back to the days of Gordon Brown bringing forward the time when large companies have to pay tax to the Exchequer.

“But not all ideas survive the Magpie. The tobacco levy, an idea the Chancellor stole from Labour at the Autumn Statement, has now been dropped and we also saw the decline on the bank levy.

“This might be a one nation Budget, but was clearly a cross-bench one.”

Changes will dampen down buy-to-let as an investment proposition but we doubt people will sell

“The changes to buy-to-let will raise almost 2/3 of a billion by 2020, but will impact only a very narrow group. It hits UK individuals rather than professional outfits or non-residents. Landlords need to be both a higher rate income tax payer and a UK resident to be within scope, and at HMRC’s own estimate it will only hit 1 in 5 of individual landlords. This is unlikely to take much of the heat, including that generated by overseas buyers, out of the residential property market. The Chancellor has also raised £200 million in 2016 by removing the 10% exemption from wear and tear potentially replacing it with a relief for some actual costs. While all this may marginally dampen down buy-to-let as an investment proposition for the middle classes over time, we doubt people will sell. Despite the changes, buy-to-let still remains quite an attractive part of a broader investment portfolio.”

Devolution of Air Passenger Duty

“While the Government has ignored aviation and travel industry pleas for a wholesale review of the APD regime in the UK, it has issued a discussion paper that considers various options such as devolving APD within the English regions, varying APD rates across English airports and also providing aid to English regional airports.

“This is set against the background of APD devolution to Northern Ireland, Scotland and possibly also Wales, with an SNP proposal to reduce APD by 50% from Scottish airports.

“The Treasury is reacting to concerns raised by English regional airports about collateral damage from possible APD rate reductions at nearby airports in Scotland or Wales, but this also raises the spectre of a compliance nightmare for airline operators who will need to administer multiple APD rates within the same country with extensive system changes required and re-pricing of flights. As it stands we already have 6 rates in the UK and could end up with more than 20.”



Hannah Forrester, EY Media Relations on 0121 535 2997 / 07931 491 342

Follow us on Twitter @EY_PressUK and @EY_ITEMClub


Looking for something specific?