New Treasury leadership could see a loosening of the fiscal purse strings
In perhaps the least surprising vote in recent political times, the Conservative party elected Boris Johnson as its new leader and the UK’s new Prime Minister. He in turn offered the post of Chancellor of the Exchequer to Sajid Javid, formerly Secretary of State for the Home Office.
But Mr Javid has been in the Treasury before, as a Junior Minister in the role of Financial Secretary to the Treasury and Economic Secretary to the Treasury. This should mean that he is familiar with the machinations of our country’s economic and finance ministry, including the annual Budget cycle. It may also mean that he has specific ideas about how he wants to run things that are different from his predecessor and which he didn’t have influence over as a Junior Minister. Only time will tell.
For businesses, his background in finance and general support of capitalism and free markets is welcome news. Though he has been clear that in markets that aren’t working, including in his view housing and internet safety, the government should and will intervene.
At the time of writing, the Chancellor has just announced a one-year Spending Round. This will set central government resource funding for one year from 1 April 2020. This process will conclude in September and be followed by an Autumn Budget, likely in early October. For businesses this short-termism in domestic policy making will add to the general feeling of uncertainty and lack of long-term strategic direction. But, given the high degree of uncertainty over the economic outlook in the next couple of years it is hardly a surprising decision. Get involved with our fiscal event work this Autumn. We’ve had a regular drumbeat of meetings with the Treasury over the summer, covering topics such as business rates, the Apprenticeship Levy, transport funding and a new funding model for nuclear power. Our access and influence is strong and growing thanks to the invaluable insight of our members. So keep it coming!
There are some familiar faces in the Treasury as well. Jesse Norman will retain his position as Financial Secretary to the Treasury and the CBI has invited him to a future Taxation Committee to speak directly with members. John Glen also retains his post as Economic Secretary to the Treasury. Simon Clarke comes in as Exchequer Secretary, replacing Robert Jenrick who has been promoted to Secretary of State for Housing, Communities and the Local Government.
Overall, the Treasury team has been more stable than some other government departments. However, we may soon see a radical departure by this Chancellor from the position held by his predecessor on fiscal policy. During the Conservative leadership race the Prime Minister made commitments in the order of £57bn which the new Chancellor has started to follow up on. We can certainly expect some form of fiscal loosening, including using up existing headroom and possibly increasing government debt levels. For businesses, some of the government’s plans will be hugely welcome, including investment in northern infrastructure. More broadly there will need to be questions about financial sustainability and whether we might see future governments coming back to business to pay for today’s promises.
Government publishes the latest Finance Bill
On 11 July the government published the draft Finance Bill. As mentioned in last month’s update it included the legislation for the new Digital Services Tax (DST), implementation of IR35 reform in the private sector and corporate capital loss and return to crown preference provisions.
The CBI met with the Specialist Advisors to the House of Lords Finance Bill Sub-Committee of the Economic Affairs Committee to share member views on these key areas. We raised our concerns about the relatively wide scope of the DST and the wide powers proposed for HMRC to apply it. The reality is that most businesses won’t be caught by the tax but the uncertainty and cost of legal advice to make sure that is the case will not be welcomed.
The CBI called on the Labour party to re-think their Inclusive Ownership proposals
This month saw the CBI release a letter sent from Dame Carolyn Fairbairn to Shadow Chancellor John McDonnell on Labour’s inclusive ownership to the press. This culminated the work of several member working group meetings on this issue, a member survey and CBI economic analysis. You can find the Financial Times article here.
The proposal from Labour, which sees up to 10% of company ownership placed in a government held fund, would cause serious damage to investment in UK businesses and our economy. But, CBI analysis also shows that it would hurt employees too. Lots of employees own shares in the business they work for, over 7.5m of them in fact. And on average those employees would be made £2,000 worse off in the short-term. That is why it was so important for the CBI to raise the alarm on this policy and put forward more measured and practical solutions, such as an employee ISA. To find out more about the CBI’s letter to the Labour party, our alternative proposals and how your business can help shape this debate follow this link.
Despite the strength of opposition set out in the letter engagement with the Labour party team since has been very strong and we have another meeting to discuss the detail of our ideas and evidence with them next month. So now is the perfect time for you to get involved and influence those discussions.
CBI hosts roundtable with Treasury employment taxes team
This month also saw the CBI offices welcoming the Treasury employment taxes team to hear directly from members on the issues that are of most importance. That included IR35 implementation, the Apprenticeship Levy and the forthcoming work on tax and employment status alignment as part of the follow on from the Taylor review. It was an opportunity for members to share the practical challenges with implementing these policies, including the absence of any published guidance and finalised tax legislation on IR35 despite companies needing to read it before its introduction in April next year. Members also highlighted frustrations with their ability to access their apprenticeship levy funds, with some having checked their accounts before the meeting to see they have used less than 10% so far! We will be organising future roundtables with members and the Treasury team on this issue. Get involved by joining the distribution list for the CBI’s Employment taxes working group.
On the theme of employment tax last month saw Bill Dodwell, Director of the Office for Tax Simplification attend the CBI’s Taxation Committee. He shared his priorities and focus for the department with members and heard their areas of interest. One area we agreed to work with the OTS straight away on was their project on tax reporting for the self-employed, including organising a roundtable with CBI members later this year. If your business uses a large volume of flexible labour their proposals may affect you. If you are interested in attending this roundtable or any other areas of the work of the OTS, contact Matthew Lewis.
