Autumn Budget implications for Local Government - KPMG United Kingdom
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Autumn Budget 2018: Implications for Local Government

Autumn Budget implications for Local Government

KPMG assess the implications of the Autumn Budget 2018 for Local Government.

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The Chancellor made a number of announcements in respect of Local Government in his Budget statement on Monday. In his statement he said: 

‘The Government is already taking steps to empower local councils, giving them greater choice in how best to serve their local area. The Budget provides additional funding to help support local authority financial sustainability.

’The Chancellor’s Budget included a number of new measures impacting on local government, across social care, infrastructure, support for retail and some fiscal measures. 

The additional funding announced for social care for local authorities will be very welcome at a time of crisis but it is a temporary measure and more will be needed through the spending review to truly reform care.

The investment in infrastructure will be welcome and ever more important if the economy is to sustain and grow. With the uncertainties of Brexit Infrastructure and Skills are likely to be at the forefront of both public and private concerns.

The Budget announcements are a move in the right direction and one which struggling Local Authorities and the sector will undoubtedly appreciate. But these are still short term measures and funding and reform will continue to be required to sustain public services. Additional funding for Infrastructure was provided for Combined Authorities through the Transforming Cities Fund, if however local places are truly to serve their local communities and improve productivity the devolution agenda will need to be re-ignited, along with reform and continued focus on funding.

In terms of any announcements of reforms or changes in relation to tax or pensions, there was little of significant benefit to the Local Government sector.

Looking at the announcements of reforms or changes in relation to tax and pensions:

Pensions

On the face of it the Budget was a quiet one for the pensions industry. However for organisations participating in public service pension schemes it is of more relevance.

Firstly, the possibility of a change in pension’s tax relief was well trailed, but didn’t come through on this occasion. Given that around 75% of the tax savings would have come from extending the Annual Allowance to more public servants, many of whom work for the NHS, the wider consequences may have been problematic. However, this is a change waiting to happen and in the meantime the Annual and Lifetime allowances continue to impact more members of public service pension schemes.

Secondly, in the detail of the Budget is confirmation that the Treasury’s discount rate used for valuing the unfunded public service pension schemes will reduce to CPI + 2.4% (from CPI + 3.0). The change in the discount rate means that the employer contribution rates are due to increase significantly (e.g. 7% of pay for the Teachers’ Pension Scheme in England and Wales). Note that the Local Government Pension Scheme is not directly affected. For post-92 universities, FE Colleges and independent schools in particular this is a very significant change as there will be no financial support provided by the Treasury. Local Authorities are being subsidised to some extent in 2019/20 with future years being part of the spending review settlement. The NHS on the other hand is getting full support for 5 years, meaning that in effect, this move is raising funds for the benefit of the NHS.

 Finally, other more minor mentions for pensions include:  

Lifetime Allowance – to rise in line with formula to £1,055,000 for tax year 2019/20

Investment – the FCA is to consult by the end of 2018 on updating the permitted links framework to allow unit-linked pension funds to invest in an appropriate range of patient capital assets (including innovative companies and infrastructure)

Pensions dashboards – some additional funding and a consultation later this year on detailed design. It will be a challenge to include public service pension schemes in this exercise and this is something to be monitored

Cold callingthis consultation response confirms that the Government will proceed with regulations and guidance quickly

DC charge cap – the Government to consult in 2019 on the function of the charge cap to ensure it does not unduly restrict use of performance fees

Self-employed – there will be Government paper this Winter on its approach to boosting pensions saving

Corporation Tax

Corporation tax is not, of course, a significant issue Local Government, as local authorities are not within the charge to corporation tax. However, there are some changes that may be relevant to local authority commercial vehicles such as subsidiaries.

In terms of capital allowances for subsidiaries with substantial capital assets, the announced changes could be important. These include:

  • Introduction of a new 2% capital allowance in respect of expenditure on new non-residential structures and buildings, where all contracts for the physical construction works are entered into on or after 29 October 2018;
  • An increase in the Annual Investment Allowance to £1 million, from £250,000, for expenditure on qualifying plant and machinery in the period from 1 January 2019 to 31 December 2020;
  • A reduction to 6%, from 8%, of the special rate allowance (for integral features), from April 2019, and
  • The phasing out of the Enhanced Capital Allowances regime from April 2020.

Where any entities have significant capital losses, the proposed restriction from April 2020 of the offset of such losses to 50% of annual capital gains (to bring them in line with the treatment of income losses) may be an important consideration.

Finally, there is a significant announcement on the introduction of a Digital Services tax which we include for your information:

  • The introduction of Digital Services Tax – information to date would indicate that this new 2% tax will be targeted at “tech giants” performing certain specific digital intermediation activities (e.g. search engines, social media platforms and online marketplaces), and then only in relation to companies with annual global turnover of at least £500m.  Exemptions for online sales of goods and services will be available although the detail is yet to be released.

VAT

This Budget does not include any major changes affecting the treatment of VAT for Local Government.

The Budget confirmed that in certain circumstances, construction services will become subject to reverse charge VAT whereby the purchaser of the services accounts for VAT rather than the supplier. This will apply where a contractor buys in services which are then used in a further supply of construction services. It will for example apply where, as is common practice, a construction contractor sub-contracts elements of its work to other entities. The principal impact of this measure will be for local authorities operating development or design and build companies which do buy in construction services in order to make onward supplies of those same services. Subject to approval of the Finance Bill, the measure will be effective from 1 October 2019.

