A Chairman's view: The Spring Budget

Posted by Bruce Potter on
Bruce Potter, Chairman at Blake Morgan: “Philip Hammond’s predecessor was known for his catchphrase about “fixing the roof while the sun is shining” – but his approach to today’s Budget was more akin to hoarding supplies in expectation of a coming storm.

“There may or may not be a “hurricane on the horizon” as Chris Leslie, Labour shadow secretary to the Treasury warned ahead of Mr Hammond’s statement, but it is clear that the Chancellor is preparing to weather whatever is on its way as the triggering of Article 50 looms.

“The Chancellor was keen to establish his Budget as a strong, stable platform for Brexit negotiations and his confidence was boosted by better than expected economic performance, with the Office of Budget Responsibility revising this year’s predicted growth upwards from 1.4% to 2%.

“There will, however, be no spending spree as the focus remains on maintaining a “war chest” to sustain us through the Brexit process.

“There is no doubt that leaving the EU is still a leap into the great unknown, despite Mr Hammond’s insistence that the Government’s measures would ‘build the foundations of a stronger, fairer, more global Britain’.

“Smaller businesses will welcome the £50 cap on monthly business rate rises for companies which grow out of business rates relief. For medium and larger firms, however, the picture remains unclear, with a promise of a new consultation to find a better way “in due course” the only crumb of comfort.

“The self-employed and directors of SMEs will be hit by a rise in National Insurance contributions and a lowering of the tax-free dividend threshold respectively – moves that will be unpopular and in some cases will offset the good news around business rates.

“That aside, there were precious few significant announcements in this last ever Spring Budget – perhaps as the Government seeks to make Autumn’s Budget the headline event, when Brexit may already be under way. Whether the Chancellor will be able to bask in the sunshine then remains to be seen.”

Summary:

The economy

The Office of Budget Responsibility was more upbeat than many expected, revising its forecast for this year’s growth up from 1.4% to 2%. This suggests a degree of optimism as we head into the Brexit process, although we must wait to see whether that remains once Article 50 is triggered.

Borrowing levels were lower than forecast, although the Chancellor made it very clear that this extra headroom would not signal a spending spree or an easing of austerity measures.

Tim Forer, a Partner at Blake Morgan and a specialist in business and employment, said: “The Chancellor has taken a very cautious and responsible approach in his first full Budget. There were few surprises in today’s statement as Mr Hammond was undoubtedly steadying the ship and creating a stable platform for the Brexit negotiations.

“Bearing in mind the uncertainty of Brexit, that the fact the economy has been so robust is excellent. In my view, many forecasters have underestimated the resilience of the economy.

“The large investment in education is encouraging. Moving forward, we are becoming more and more of a knowledge-based economy and we need to increase our skills base, particularly in sectors such as engineering.

“In summary, the Spring Budget provides continuity and puts Britain on a strong footing to enter the negotiating arena for Brexit with the ultimate goal of getting the best deal possible for the country.”

Business rates and tax

It was inevitable that the Chancellor would act on widespread dissatisfaction with the new business rates regime. At this stage there was good news for smaller business, with a pledge that companies which grow out of business rate relief will only see their monthly bill increase by a maximum of £50. It’s a waiting game as far as medium and large businesses go, with the promise of a new consultation “in due course”.

The announcement of a £300m discretionary relief fund for local authorities was intriguing, but it is far from clear how this money will be allocated and what the criteria for awarding it will be.

Company shareholders will not welcome the cut in the tax-free dividend allowance from £5,000 to £2,000 from April 2018, designed to address a perceived unfairness that shareholders can take earnings through dividends rather than salary, gaining tax advantages in doing so. This, combined with increased National Insurance contributions for many self-employed people, could be seen by critics as an assault on enterprise and entrepreneurship.

The Government remains committed to insisting that businesses introduce quarterly digital reporting for tax purposes, but will delay its introduction for a year for small businesses which are under the VAT registration threshold.

Cathy Bryant, a lawyer specialising in business tax at law firm Blake Morgan, said: “As with any Budget, there will be winners and losers.

“The commitment to reducing the corporate tax rate to 17 per cent by 2020 will provide the business community with much-needed certainty and show that Britain is very much open for business.

“The revaluation of business rates will be less welcomed by most businesses, particularly in wealthy areas where rates are expected to increase significantly in line with soaring property prices in those areas.

“The £300m of rates relief in England will be of some comfort to smaller businesses but it remains to be seen how the fund will be divided up and how it will work in practice.  It also remains to be seen how the devolved administrations will deal with this.

“Many businesses will already have contingency measures in place to cope with the changes, but many will not, and it will be a real test of the strength of some businesses to see how they fare with these increases.”

Oliver Sowton, retail specialist Blake Morgan, added: “The high street is a very competitive business environment and the significant and sudden increase in business rates may prove to be a tipping point threatening the long-term viability of some high streets.

“The rates relief for small businesses should go some way to softening the blow, but it remains to be seen how it will work in practice and how the £300m relief fund will be divided up and of course whether this is enough.

“Pubs are one of the components of creating viable town centres, a sector which has struggled in recent years, so the discount will be of some relief but operators in other sectors may well ask why the pub sector is getting favourable treatment on this issue.

Education and training

As widely expected, the Chancellor announced funding of £320m for 110 new free schools, creating 70,000 new school places. This is in addition to the existing commitment to 500 new free schools by 2020.  A further £216m will be invested in maintenance of existing schools.

