Budget 2015 – reaction from the IoD

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The Institute of Directors has accepted the chancellor’s deal on higher wages for lower taxes, after George Osborne delivered his seventh budget as chancellor, the first for a majority Conservative government since November 1996

Simon Walker, director general of the IoD, said:  “In today’s budget, George Osborne has offered business a new deal on employment. Introducing a national living wage at a significantly higher level than the minimum wage was a dramatic announcement, but in return, companies have been provided with a cut to corporation tax and an increase in the employment allowance. We should not understate the boldness of this move, and many businesses will have been taken by surprise, but the IoD accepts that after several years of slow wage rises, now is the time for companies to increase pay.

“Nine in 10 IoD members already pay even their most junior staff the living wage, and will accept this deal from the chancellor.”

On the economy and the public finances, the IoD’s chief economist James Sproule says reducing the deficit is a high priority for businesses.

“Eighty-five per cent of IoD members support the chancellor’s aim to run a budget surplus by the end of the parliament, and they back the plans to do this by cutting government spending and clamping down on tax avoidance, rather than raising taxes. The economy has been growing impressively for more than two years, but we do have concerns that the economic forecasts outlined today are based on a particularly benign set of assumptions.

“History suggests that the world economy seldom stays tranquil for long, so while we welcome the target of running a budget surplus, the chancellor’s margin for error is slight. His plans rely on low debt servicing payments, themselves dependent upon the continuation of historically low interest rates.”

Higher tax threshold

The chancellor announced a higher rate tax threshold, with the point at which people start paying income tax at the 40p rate rising from £42,385 to £43,000 next year. The personal allowance will rise to £11,000 next year and £12,500 by 2020.

Stephen Herring, head of taxation at the IoD, said: “For too long, wage growth and inflation have meant those on modest incomes have been sucked into tax bands which were not originally designed for them through ‘fiscal drag’. We fully support the chancellor in raising the level at which individuals start paying both the 20p and 40p rates of tax. However, we would have liked to have seen both a larger increase this year and more detail on how the chancellor’s plans to reach a £12,500 personal allowance and a £50,000 higher rate threshold are to be delivered.

“The increase in the higher rate threshold announced by the chancellor for next year does not even keep track with wage growth, meaning even more people will be dragged in. Plenty of benefits, including the new single-tier state pension, have mechanisms in place to ensure that the payments increase every year, not just at the whim of the chancellor. It should be no different for tax bands. That is why we are calling for the introduction of a ‘triple lock’ for income tax, where thresholds rise each year by the highest of inflation, earnings or 2.5 per cent.”

The additional tax rate

Herring believes cutting the 45p tax rate to 40p would have been the right move by the chancellor, despite the political outcry which would inevitably have followed. “There are considerable doubts about how much money the additional tax rate raises, and lowering it will help the UK attract high-earning, high-tax paying individuals to come and live in Britain. For 20 years both major parties agreed that 40p should be the highest rate of income tax. Hopefully today’s decision will not prevent a return to that sensible consensus.”

The chancellor announced that the inheritance tax threshold will increase to £1m, phased in from 2017, underpinned by a new £325,000 family home allowance. Herring says IoD members continue to prioritise reform to inheritance tax. “It is encouraging to see the chancellor move to implement the manifesto commitment to raise the threshold. However, it is exasperating to see the system complicated further by needlessly linking exemptions to property ownership and complex rules on marital transfers. A simple threshold of £1m for each individual would have been a much better option.”

Corporation tax and annual investment allowance

The chancellor’s decision to cut corporation tax to 19 per cent in 2017 and 18 per cent in 2020 “is a rabbit out of the hat” which will be cheered by business, said Herring.

“A headline rate of 18 per cent will cement the UK’s position as an attractive place for entrepreneurs to start up and businesses to invest in.

“A fixed Annual Investment Allowance of £200,000 is far too low, and will not encourage medium-sized business to invest. The current temporary allowance is £500,000, and many businesses were hoping it would have been raised even further. A £200,000 fixed limit is not enough to boost productivity by encouraging firms to invest in plant and machinery.”

Apprenticeship levy

On the chancellor’s announcement of a new apprenticeship levy for larger employers, Seamus Nevin, head of employment and skill policy, said: “The UK needs to invest more in education and training if we are to address the challenges of the skills shortage affecting our employers and economy. Businesses understand that they have a role to play.

“Though the details of the size and scope of the apprenticeship levy have yet to be made clear, the chancellor has rightly said that those who train apprentices will get back more than they pay in. The scheme will therefore have greater reward for those companies which invest significantly in training their workforce and that should be encouraged.”

Infrastructure

The government is right to push for a northern powerhouse, said Dan Lewis, the IoD’s senior infrastructure policy adviser. “Increasing transport links within urban areas is the priority for the north, which is why the debacle at Network Rail is so worrying. Its crippling level of debt must have played a part in the delay to the vital electrification of the TransPennine rail line.

“We welcome the chancellor’s decision to set aside revenue from vehicle excise duty for road building. Investment in roads delivers greater returns that many other forms of transport infrastructure.”

