Tony Wickenden: What to expect from new Chancellor Hammond

Tony Wickenden 700x450

Last week I introduced the concept of tax prediction volatility. I was referring to the various potential shapes that UK tax policy may take following the referendum.

Ahead of the referendum we had a warning from then-Chancellor George Osborne that a leave vote was likely to result in an austerity-based Budget, with the need to close what would be a £30bn hole in government finance. This would require a cut in benefits to the tune of £15bn and tax increases of £15bn.

These predictions were apparently based on research from the Institute of Fiscal Studies and it was indicated that basic rate, higher rate and inheritance tax may need to rise, each by 2-3 per cent. Some suggested  an austerity-based Budget might have also put the recent capital gains tax rate reductions at risk. After all, no one really expected them when they were introduced.

New Chancellor Philip Hammond has ruled out an emergency Budget. However, when one does eventually come, the stronger bet, given the continuing uncertainty, seems to be that it would be more tilted towards stimulation.

The most recent evidence of this was Osborne’s suggestion that he would consider cutting the UK’s corporation tax rate to below 15 per cent to make the country tax competitive, and to retain and attract businesses to the UK. Whether or not Hammond will implement such a move is impossible to predict.

We are already on track to a promised 17 per cent rate by 2020, so the trajectory or direction of travel is already set. And for those, such as the head of OECD tax policy, who argue it would prejudice Brexit negotiations with the EU, there is always the Irish corporation tax rate of 12.5 per cent to highlight as a precedent.

And anyway, tax policy would be just one factor in an increasingly complicated list of considerations influencing what sort of deal the UK would get should it trigger Article 50.

Even if the tone of any Budget is stimulative and the tax rises indicated pre-referendum are avoided or diminished, action against aggressive tax avoidance will certainly continue. In relation to tax avoidance by multi-national corporations it is worth remembering that the so-called base erosion and profit-shifting project is OECD-driven.

Still on the subject of post-referendum taxation policy, it seems there is considerable uncertainty in relation to the future of the proposed reform to the taxation of UK resident non-domiciled individuals.

Planners with non-dom clients were also awaiting information on any reliefs and the taxation of non-UK trusts with which non-doms are connected. It has been reported, but with no official confirmation, that work on the non-dom legislation was put on hold by the Treasury many months ago, pending the Brexit referendum.

It was indicated by Treasury sources that further information would be released either before the summer recess, which started on 21 July, or in September or October. It now seems questionable whether even the latter part of this loose timetable can or will be adhered to in view of the other demands on governmental time.

As a result, many hope the Government will recognise the need to push the implementation of the deemed domicile rules and IHT “transparency” rule back to April 2018, unless draft legislation can be issued in September or October.

In relation to UK pension reform, the cost of pension tax relief is well known to be substantial – in excess of £30bn. No significant change was made in the last Budget but the Lifetime Isa, embodying many of the characteristics of the type of Isa-centric, money (rather than tax) incentivised saving proposed by the Centre for Policy Studies, may represent some market research into a different way of incentivising retirement saving. We shall see.

Chancellor Hammond and pensions minister Richard Harrington will clearly have an impact on pensions policy but the numbers mean that possible reform cannot be totally written off yet, especially given the outlook for Government finances post-referendum have undoubtedly worsened.

Advisers are likely to continue to be confronted by worried clients. The worries will probably stem more from investment prospects than taxation, but tax efficiency is an important part of the investment planning process.

Economic and tax uncertainty both need to be addressed in designing a financial plan, which makes a tricky job even trickier. Securing balanced and informed advice will be essential.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn