Spring Statement 2018

Today’s post is a summary of the Chancellor’s Spring Statement 2018.

Spring Statement 2018

Until recently, the main Budget of the year was in the Spring, with a minor update in the Autumn Statement.

• Philip Hammond has swapped these around, promising to change tax rates only once a year.

And so this week saw the first “teaser” Budget to be given in March.

Fiscal forecasts

The Chancellor reported on positive revisions from the OBR, and the clearance of the budget deficit.

• A small surplus is expected in 2018/19, if infrastructure borrowing is excluded.
• If we include infrastructure borrowing, the deficit is now down to 2%.

This means that government debt (now £65K per household) will start to fall as a share of GDP.

Growth of 1.5% is expected in 2018 (down from 1.7, followed by 1.3% in 2019 and 2020.

• Inflation is expected to fall back from the current 3% pa to the government target of 2% pa by the end of 2018.
• Wages are expected to  increase faster than prices over the next five years.

All this paves the way for possible announcements of increased spending (perhaps on infrastructure and the NHS) in the budget proper.

• Certainly the lone priority won’t be debt reduction – Hammond stressed a “balanced approach” going forward.

But with the Brexit uncertainties still likely to be around in the autumn, perhaps spending increases will be delayed.

• Brexit itself didn’t figure much in the speech, apart from the repeated references to a outward-looking economy.

Housing

A plan to build 300K homes a year was announced at the Autumn Budget last year.

• It will cost £44 bn over the next five years.

Coincidentally, this week Hammond announced that 44 areas are bidding for cash from the  £4.1bn Housing Infrastructure Fund .

• In addition,  the Housing Growth Partnership – which provides financial support for small housebuilders –
  will be more than doubled to £220 M.
• And £1.67 bn will go to London to build 27K “affordable” homes.

There were no further changes to stamp duty, which was abolished for first time buyers in the autumn.

• Hammond said that 60K buyers had taken advantage.

This means that the measure has cost £300M in its first four months, a run-rate of close to £1 bn per year.

• The government’s original estimate was that it would cost £125M in its first year, rising to £670M by 2022/23.

Business rates

It was announced in the Autumn that business rates revaluations will take place every three years, rather than every five years.

• This week Hammond announced that the next review will be in 2021 rather than 2022.

Digital payments

Hammond said that he  plans to change the tax system to give a “fair result for digital businesses.”

This had three parts:

1. to support people and businesses who use digital payments.
2. to ensure that those who need to are able to pay with cash.
3. to prevent the use of cash to evade tax and launder money.

A review of the usefulness of 1p and 2p coins was also announced.

• The Treasury suggested that 60% of 1p and 2p coins are only used once before being saved in a jar or thrown away.
• More than 500 million of the coins are produced each year to replace those falling out of circulation.

It’s also possible that the £50 note will be dispensed with.

But a day after the Spring Statement, the government was backing away from plans to scrap the coins in the face of vocal public opposition.

VAT

The Treasury also announced possible reforms to the the VAT registration threshold.

• The UK’s threshold of £85K is the highest in both the EU and the OECD.
• Germany’s threshold is £15.6K.

It is understood that the threshold acts as a brake on the growth of small businesses, and the Office for Tax Simplification has suggested three ways to address this:

1. gradual reliefs for businesses just above the threshold
2. allowing businesses to exceed the threshold by a set amount for one-off years
3. applying the threshold over a longer period of time than a year

EIS

After the recent restrictions (as part of the Patient Capital Review) on EISs (and VCTs) to favour “knowledge intensive companies” over asset-backed capital preservation schemes, the Government has now released a paper suggesting that a new fund structure might be needed to encourage investment.

• A consultation period will run until 11th May this year.

Presumably these new funds would be similar to a VCT, but using the EIS rules.

• The only tax change that has been mooted is to make dividends tax free (as they are with VCTs).

As we’ve seen before, EIS funds do exist (most notably from Syndicate Room and Startup Funding Club) but any encouragement for more to be offered is welcome.

Entrepreneurs’ relief

Entrepreneurs tax relief is a special low rate of tax (currently 10%) for large holders (more than 5% of the share capital), selling shares in a private company .

• One problem is that if new shares are issued such that their holding is diluted below 5%, they no longer qualify for the relief.

Since the money for the new shares goes to the company and not the entrepreneur, this is seen as a punishment for growth.

The new proposal is that investors can trigger the tax relief just before they issue new shares.

• The tax payment would be deferred until the shares are actually sold.

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And that’s about it.

• Not much in the way of big news, but at least the deficit has been cleared.

Until next time.