Investment in start-ups

The IoD has welcomed the consultation on including crowd funding in the ISA allowance. Jimmy McLoughlin, deputy director of policy, said: “Britain is currently undergoing a start-up revolution, with more people setting up businesses than ever before. It is encouraging that the budget included announcements which look to safeguard and strengthen the investment of these start-up companies

“Crowdfunding has the potential to be the biggest revolution in finance of the 21st Century, so we welcome the consultation on including it in the ISA allowance.

“It is critical to the future of the UK that everyone has the ability to share in the start-up revolution. Just 38 per cent of IoD members are aware of tax breaks such as the Seed Enterprise Investment Scheme, indicating that the government can do far more to promote these schemes.”

Director provided live twitter reaction during the budget from the IoD’s policy team (read a selection of tweets below.) Watch a video discussion on the budget between Simon Walker and key members of the policy team at the top of this page.

Have your voice heard

IoD director general Simon Walker and the policy team will take IoD members’ views on this budget and other topics to government ministers. To have your voice heard, join the Policy Voice panel now

Not a member yet? See how IoD membership can help your business flourish. Find out more

Have your voice heard

IoD director general Simon Walker and the policy team will take IoD members’ views on this budget and other topics to government ministers. To have your voice heard, join the Policy Voice panel. Join Policy Voice now

Not a member yet? See how IoD membership can help your business flourish. Find out more

The IoD’s pre-budget demands
Published 5 July – George Osborne urged to radically simplify the tax system in his budget

The IoD is urging George Osborne to radically simplify the tax system in his budget in order to unleash investment and give more people a stake in the private sector

The institute believes Osborne must be ambitious in his tax reform agenda in order to create an “equity economy”, in which simple and sensible taxes on wealth, and easy-to-understand investment tax breaks encourage more people to buy shares in entrepreneurial businesses.

“The chancellor has the opportunity to deliver an investment-boosting budget, making it easier for businesses to raise capital and promoting investment in the private sector,” says IoD director general Simon Walker.

“The painfully complex system of unreliable allowances and competing or overlapping schemes makes it harder for businesses to take long-term investment decisions. For individuals, the process of investing is daunting, meaning many do not even consider it an option,” he adds.

“The IoD is calling on George Osborne to create an ‘equity economy’, by making sure the tax system promotes investment and is easy for both individuals and businesses to understand. The priorities must be a consultation on merging capital taxes, raising the Annual Investment Allowance and creating a single personal tax relief for business investment.

“The chancellor is right to take seriously his responsibility to consolidate the public finances, but he also has the opportunity to kick-start a big change in behaviour and give more people a stake in the real economy. The focus for the next five years must be on building an entrepreneurial and dynamic economy that not only creates wealth but spreads it as widely as possible.”

IoD budget demands

  • Increase the Annual Investment Allowance by £100,000 (from £500,000 to £600,000) and fix it for the whole Parliament, to help businesses plan longer term investment projects
  • Consult on merging the UK’s two direct taxes on capital, inheritance tax and capital gains tax, to remove the possibility of double taxation of capital
  • In the meantime, merge capital gains rates at 20% (but increase the annual exemption) to encourage transactions and thereby increase the tax take
  • Increase the inheritance tax threshold to £1,000,000, removing the need for either the existing spousal relief or the proposed (and fiscally complex) relief for certain main residences
  • Begin to align tax reliefs for venture capital trusts, and the Enterprise Investment and Seed Enterprise Investment schemes, with the goal of creating a single personal relief for business investment
  • Clamp down on aggressive tax avoidance, with the support of 90% of IoD members, but make sure legitimate tax planning is not penalised
  • Introduce a ‘triple-lock’ for income tax, like the one that exists for the state pension, so that thresholds rise each year by the highest of consumer prices, earnings growth or 2.5 per cent
  • Make sure the proposals of the OECD/G20 Base Erosion, Profits Shifting initiative, which aims to prevent companies artificially moving profits between countries to reduce their tax bill, are implemented in a way which doesn’t erode our competitiveness
  • Reject the ill-thought out and dangerous proposals for a European-wide ‘Common Consolidated Corporate Tax Base’
  • Ensure that any reforms of the business rates system following the recent consultation do not adversely affect micro-businesses, small businesses or medium-sized businesses
  • Consult on giving small businesses the option to be taxed like an individual or a partnership, rather than a corporation
  • Millions of SMEs (known as ‘S-Corporations’) in the USA use this system, which would be hugely beneficial in promoting business growth and simplifying tax compliance

“As the economy continues to recover, both business and individual taxpayers will rightly expect more wide ranging tax reforms and simplification than the previous government was able or willing to undertake,” says Stephen Herring, head of teaxation at the IoD.

“Businesses, especially SMEs, are concerned about high taxes on employment, commercial property occupation and transactions as well as being convinced that government ought to try much harder to deliver authentic, far reaching tax simplification,” he adds.

“Individual taxpayers are rightly concerned with the impact of fiscal drag upon their marginal tax rates. The chancellor should also take the opportunity to make it clear the government is determined to distinguish between authentic tax planning by businesses and individuals and aggressive tax avoidance.”

iod.com

About author

Hannah Baker

Hannah Baker

Hannah Baker is deputy editor at Think Publishing. Previously she worked as a features writer and sub-editor for Director magazine

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