OpinionOct 29 2018

Hammond is walking a tax tightrope

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Hammond is walking a tax tightrope
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When the Office for Budget Responsibility's (OBR’s) revised borrowing forecasts were revealed a week ago, you could almost hear the sighs of relief coming from Number 11 Downing Street. 

The public spending tap is seemingly about to be turned on, while there is a need to both support businesses through the turbulence of Brexit and showcase the UK as an attractive place for international capital to invest; the 'raise or cut' tax conundrum will have been testing the limits of Chancellor Philip Hammond’s spreadsheet nous.

The OBR’s revisions are potentially game changing. 

Mr Hammond was clearly sweating over where the money for recent spending pledges, including for the NHS, was going to come from, and the OBR’s new calculations – a £13bn annual ‘windfall’ –have fortuitously plugged a large part of the black hole. 

There is still a big ‘but’ however. The government’s mantra has been for so long based on balancing the books and the Chancellor will be reticent to deal out generous spending gifts too ‘easily’.

The big-ticket policy could come in the form of a new digital services tax, with Mr Hammond stating that he is ready to accelerate beyond the EU and OECD.

As such, we still expect some tax tinkering and, potentially, announcements over one or two big ticket policies to show government ambition in a post-Brexit world. 

When it comes to tinkering, we may see a freeze in the personal allowance, but this wouldn’t mean big money for the Treasury.

There has been growing chatter around cutting pensions tax relief and reform is possible – but this is already incredibly tight in real terms and significant change will push the Chancellor into a political minefield and risk alienating voters across the political divide. The Office of Tax Simplification, meanwhile, are currently reviewing inheritance tax and we may see an update on that front. 

More controversially, Prime Minister Theresa May caused quite a stir when she announced the prospect of changes to stamp duty land tax for non-resident buyers at the Conservative party conference and we expect to see more detail on that front.

The initial announcement had a mixed reaction, to say the least, from the property industry, and the Chancellor will certainly be wary of throwing the baby out with the bathwater, with overseas capital being both a sizeable source of income for the Treasury and an important investment pool for the property industry – particularly post-Brexit.

The big-ticket policy could come in the form of a new digital services tax, with Mr Hammond stating that he is ready to accelerate beyond the EU and OECD. This would likely play well in the court of public opinion but, as with property investment, the Chancellor will still be treading carefully so as not to kill the golden goose and drive the tech businesses, who are huge investors and employers, into the waiting arms of other welcoming jurisdictions.

On a more granular level, the advisory industry will be hoping for more clarity on 'Making VAT Digital', and 'Making Tax Digital', both of which come into force soon and for which further guidance is very much needed, as well as any plans to extend IR35 reforms to the private sector. 

What this boils down to is that the Chancellor is walking a tax tightrope.

Despite a helping hand from the OBR it seems probable that he, and the government, will be looking to get to the other side of the ravine unscathed come March 2019, rather than hopping and juggling with flamboyant tax reforms along the way.

Lucy Brennan is a partner at Saffery Champness