‘A Budget to respond to the impending economic shock of Coronavirus’Mar 12, 2020
Hazel Platt, regional head of tax at Grant Thornton: “The measures on Coronavirus are designed to manage the cashflow impact for businesses and individuals as demand, supply and production is disrupted.”
Budget 2020 reaction from Hazel Platt, head of tax, Central & East, Grant Thornton UK LLP
IN HIS BUDGET Statement yesterday (March 11) the Chancellor Rishi Sunak planted a few seeds for Boris Johnson’s future plans for the UK economy before investing heavily in the fiscal equivalent of stockpiling to see the UK through the impending Coronavirus storm.
In the process he announced a massive increase in capital spending, coming close to the Labour party’s plans during the general election campaign last year. With the economic impact of Coronavirus impossible to forecast and borrowing set to increase this year, we don’t know how the fiscal stimulus will be paid for in the long term and will have to wait until the autumn budget and the five-year spending review to find out the full impact on public finances.
And with little mention of Brexit, we will also have to wait for the big decisions about what the business environment will look like when the UK self-isolates from the EU in nine months’ time.
COVID19: managing the cashflow impact
Above all this was a Budget to respond to the impending economic shock of Coronavirus.
Yesterday saw a double-barrelled response, with a monetary bombardment from the Bank of England and a fiscal barrage from the Chancellor. The measures on Coronavirus are designed to manage the cashflow impact for businesses and individuals, as demand, supply, and production is disrupted.
Wednesday saw the outgoing Governor of the Bank of England take action to mitigate “sharp and large but temporary” economic disruption caused by coronavirus. The base interest rate was slashed to 0.25% and a term funding scheme launched to enable banks to lend at low rates to business facing cashflow problems.
In the Budget, the Chancellor announced measures for the health service, individuals and businesses. An extra £5 billion was made available for the NHS as he pledged to provide “whatever extra resources our NHS needs to cope with coronavirus”.
For individuals, statutory sick pay was extended to all who self-isolate and measures taken to provide the self-employed with easier access to benefits from day one. Support for business was focused on small and medium sized enterprises: those employing fewer than 250 people. For SMEs, employer costs of sick pay will be paid by government, a loan scheme will be introduced, and business rates will be scrapped for one year for properties with a rateable value below £51,000 in retail, hospitality and leisure. HMRC will also allow more time to pay taxes.
These measures are good news for individuals and for smaller organisations. Mid-market businesses employing 250 people or more may be less insulated from cashflow difficulties.
The focus will now also turn to implementation of these measures: whilst today’s announcements may look good, the key question will now be how quickly these can be implemented and feed through to the economy. Effective implementation will be critical and it is encouraging that the measures are largely based on existing schemes with existing delivery mechanisms.
Capital Investment: massive spending increase to boost productivity and level up regions
The Chancellor announced huge increases in capital spending: £175 billion additional spend over five years. This is closer to the Labour party’s election proposals (around £220 billion) than it is to the Conservative manifesto (around £40 billion). This is the main area, aside from Coronavirus, where the Chancellor went way beyond what was promised in the December election.
As well as a huge increase in research funding, including a new agency for blue skies R&D, this includes £27 billion on roads and motorways and £2.5 billion on pothole repairs – shovel-ready projects that can get money into the economy fast. For the longer-term infrastructure investment, including £5 billion for broadband and additional spend on carbon capture and rail, the big question remains whether the supply side in the construction industry can respond to the accelerated spend.
There were also some contradictions on the decarbonisation agenda, with significant road building and fuel duty freezes alongside investment in rapid charging points for electrical vehicles and investment in the national rail infrastructure.
How these investments and incentives are phased to deliver the long-term target of net carbon zero by 2050 will be crucial.
Changes for individuals and investors
The Budget confirmed the rise in the threshold for employee National Insurance Contributions.
The widely anticipated abolition of Entrepreneurs Relief was watered down to a more limited reform, taking the lifetime limit back down to the £1 million level of ten years ago (from £10 million today). This change comes into force with immediate effect.
Most investors and owners have been anticipating this since the election and will be relieved that for now there were no other new taxes on assets and wealth.
Reforms to pension relief, designed to specifically help with NHS shortages of doctors and other clinical staff, will help all higher earners. Both thresholds for the tapering of annual allowances on pension contributions (currently £110,000 for ‘threshold income’ and £150,000 for ‘adjusted income’) will be raised by £90,000.
Little change for employers and corporate tax
For larger employers and businesses, there was very little change in the Budget. As set out in the election, corporation tax stays at 19% and R&D tax relief increases by 1%. IR35 and the Digital Services Tax were both confirmed as going ahead in April.
HMRC will invest in a new programme of action to tackle tax avoidance, evasion and non-compliance. From April 2021 large businesses will be required to notify HMRC when they take a tax position which HMRC is likely to challenge. The government will consult shortly on the detail.
Economic outlook foggy
The Office for Budget Responsibility has forecast GDP growth of 1.4% this year, with the infrastructure spend boosting an otherwise downward trend compared to previous forecasts. However, this will be out of date within days as the impact of coronavirus is impossible to model at this stage.
The big fiscal questions will come in autumn or next spring. Having increased spend for fiscal stimulus does government accept much higher borrowing or is there an “austerity 2” to correct this more sharply?
Short-term assurance, longer-term uncertainty
The Chancellor tackled the immediate task in hand yesterday – a comprehensive package for dealing with the economic shock of COVID19 (at least for smaller firms) and progress on some of the main election manifesto commitments made in December including a big investment in infrastructure and research.
This provides business with some short-term assurance.
Big uncertainties remain about the full impact of coronavirus and how this affects longer-term tax and spending decisions. As we head towards the end of the Brexit transition period, there will also be increasing concerns about businesses’ ability to get ready for all the changes required for trading with the EU on January 1 next year.