The Autumn Budget 2017: Implications for Business

This blog entry focuses on the implications of the Autumn Budget for businesses and the financial services sector, which contributed an estimated £71.4bn to the economy in 2016 alone (see here). As expected, the Budget is politically sensitive to the current economic and regulatory environment. However, whilst positive investments have been announced in R&D and productivity, taxation and regulatory challenges remain for some multinationals.

The economic landscape

In yesterday’s House of Commons speech, the Chancellor Philip Hammond announced a decidedly gloomier economic growth forecast by the Office for Budget Responsibility (OBR) than was expected (see full speech transcript here). In contrast to the reasonably optimistic perspective expressed in the previous Spring Budget (i.e. 2% growth), the OBR has now revised productivity growth down to 1.5%. As the OBR reports, UK GDP growth will continue to fall to a 1.3% low in 2019-20 before picking up again in 2021 and 2022 (1.5% and 1.6% respectively).

These are significantly lower estimates compared to both the UK’s pre-recession average of 2% and growth increases of 2.2% predicted in the Eurozone and the US this year (see here and here). In response, the UK Budget announced increased spending in several categories, notably housing, the NHS and certain measures to boost productivity. As will be discussed, the giveaways include investments in R&D and the National Productivity Investment Fund (NPIF).

Business imperatives

The Business community’s expectations from the Government centre on certainty, stability and ensuring the UK market remains competitive. The Autumn budget has met these concerns to some extent. Initial reactions have described the Budget as generally ‘business-friendly’, with very few major radical changes. ‘A good budget for the country in tough times’, as stated by the CBI lobby group (see here). Headline measures include reducing business rates by £2.3bn over the next five years and maintaining the current VAT registration threshold of £85,000 for two years until further consultation (see para 3.61, Autumn Budget 2017).

Investments in R&D and technology

Businesses also welcomed the expansion in the NPIF (i.e. to £31bn from £23bn) and an increase in the rate of R&D expenditure credit from 11% to 12% from 1 January 2018. This includes piloting a new Advanced Clearance service for R&D expenditure credit claims. These measures are intended to ‘provide businesses with confidence’ to invest in R&D, and help boost productivity and national efficiency levels (see paras 3.26 and 4.7, Autumn Budget 2017). Notably, the NPIF will include an allocated £4.7bn on science and innovation, £2.6bn on modernising roads, building infrastructure for electric vehicles and supporting railways and £500m on high-speed fibre broadband and 5G services, as well as a range of initiatives for tech businesses, such as investment in Artificial Intelligence (AI), FinTech, immersive technology and driverless cars. Further measures are due to be published on 27th November as part of the government’s industrial strategy.

Some global banks’ fear of losing passporting rights and access to the Single Market due to the UK leaving the EU is well documented (see e.g. Goldman Sachs). However, investments in productivity and innovation arguably signal a willingness on the government’s part to invest in the UK’s attractiveness as a global financial centre. This may provide some reassurance to global financial institutions that the UK would equally thrive in a post-Brexit business environment.

Taxation initiatives and the digital economy

In positive news, the Corporation Tax (CT) rate has remained unchanged at 19%, which should bring a sense of stability for businesses (see para 3.1, Autumn Budget 2017). The government’s commitment to a ‘low-tax economy’ would continue to make the UK a competitive location to do business. Post Brexit, the government acknowledges the potential cash flow risk resulting from having to pay import VAT on purchases from other Member States and promises to consider options to mitigate it.

On the other hand, the government intends to crack down on online VAT evasion by ‘strengthening and extending existing powers that make online marketplaces responsible for the unpaid VAT of their sellers.’ This includes the requirement for online marketplaces to ensure that VAT numbers displayed for business operating on their website are valid, which will be introduced in the Finance Bill 2017-18. Such measures are intended to provide the HMRC with additional resources to tackle avoidance and evasion.

On the international tax front, the Treasury published a Position Paper yesterday as part of the Budget pack which addresses ‘Corporate tax and the digital economy’ (see here). The paper reaffirms the government’s commitment to the principle that a multinational group’s profits ‘should be taxed in the countries in which it generates value’. Previously, the government has implemented the recommendations from the OECD’s Base Erosion and Profit-Shifting (BEPS) project via the Corporate Interest Restriction (CIR) and the UK loss reform rules. This time, the Government outlines what may be perceived as a fully-fledged digital strategy, in preparation for the OECD Task Force on the Digital Economy’s interim report to the G20. The paper is particularly relevant for social media and online marketing players as it focuses on businesses serving UK consumers where there is a significant user-generated value created in the UK.

Essentially, the government challenges the existing transfer pricing model whereby profit is apportioned based on value generation, taking into account a business’ location of activity. In effect, it argues an extension of the tax base to include any value generated by a company via external users, profits of which are not currently being taxed in the jurisdictions where the users are located. It does so by introducing an additional Withholding Tax (WT) which arises where the royalty relates to UK sales to cover royalties paid to no or low-tax jurisdictions (see para 4.18, HM Treasury, ‘Corporate tax and the digital economy’).

Whilst this may demonstrate the UK’s commitment to reforming the international tax system, such additional initiatives may unhelpfully increase the regulatory burden for cross-border businesses at a time when a clear direction from the government is critical. Some commentators have even suggested that the business community should be more involved in advocating their interests in shaping the Brexit agenda (see here).

Iulia Nicolescu is an Analyst at Limehouse Consulting.

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