Spring Statement 2018

By the time Chancellor Philip Hammond rose to his feet in the House of Commons to deliver the first Spring Statement, he had already offered plenty of hints that this would be a low-key affair.

Gone was the primetime Wednesday slot after Prime Minister’s Questions, gone was the trailing of policy announcements in the days and weeks beforehand and gone was the set-piece photo call with the red box outside Number 11.

This was all carefully orchestrated. Mr Hammond could not have been clearer that there were to be no rabbits pulled from hats.

In line with the move towards a single fiscal event each year, this was to be a straightforward response to the Office for Budget Responsibility’s (OBR) updated economic forecasts, dispensing with the usual drama of Budget Day.

Indeed, Mr Hammond may well be relieved that he does not need to deliver a Budget until the Autumn. A year ago, his first Budget was widely seen as disastrous for the Government, with the Chancellor having to quickly backtrack on heavily-criticised tax rises for the self-employed, providing helpful ammunition for the opposition at the subsequent general election.

Nevertheless, being the first of its kind, the Spring Statement was still something of an unknown quantity and the business community was still curious to see what he might have to say as they waited for the cheers and jeers to quieten in the Commons.

As it turned out, the Chancellor stuck to his guns, saying at the start of the speech that the UK had been unique amongst major economies in making tax changes twice each year. He added the move to a single fiscal event is intended to give greater certainty to business.

The Economy

There was a strong emphasis on jobs in the Chancellor’s assessment of the state of the UK economy. He noted that the wages of the lowest paid have increased by seven per cent since 2015 and that there are three million more people in work since 2010. He told MPs that the OBR now predicts 500,000 more people will be in work in 2022.

The OBR revised up its GDP growth forecast for 2018 from 1.4 per cent to 1.5 per cent. This is then predicted to remain in line with previous predictions at 1.3 per cent in 2019 and 2020, before rising to 1.4 per cent in 2021 and 1.5 per cent in 2022.

Following the recent rise in interest rates, the OBR now expects that inflation will now return to its two per cent target over the next year, while wages are expected to rise faster than prices over the next five years.

The Chancellor said figures show that the manufacturing sector has enjoyed its longest period of expansion for half a century.


The Public Finances

Moving to the state of the public finances, the Chancellor noted that the UK has now had its first sustained fall in public sector debt for 17 years, saying that this represents a ‘turning point’ for the economy.

Debt as a percentage of GDP is expected to fall from 86.5 per cent in 2018-19 to 77.9 per cent in 2021-22.

Meanwhile, borrowing is now forecast to be £45.2 billion in 2018, £4.7 billion less than had been predicted by the OBR in November 2017.

In the wake of what he was eager to present as positive predictions, the Chancellor said that he is on course to increase public spending at the Autumn Budget, so long as the OBR’s predictions for the public finances are borne out.


Business measures

Mr Hammond said he was keen to support British business, before promising that the next business rates revaluation exercise will be brought forward by one year to 2021, meaning rates will better reflect current rental values.

He also said that there will be a review of how to tackle the problem of late payments, which are seen as an ever-increasing problem for SMEs in particular.

Continuing the theme, and appearing to go against the suggestion that there would be no spending commitments in the speech, Mr Hammond said the Education Secretary will make up to £80 million available to small businesses to take on new apprentices.


Consultations

As had been widely expected, Mr Hammond took the opportunity to announce a number of consultations on the future of the tax system.

Top of the Chancellor’s list was a consultation on ‘Reducing single-use plastic waste through the tax system’. He said the Government is inviting views on how to tackle the problem of plastic waste through the tax system.

He also set his sights on large multinational digital businesses, publishing a position paper on ‘Corporate tax and the digital economy’, including measures relating to VAT.

Maintaining the focus on the digital economy, the Chancellor announced a consultation on the role cash will play. He said the Government will seek views on how to support consumers and businesses to use digital payments, while ensuring those who need to can continue to use cash. The consultation will also seek views on the use of cash in tax evasion and money laundering.

Meanwhile, the Chancellor also said that the Government would consult on extending tax relief for employees and the self-employed who fund their own training.