Employers will have paid attention to the previously announced changes to further education in technical qualifications. 15 routes of so called 'T-Level' will replace some 13,000 qualifications for 16-19 year-olds and the number of hours training will increase by over 50% to 900 hours. They will also be supplemented by a high-quality three-month placement. This is designed to catch up with standards set in countries like Germany, and ensure that technical education provides UK employers with the rights skills to compete in a global market post-Brexit.

These had been previously mooted but the announcement confirmed the Government’s commitment to them, although the timescale is unclear, and no courses are expected to be in place before September 2019 at the earliest.

An additional £300m for 1,000 new PhD placements and £270m to invest in research and development of technologies such as robotics, AI and driverless vehicles was also announced.

Matthew Smith, a Partner in the Employment Team at Blake Morgan and a specialist in the education sector, said: "Mr Hammond’s commitment to investing in skills and education is likely to be welcomed, given the central role of training and education in delivering long term prosperity and productivity. That said, the announcement of funding for a further 110 free schools is relevant only to part of the English education system. 

"It remains to be seen whether the commitment of a further £216m for the schools estate in England will go far enough to meet the current and future needs of schools and as ever, we expect the devil to be in the detail when the forthcoming schools White Paper is published - in some cases it may be a big ask to expect universities and other schools to sponsor new free schools.”

Employment

While the Chancellor was prevented from increasing taxes due to election manifesto pledges, as expected, Class 4 National Insurance Contributions (NICs) for the self-employed will rise, though they will not be completely aligned with employee NICs.

Class 4 NICs will rise by 1% to 10% from April 2018, and by a further 1% to 11% in April 2019. On average this will result in the self-employed paying 60p more in NICs a week. However, the lowest-paid self-employed earners will still see a drop in NICs through the abolition of Class 2 NICs. The Chancellor noted that an employee earning an average of £32,000 currently pays £6,170 in NICs whereas a self-employed person with the same earnings will pay on £2,300.

Against this background, the distinction between the benefits received by the self-employed, including the state pension, has been dramatically reduced. Interestingly the Chancellor noted that one exception to this is parental benefits, and he pledged to consult on changes to these this Summer.

This measure reflects the growing concern that the growth of the so-called 'gig economy' and in individuals providing work through Personal Service Companies (PSCs) is resulting in lost revenues to the Exchequer and in unfairness in the tax system for those who are employed. The Chancellor referred to the Matthew Taylor Review on Modern Employment Practices (which will produce its final report in the Summer) and Mr Taylor's preliminary thoughts: namely that the tax differences between the employed and the self-employed is the key driver to the growth of such business models.

Ruth Christy, Associate in the Employment team at Blake Morgan, says: “Recent Employment Tribunal rulings in cases involving Uber, Pimlico Plumbers and CitySprint have highlighted that in many cases, self-employment is a model adopted by such organisations for tax reasons but it also may have the effect of depriving workers of certain rights.

“Although in many cases the individuals may be happy to pay less in tax and NICs, they may in fact be not self-employed, but 'workers' – a middle ground between employees and the genuinely self-employed – who are entitled to holiday pay, the National Minimum Wage, working time limits and pensions auto-enrolment.

“The position is complicated by the fact there is no equivalent tax status for 'workers' and also the fact that Employment Tribunals and HMRC can and sometimes do come to different conclusions about whether an individual is self-employed or not. “

Health and social care

An extra £2bn will be spent on social care over the next three years as the Chancellor admitted the system was “clearly under pressure”.

A £325m capital funding pot will be made available to selected “pioneering” Trusts which can demonstrate that they have robust Sustainability and Transformation Plans (STPs) in place.

A forthcoming Green Paper will confirm new proposals for social care funding, with Mr Hammond taking the opportunity to assure that these will not include a “death tax”.

In a bid to ease winter pressures on stretched hospital A&E departments, £100m will be invested in GP triage services aimed at quickly dealing with patients with minor conditions or injuries.

Bruce Potter, Chairman at Blake Morgan and a specialist in the health sector, said: “The Chancellor has, in amongst everything else in the budget, signalled he knows all is not well in the health and social care space, but he has little headroom (in his opinion) to do much more than alleviate the symptoms – not pay for cures.

“He would have been pilloried if he had made no supporting gesture to relieve the social care funding gap.  £2bn is quite a gesture - but it is quite an issue, and could be seen as expensive sticking plaster not a cure.

The other gestures towards supporting A&E with £ 100m to support GP triage (acting as a first stage filter),and supporting those rare beasts,robust STPs, with a £325m capital fund, will not promote a radical and rapid recovery. Mr Hammond (and Mr Hunt) no doubt hope these financial painkillers will bat these issues down the road until the larger (inevitable) wide-ranging review kicks off.”

Scotland, Wales and Northern Ireland

The Chancellor announced £350m for the Scottish government, £200m for Wales and £120m for the Northern Ireland executive.

Emyr Lewis, Regional Senior Partner for Wales at Blake Morgan, said: "The Chancellor has not taken the opportunity to support South West Wales in transforming its economy with the green light for the Swansea Bay City Region Deal or Swansea Bay Tidal Lagoon. The uncertainty is not helped by suggestions made last week that electrification of the railways in Wales may now not extend further West than Cardiff.

“While the additional £200m funding for Welsh Government will no doubt be appreciated, it is unclear whether this is new money or consequential money as a result of increased spending on social care in England. In any event, more needs to be done by UK Government to work with the Welsh Government and others in Wales to stimulate economic activity and create jobs for the benefit of future generations.”

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Bruce advises both private and public organisations on all aspects of commercial, corporate policy and governance advice.

Bruce Potter
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