U.K. Chancellor’s Spring Budget Tax U-Turn Comes Full Circle

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By Ben Stupples

U.K. Chancellor Philip Hammond’s U-turn two months ago on increasing taxes for self-employed individuals has come full circle after the Conservative Party opened up the chance of future rises.

In its May 18 manifesto for next month’s U.K. general election, the party backtracked on its previous election promise not to raise the national insurance contributions (NICs), an employment tax.

The move comes after a backlash on the NICs pledge forced Hammond to scrap his decision, announced at the March 8 Spring Budget, to raise the tax for self-employed individuals. While the party said it would not “increase the level” of value-added-tax, it also dropped its previous promise against raising income tax rates, unpicking the ‘ triple-tax lock’ from the 2015 election.

‘Maximum Flexbility’

The lower NICs payments that self-employed individuals make, compared to those in full-time work, amounts to a subsidy of 5.1 billion pounds ($6.5 billion) in total, according to the Institute for Fiscal Studies.

Removing the tax pledges on NICs and income taxes “seems designed to give maximum flexibility for future decision-making,” John Cullinane, policy director of the U.K.’s Chartered Institute of Taxation, told Bloomberg BNA in a May 18 email. The party has kept its aim of cutting the corporation tax to 17 percent by 2020, he added.

Yet the decision to remove the pledges doesn’t mean an immediate NICs rise “is in the offing,” George Bull, a London-based senior tax partner at accounting firm RSM, told Bloomberg BNA.

“Previous administrations have tended to try and give an idea of what they will and won’t do with certain figures,” he said May 18 in reference to the party’s triple-lock tax pledge. The party has “now learnt that those figures can come back to haunt them.”

U.K. State Benefits

Some U.K. state benefits, like a basic pension, depend on an individual’s overall NICs. In the past, the available benefits for someone who’s self-employed or in full employment has reflected the NICs divide. The gap narrowed, however, with the U.K.’s new flat-rate pension introduced last year.

At this year’s Spring Budget, Hammond sought to address the imbalance by increasing Class 2 NICs—applicable to self-employed individuals with annual profits of 8,060 pounds or more—by 2 percent within the next three years. A week later, the Conservative Party member ditched the decision.

The Conservative Party’s 2015 pledge over VAT, income tax and NICs “did tie the hands of the government,” David Brookes, U.K. head of tax at accounting firm BDO, told Bloomberg BNA.

“Now that we know Brexit will happen in two years’ time, the Chancellor will want to have more flexibility to change tax rates, up or down, depending on how the economy responds,” he said in a May 18 email.

“As we saw in the Spring Budget, the Chancellor was looking to bring closer equality in taxes for those who are employed and self-employed, and so, if the pledge is removed, this NICs increase could be tabled again,” he added.

‘Tougher’ on Tax Advisers

On top of breaking the triple-tax lock and keeping the corporation tax timetable, the Conservatives pledged “tougher” rules for tax advisory firms and a “proactive approach” on the misuse of trusts.

The party, which is leading the polls for the June 8 election, also said it would aim to reduce online VAT fraud and made a passing reference to reducing the complexity of the U.K.’s tax system.

While he acknowledged the Conservative Party’s manifesto pledge, Jonathan Riley, Grant Thornton’s U.K. head of tax, suggested that political parties should pay more attention to the U.K.’s tax system.

“Of course, what is missing from all manifestos so far is any mention of wholesale tax simplification,” he told Bloomberg BNA in a May 18 email.

Liberal Democrats Manifesto

The Liberal Democrats, the party that shared power with the Conservatives between 2010 and 2015, said in its May 17 manifesto that it would raise all rates of income tax by 1 pence to raise 6 billion pounds in additional revenue that would go toward the U.K.’s health and social care services.

The party, England’s third-largest by number of seats, also pledged to reverse the Conservative’s “unfair and unjustified” tax cuts, including the plans to cut the corporation tax rate to 17 percent.

On the topic of calculating corporate tax, which is currently based on a profits, the Liberal Democrats added that they would move to a system that takes into account a “wider” activity range, such as sales.

The party also said it would raise 1 billion in tax revenue through legalizing cannabis. The drug is currently categorized as a Class B drug, meaning that anyone caught selling or producing it will get a prison sentence of up to 14 years.

With assistance from Ali Qassim.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj in London at psukhraj@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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