UK Budget 16 March 2016 - Overview

Budget overview

George Osborne heralded his eighth Budget as a Budget for the next generation. And it is true that many of his headline tax announcements were for the future. Future reductions in corporation tax. Future increases in the personal allowance and higher rate threshold. Indications, perhaps, that the Chancellor has little fiscal room to manoeuvre at the current time, particularly in light of the OBR’s significantly downgraded GDP growth expectations.

However, the appearance, finally, of the Government’s much vaunted business tax road map shows its continuing commitment, in principle, to working with business on tax policy. And whilst the route to be taken is, perhaps, not quite so scenic as that in 2010, the road map will, nevertheless, be welcomed by business. Its 2010 predecessor set a positive tone for the relationship between Government and business on tax, as well as containing long-term commitments to structural reform of the tax system  - notably the move to a more territorial basis of tax and a system based on lower taxes with a wider tax base. The Government has certainly made good on its promise of lower tax rates, going much further than most expected in making Britain “open for business” with the Chancellor’s announcement of a 17% rate by 2020. The reverse side of this particular fiscal deal was, of course, ensuring that all companies pay the “proper” amount of tax and the recent furore over the Google tax deal shows, if nothing else, that public perception is that the Government has still not achieved enough on this front. So, it should come as no surprise that much of the new business tax road map focuses on tackling this issue.

In particular, the new road map confirms the Government will take forward its commitments to introduce anti-BEPS measures, notwithstanding the potential competitiveness challenges faced by the UK as an “early mover” on these issues. There will be the promised restrictions on the use of hybrid instruments and entities, a new withholding tax on royalty payments to connected entities (incorporating a controversial treaty override mechanism) and, of course, restrictions on interest deductions. But, overall, if the 2010 road map steered a course across the motorways and trunk roads of the UK’s business tax regime, the 2016 equivalent takes a turn onto the smaller A and B roads.

Quite apart from issues around the taxation of multinational businesses, the Chancellor has, once again, turned his focus to domestic tax avoidance and evasion. In the light of continuing economic and budgetary concerns, and, indeed, his own damaged public image following the Google tax deal, it is no surprise that the “tough on tax avoidance” stance was very much to the fore. Disguised remuneration practices, offshore property developers and VAT evasion by overseas sellers were the headline measures, but there is much else beside in the small print designed to raise an estimated £12bn.

Other tax raising measures included surprise changes to the structure of Stamp Duty Land Tax (SDLT) on commercial property transactions and restrictions on carried forward loss relief. Though equally surprising, perhaps, was the Chancellor’s decision to limit structural reform of the IR35 rules to public service employers and to introduce only limited restrictions on the use of salary sacrifice schemes.

The key benefit of a business tax road map is its potential to provide business with the certainty and stability needed to plan for long term growth and investment. The irony, of course, is that no such certainty and stability can exist with such a large question mark hanging over the position of the UK within the EU. There were suggestions that the Chancellor would, therefore, avoid a politically-risky, tax-raising Budget, which may hurt the “remain” campaign. The 2016 Budget appears to heed those concerns in largely limiting the tax raising measures to politically acceptable targets such as multinationals, tax avoidance and evasion and less prominent areas of tax, such as insurance premium tax (although even there, a higher increase in the rate had been feared by many). And with the Conservative’s legally redundant tax lock in place, it is unlikely that the tax raising targets will change in the life of this Parliament.

Read our detailed commentary and analysis of the UK Budget 2016 in full here.