U.K. Snap Election May Unpick Conservative ‘Triple Tax Lock’

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By Ben Stupples

After last month’s Spring Budget U-turn, U.K. Chancellor Philip Hammond probably thought it was a matter of years before he could try again to increase National Insurance Contributions, the government’s employment tax.

Yet with Prime Minister Theresa May’s move April 18 for a snap general election June 8, it may be just months before Hammond can target the tax if the Conservatives are re-elected. A parliamentary vote to allow the general election will be held April 19.

“Everything is up for grabs,” George Bull, a London-based senior tax partner at tax and accounting firm RSM, told Bloomberg BNA in an April 18 telephone interview on possible tax changes following the introduction of a new U.K. government. “The purpose behind it all is very simple—for Theresa May to get a mandate—but the immediate effect of her decision today is that it’s all up in the air.”

National Insurance Contributions, or NICs, together with income tax and value-added tax, make up the triple-lock taxes that former Prime Minister and Conservative Party leader David Cameron publicly pledged during his campaign for the previous U.K. general election not to increase between 2015 and 2020.

At the March 8 Spring Budget, Hammond sought to raise NICs for self-employed individuals in light of research that revealed how Her Majesty’s Revenue and Customs, the U.K.’s tax authority, could lose as much as 6 billion pounds ($7.7 billion) a year by 2021 if Her Majesty’s Treasury failed to reform the tax. A political backlash saw the Chancellor scrap the 2 percent tax increase, however, just a week later.

Break the Tax Lock

With May’s Conservatives boasting a healthy lead in political polls, the general election provides an “opportunity” to unpick the “dreaded tax triple lock, that has provided such a constraint” to the party, Jonathan Riley, Grant Thornton’s U.K. head of tax, told Bloomberg BNA in an April 18 email.

“Hammond knew he was on a sticky wicket on NIC rises for the self-employed, but with tax leakage through self-employed individuals and those using service companies he had to gamble,” he added. “The slate will be clean post-8 June, subject to manifesto pledges, but surely they won’t be that daft twice?”

5.1 Billion Pounds

The lower NICs that self-employed individuals make compared to those in full-time work amounts to a subsidy of 1,240 pounds per self-employed person a year, or 5.1 billion pounds in total, according to the Institute for Fiscal Studies, a London-based think tank.

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

At an April 18 evidence session with the U.K.’s Treasury Select Committee, Chartered Institute of Taxation president Bill Dodwell told lawmakers that the government should increase NICs for the self-employed to reflect the smaller gap in benefits between the employed and self-employed.

“We don’t think that everyone should pay exactly the same, but we do think the gap has got too large,” he said.

Jeremy Cape, a London-based tax partner at law firm Squire Patton Boggs, told Bloomberg BNA in an April 18 telephone interview he still expected the Conservative Party to raise NICs, adding that the election provides a chance for the U.K. to focus on tax as it prepares to leave the European Union.

“What’s it going to say about the landscape of the U.K. after Brexit?” he asked about tax in the Conservative Party’s manifesto for the election. “Theresa May is passionate about those who are just-about-managing, the JAMs, so will we see more tax on wealth and capital in the future?”

Finance Bill 2017

As well as providing a chance to focus on tax, the general election may equally present companies an opportunity to lobby the U.K. government on tax laws that have yet to be finalized, such as plans to limit the amount of interest that companies can use to offset against their annual tax bill.

At the April 18 evidence session with U.K. lawmakers, Dodwell called for the Treasury to delay the introduction of the new tax laws—which are still under consultation—due to their complexity.

Commenting on the tax issues arising from May’s election announcement, RSM’s Bull said tax practitioners will have to work out what the future U.K. government will keep and remove from the existing 2017 Finance Bill, which received its second reading April 18 in the House of Commons.

“It may be politically damaging to drop a commitment not to raise NICs, income tax and VAT,” he added about the prospect of the Conservatives scrapping their 2015 triple-tax lock promise. “But that comes down to the strength of the opposition and whether they make that point stick.”

Betting on Brexit

In the lead up to the U.K. leaving the European Union sometime in 2019, May is betting that she can extend the slim parliamentary majority her predecessor won in 2015. The prime minister, who became her party’s leader without an election, said the existing schedule for an election in 2020, just after the deadline for an exit deal with the European Union, posed a threat to a successful Brexit.

Some 55 percent of people support May’s call for an election less than a year after coming to power, according to a poll by ICM after her announcement that gave the Conservatives a 21-point lead over Labour.

Discussing the reasons behind May calling the snap election, Patrick Ford, a Manchester-based tax partner at law firm Squire Patton Boggs, cited Brexit as the main reason and cast doubt on the chances of the Conservatives having plains to raise tax rates.

“However, I do think they will appreciate not being subject” to the 2015 pledge “to give them the flexibility to raise tax or NI rates in the future given the squeeze on public services,” he told Bloomberg BNA in an April 18 email.

U.K. Treasury Response

A Treasury spokeswoman said in an April 18 interview with Bloomberg BNA that Philip Hammond’s March 15 letter to Treasury Select Committee Chairman Andrew Tyrie, in which he said he won’t increase NICs before 2020, is “still the government’s position.”

A Conservative party spokeswoman didn’t respond to a telephone call and email seeking comment.

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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