Employment taxes

The key changes announced can be summarised as follows:

  • Off-payroll working in the private sector – As expected, the Chancellor announced that the public sector reforms you faced in April 2017 will be extended to the private sector although this will not take effect until April 2020.  
  • Short Term Business Visitors (STBVs) – From April 2020 the administrative treatment of individuals who come to work in the UK from an overseas branch of a UK company will be eased – key features are an extension of the special annual PAYE scheme to cover individuals who spend up to 60 days in the UK, and moving the annual reporting and payment deadlines from 19 April to 31 May, aligning them with the main STBV reporting deadline;
  • National Insurance Contributions (NIC) – Employer’s NIC will apply to termination payments to the extent they exceed the £30,000 threshold from April 2020, rather than from April 2019 as was originally announced, and the Employment Allowance (£3,000 per year offset for employer’s NIC) will be targeted at smaller employers from April 2020;
  • Employment status and the Taylor Review – There was no announcement on the Government’s consultation on employment status that followed the Taylor Review.

Whilst most of you will already be operating the new off payroll worker rules, you are welcome to join our Webex in November.  Details will be published on our Employers’ Club web-site over the next few days, so please do visit and register for more information. 

Off-Payroll Workers in the Private Sector

The lead option in the Government’s recent consultation on improving ‘IR35’ compliance – extending the 2017 public sector reforms to the private sector – will come into effect from April 2020. The rules in 2017 covered public bodies as defined by the Freedom of Information Act.  From April 2020 it will only be small businesses that will be excluded from the rules (which the Government intends to define in line with the Companies Act 2006 definition – broadly where two out of the following three conditions are met: turnover not more than £10.2 million; balance sheet of not more than £5.1 million; and not more than 50 employees).

In line with the public sector rules, these changes will see responsibility for determining whether an engagement falls within the ‘IR35’ regime moving from the worker’s Personal Service Company (PSC) to the end user. Where an employment relationship is deemed to exist, the end user of the services would be responsible for operating PAYE/NIC on payments made to those PSCs if it pays them directly. Otherwise, if the end user has contracted with an agency and the agency is paying the PSC for the services rendered, then the agency will be responsible for applying PAYE/NIC to those payments based on the end user’s IR35 determination.

The Government also announced that HMRC would work with stakeholders to improve its online Check Employment Status Tool (CEST), and improve its published guidance prior to the new rules coming into force. We agree that improvements to CEST and HMRC’s guidance are necessary to ensure businesses are able to comply with the new regime, and will continue to work with HMRC in this regard. If you currently use CEST and have any comments you would like us to feed into HMRC, please get in touch.

A further consultation on the detailed operation of the new rules is expected in the coming months which will inform the draft legislation that will be published in summer 2019.  In the meantime, please you can see our brochure for more detail.

Short-Term Business Visitors (STBVs)

From April 2020, the UK workday limit for participants in special annual PAYE schemes applying to STBVs will increase from 30 to 60 days.  These arrangements allow employers to submit a single payroll report after the end of each tax year, rather than monthly returns, in respect of STBVs who do not meet the requirements for inclusion in a ‘Short Term Business Visitors Agreement’, whereby an employer is relieved from applying PAYE. This change will allow more STBVs from overseas branches of UK companies, and from territories which do not have a double tax treaty with the UK, within the scope of the simplified compliance regime. 

Additionally, the reporting and payment deadlines for the special PAYE regime will be extended from 19 April to 31 May following the end of the tax year. This aligns the reporting deadline for the special PAYE regime with that of Appendix 4 STBV arrangements. 

NIC measures

Legislation will be introduced to impose the previously announced Class 1A (employer only) NIC charge on termination payments made after 6 April 2020 to the extent the £30,000 threshold is exceeded.

The NIC Employment Allowance will be restricted to employers with a total employer’s NIC liability of less than £100,000 in the previous tax year from April 2020.

National Living Wage and National Minimum Wage update

Following the recommendations of the independent Low Pay Commission, the National Living Wage will increase from £7.83 to £8.21 from April 2019.  In addition:

  • The rate for 21-24 year olds will increase from £7.38 to £7.70 per hour;
  • The rate for 18-20 year olds will increase from £5.90 to £6.15 per hour;
  • The rate for 16-17 year olds will increase from £4.20 to £4.35 per hour; and
  • The apprentice rate (for apprentices aged under 19 or in the first year of their apprenticeship) will increase from £3.70 to £3.90 per hour.

Personal Allowance & Higher-Rate Threshold

The Government has brought forward its manifesto pledge to raise the income tax Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 by the end of this Parliament. These increases will now take effect from April 2019

Whilst the Personal Allowance is available to all qualifying UK taxpayers, Scottish taxpayers will be subject to tax on non-savings and non-dividend income from April 2019 based on rates and bands that will be set by the Scottish Parliament early next year.

Similarly, from April 2019 Welsh taxpayers will be subject to tax on non-savings and non-dividend income at rates that will be set by the National Assembly for Wales. Currently, these are expected to be the same as for other UK taxpayers outside Scotland.

Draft legislation on the above announcements is expected to be included in the draft Finance (No.3) Bill, which is due to be published on 7 November 2018.

If you would like to discuss this further please contact:

Corporate Tax: Sandra Cox (0161 246 4280) or John Hart (020 73113248)

VAT: John Hart (020 73113248) or Dan Smith (020 7311 4379) 

Employment tax: Caroline Laffey (0191 401 3849)

Pensions: Steve Simkins (0113 254 2975)

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