New EU rules requiring mandatory disclosure of cross border tax arrangements
On 22 July HMRC published draft regulations to implement EU Directive 2018/822, commonly known as DAC 6, which requires member states to introduce rules requiring mandatory disclosure of cross border tax arrangements which could be used to avoid or evade tax. DAC 6 entered into force on 25 May 2018 and member states are required to put in place legislation transposing the Directive into national law by 31 December 2019. Whilst the UK is due to leave the EU on 31 October, it is understood that the UK government is committed to implementing the Directive irrespective of the UK leaving the EU.
The regulations will require promoters, intermediaries and in some instances taxpayers themselves to report details of certain types of cross-border arrangements to HMRC. Reported information will be shared with other EU member states and likewise, other member states will share information reported to them with HMRC. Whether arrangements are reportable will be determined by reference to certain hallmarks or criteria, which have the potential to be broad in application.
HMRC is consulting on the draft regulations published until 11 October 2019, the CBI intends to submit a written response and will be meeting with HMRC to discuss member views ahead of this.
If you think these new regulations might affect you, or you are unsure, contact the team to find out more and discover how and whether to get involved.
Treasury launch Financial Services Future Regulatory Framework Review
On 19 July, HM Treasury launched a Call for Evidence seeking views on regulatory coordination in the financial services sector. This is the first in a series of papers as part of their Future Regulatory Framework review and it closely reflects on CBI's Funding our Future report, including the need for an engagement strategy involving government and regulators with financial services firms.
The consultation focuses on the need for smarter regulation that puts customers first, with responses sought on how the government and regulators work together with the financial services industry to manage the combined impact of regulatory change on financial services firms and their customers.
The CBI will respond to this Call for Evidence and is interested in hearing members' views on how existing cooperation between the government and regulatory authorities can be enhanced, and how coordination across the public and private sector can be improved.
For further details or to share views please contact Ana Gallego.
Dame Carolyn Fairbairn, Director General writing to John McDonnell on Inclusive Ownership:
“I strongly believe that good business is a powerful force for good and that profit and purpose go hand in hand. Business knows it needs to work harder to show it’s a problem solver, not a problem to be solved, and that is why I am writing to you now…
…Over 60% of businesses said that the IOF would negatively impact their company value. That’s an immediate hit to investors, many of whom are pension funds, and it makes it harder for businesses to raise capital for future growth.”
While clearly July was not a quiet month, with work happening across the full range of tax and regulation policy issues, August promises no let up. So what should you be looking out for in the coming month?
CBI will set out its stall on the future of business rates
2019 has been a busy year for the CBI’s business rates campaign. With a landmark event, complete with speech from CBI President, John Allan and evidence submitted to the Treasury Select Committee’s enquiry. But the campaign activity will increase further in the run up to the Autumn Budget, where we will be pushing the government to make reforms that will really make a difference to business.
In July we held our business rates working group meeting where members agreed to two sets of short-term recommendations to put to the government in two scenarios: an emergency budget and a "normal" budget. We also discussed longer term reform and the overarching objective governing this, which is to achieve a system that is fair, equitable and sustainable. We agreed this should involve an end state with the following characteristics: a fixed tax rate, a tax base based on rent, no fiscal lock, annual revaluations and the derating of productivity enhancing investments.
In August we will be taking this steer from members and turning it into an options paper that sets out at a high level the options available in order to get to the desired end state. This will closely mirror what we would hope to see in a formal government consultation on reform of the system.
In July we met with both the Treasury and the VOA on both our short term and long-term workstreams and will continue to do so ahead of the Budget. As part of our budget planning, we are submitting a short document outlining our recommendations if we were in a "normal" budget scenario. If you want to get involved in our business rates work, contact Megan Bulford.
Business investment will be a key theme of the upcoming Budget
The CBI’s report last year on business investment showed that the UK is lagging its international peers in terms of levels of business investment. More recently business investment in the UK has taken a further hit as a result of continued Brexit uncertainty and has now been falling for over a year.
As our report highlighted the system of tax and regulation can play an important role in creating the right environment for business to invest. Business continue to highlight the importance of tackling the rising cost of tax and regulation on businesses in the UK. As part of this and the CBI will be launching its campaign on this issue later this year, to find out more contact Milda Jardine.
Businesses also profess the virtues of stability, simplicity and predictability in the tax and regulatory system. These are principles that the CBI continues to promote in our discussions with the Treasury and we have on-going engagement with HMRC on their approach to business. If you have experienced difficulty with HMRC in the past, share your experience in confidence with Matthew Lewis. Our ‘In need of a reset’ is a useful resource for businesses interested is this issue.
But there is a role for policy design as well. So in August the CBI will engaging often with the Treasury on this issue. Including a roundtable with officials on business investment. If you can’t attend the event, or places are now filled (spaces are very limited) we would still really like to hear from you. Contact Fiona Geskes with your views, opinions and experiences.
We will also be publishing our latest research and recommendations on the R&D tax credit. Businesses regularly tell us how important this policy is for driving their R&D investment decisions in the UK. The CBI wants to see this policy protected and enhanced so that it can start to turn the dial on government meeting its 2.4% target for R&D. Check out the CBI’s campaign on raising R&D spend to 2027.