Although not mentioned in the Chancellor’s speech, the hours following the Statement also saw the Treasury publish a consultation into the VAT registration threshold, suggesting that the current flat threshold disincentivises businesses from pursuing growth.


Summary

One of the biggest advantages a politician has in Government is the ability to set the terms of the political debate and to mark where the dividing lines should fall.

That is what the Chancellor appears to have aimed for with his first Spring Statement. He made a clear statement of intent on the Government’s direction of travel on tax and spending by hinting at spending increases in the Autumn Budget.

Much of the debate in the coming months is likely to revolve around the question of who should benefit from any increases.

So while there were no specifics on tax and spending for businesses to take away from the speech, there were important indications about what may be to come for businesses and the economy.

Does Nesquik attract VAT? It depends on the flavour, Revenue says

An apparently counterintuitive judgement was handed down last month by the Upper Tier Tribunal as it ruled VAT should be applied to the strawberry and banana flavours of Nesquik milk powder, but not to the chocolate equivalent.

The case arose after Nestlé, the manufacturer of the powders made a repayment claim to HM Revenue & Customs (HMRC), which was refused on the basis that the strawberry and banana powders are standard rated for VAT.

Nestlé appealed this decision but lost, before appealing that judgement at the Upper Tier Tribunal, where the claim was dismissed by Mr Justice Snowden and Judge Charles Hellier last month.

HMRC and Nestlé agreed that the chocolate version should be zero-rated on the basis that it includes cocoa butter, which is zero-rated.

However, while Nestlé held that both strawberry and banana Nesquik should be zero-rated because they encourage the drinking of milk and milk itself is zero-rated for the purposes of VAT, the Tribunal rejected the arguments.

It found that the three powders should not be treated the same for VAT even though they are essentially the same and also that the banana and strawberry versions should not be zero-rated just because they create a new beverage that would itself be zero-rated.

The ruling stated: “it does not seem to us that the anomalies which arise on the basis of the First Tax Tribunal decision require any answer other than that Parliament has chosen to zero-rate certain foods, generally because they were everyday foods, tax on which would be ‘particularly sensitive’ for much of the population, and has chosen not to zero-rate others.”

Link: VAT ruling on fruit-flavoured Nesquik leaves sour taste for Nestlé

Only a third of EIS taken up by companies outside London

New data from HM Revenue & Customs (HMRC) shows that businesses in London and the South East account for 66 per cent of the Enterprise Investment Schemes (EIS) uptake.

Despite accounting for 62 per cent of the UK economy, businesses outside London and the South-East only account for £610 million out of nearly £1.9 billion of EIS investments.

The report shows that since the EIS was created in 1993/94, 26,355 companies have received investment worth almost £16.2 billion.

In 2015-16, the last year for which data is available, 3,470 companies raised a total of £1.88 billion of funds under the EIS scheme.

In comparison in the year before some 3,370 companies used the EIS, 100 less than the following year, but they managed to raise £1.92 billion of funds – £41 million more.

The EIS is designed to help small businesses raise finance and offer appealing incentives for investors who purchase new company shares.

The scheme offers Income Tax relief of up to 30 per cent, as well as possible Capital Gains Tax exemptions and deferral to investors who buy new shares in the company.

Data from HMRC also showed that one sector, in particular, dominated the use of EIS. Companies from the business services sector accounted for over £800 million of investment – more than 40 per cent of all EIS investment – in 2015/16.

The latest data also looked at the Seed Enterprise Investment Scheme (SEIS). This can carry more risk than the EIS, but there is substantial tax relief available to offset potential losses. Investors may invest up to £100,000 per tax year and claim back 50 per cent tax relief regardless of their marginal rate of Income Tax, which makes it particularly useful for those wanting to put in larger sums of money.

Key findings for SEIS data from HMRC include:

  • In 2015/16, 2,360 companies received investment through the SEIS and £180 million of funds were raised.
  • In comparison 2014/15 saw 2,365 companies raise a total of £180 million.
  • Over 1,800 of these companies raised money under SEIS for the first time in 2015/16, representing £154 million in investment.
  • The tech and business services sectors made up 68 per cent of all SEIS investment received.

Link: Enterprise Investment Scheme Seed Enterprise Investment Scheme and Social Investment Tax Relief