Melissa Geiger, Head of International Tax at KPMG UK gives her commentary ahead of the 2018 Budget.
“I am fairly optimistic that we could see a relatively ‘quiet’ Budget that maintains the UK’s competitiveness and attractiveness as a place to do business leaving the Chancellor with options to respond at a later date to Brexit in whatever form it takes. A boost to productivity and the Government’s vision for the UK to be a knowledge economy would be welcome, but the signs are that the Chancellor is more preoccupied with the issue of how to tax the digital economy.
“The Government has promised to increase spending on the NHS and declared an end to austerity. This will need to be funded. Yet the Office for Budget Responsibility’s upward revision of tax receipts takes some heat out of the need for tax increases. This could give the Chancellor the option of delivering a light touch Budget, leaving his powder dry on tax changes until Brexit terms are clearer.
“It is important that the Chancellor decouples the effects of Brexit uncertainty from more systemic issues within the economy. International investment is stalling but it’s not clear how much of this is due to Brexit. Different causes may need different responses.”
International consensus needed for a digital tax
“There is widespread acknowledgement that the government needs to work out how to tax new models as the world moves towards a digital future. Increasingly digitalised operating models mean that value can now be created in locations where a business has little physical presence. A robust system doesn’t yet exist for taxing that value. While acknowledging the optimal solution lies in international consensus, the Chancellor has been increasingly bullish about going it alone on this.
“A tax on digital sales would be well-received by the public but they need to be careful what they wish for. Any tax that is closely linked to revenue may well be passed on to consumers.”
Boosting UK competitiveness and productivity
“There is pressure to maintain the UK’s competitiveness and business will be hoping for measures that give UK productivity a boost. Increased incentives for R&D and innovation generally deliver value for money and would dovetail nicely with the Government’s strategy to make the UK a knowledge economy.”
Commitment to have the lowest corporation Tax in G20
“The Government has committed to reducing the headline corporation tax rate and the Prime Minister recently expressed her desire for the UK to have the lowest tax rate in the G20. But this could fall by the wayside. A drop from 19% to 17% is unlikely to alienate investors in itself. Investment decisions are rarely made for purely tax reasons. Tax rates are a factor for sure, but broader economic, political and regulatory stability play a larger part.”
Getting to grips with new ways of working
“The government has not yet gripped how new ways of working should be taxed. The disparity of tax treatment between the employed and the self-employed in the emerging gig economy drives behaviour that distorts the market. But a strategic and holistic solution is less likely than more short-term measures to plug the gaps.”
Will the Chancellor protect existing pledges?
“On the basis that people will not miss what they never had, if the Chancellor does want to increase revenues then he might ditch the pledged increase in personal income tax allowances or further limit tax relief on pension contributions.
“But this could prove to be an own goal in the long term. The Government needs to encourage people to save for retirement in order to limit the burden on the State of an ageing population. A reduction in pension tax relief will inevitably reduce pension saving.”
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