A lot has already been written about the possible implications of Brexit on the UK economy. The purpose of this article is not to
add to that discussion but to look at the options the Chancellor, Philip Hammond, has in shaping tax policy during his first public
pronouncement on this in the Autumn Statement on 23 November.
The immediate post Brexit discussion was around policy to stabilise the markets and exchange rates. It is easy to forget that post the financial crisis in 2007 the economic outlook was also deemed to be bleak. Then, as now, the experts predicted that the lower pound would result in a boost to exports. The boost may in fact be greater this time round as, unlike 2007, Brexit by itself is not going to cause a global slowdown. But there is the threat of inflation to contend with brought about by the increase in the cost of imports. Inflation tends to eat into people’s disposable income making them comparatively ‘poorer’ compared to pre Brexit, which in turn may lead businesses to reduce investment.
It is partly in anticipation of this that the Bank of England reduced the rate of interest to 0.25%, landed a £100 billion cheap funding scheme for lenders and unveiled £70 billion more quantitative easing. This drive to stimulate spending and the predicted £18 billion windfall for the Treasury from falling bond yields and the cut in interests rates, makes it almost certain that Philip Hammond will want to introduce further measures to stimulate the economy. This typically means putting more money in people’s pockets and incentivising businesses to invest.
It was thought that the anticipated change in rules affecting non-domiciled individuals, to make them pay more tax in the UK, would be deferred so as not to impact the housing market in particular, as well as the wider spending power they bring to the economy.
The government though clearly feels that this is one section of the population that does not need protection and announced recently that it was pushing ahead with the anticipated changes. (More information on the consultation can be found at: www.blickrothenberg.com/non-dom)
The sector of our economy thought to be at greatest risk is Foreign Direct Investment ("FDI"). This accounts for a large part of our economy and the government will want to ensure that the UK continues to be the destination of choice for FDI. Brexit has not altered the case for the UK as an easy place to do business. It is an attractive economy with demand for goods and services, a skilled workforce and one of the lowest rates of corporation tax in the developed world.
The government is not in a position to provide certainty about movement of labour; however, it can make the UK’s position even more attractive, particularly against Ireland’s 12.5% tax rate. So we would expect the following announcements:
- Further reduce the corporation tax rate, maybe to 17% from 1 April 2017 and then further percentage points to 15% by 1 April 2019
- Increase in the research and development enhanced deduction for SMEs from 230% to 250%
Whilst FDI may be at greatest risk in terms of overseas investment, the domestic housing market continues to be the part of our economy, with other infrastructure projects, that is likely to see a further boost. We anticipate a further relaxation in planning procedures and possibly a reduction in the rate of SDLT. The latest economic data would seem to suggest that the UK economy is in better shape than many had anticipated would be the case by now post Brexit. There are however also plenty of predictions forecasting a slowdown in the economy.
With the threat of inflation the government may decide to wait until the 2017 Budget to do anything in relation to personal taxation. In order to further stimulate employment though, it may announce a reduction in the employer’s national insurance.
There is always a temptation in such circumstances to reduce the rate of VAT to stimulate demand. It has been seen in the past that a temporary reduction in VAT only serves to bring discretionary spending forward and does not have the desired lasting effect. A permanent reduction in the main rate or getting rid of the reduced 5% rate on home energy is more likely, as discussed in the article below.
Making the above announcement would aim to steady the economy and send a message to companies outside the UK that the country is still a very attractive place in which to do business. In the longer term, once formal notice is served to leave the EU, the government will need to address more fundamental issues, the most important of which will be the movement of people and the implication thereof for the availability of skilled labour. If, in the meantime, fiscal policy can stabilise the economy, it will put the UK on a good footing for negotiations with the EU for an exit.
For more information, please contact your usual Blick Rothenberg contact or Nilesh Shah at email@example.com.