Budget 2024: Into the Chocolate Factory

Good news everyone, the Chancellor’s found over £13bn to spend on tax cuts!  Where did he find it?  In a chocolate river?  Under a liquorice bush?  In the profits of a misconceived Glasgow tourist attraction?  I don’t know, ask an economist.  And look carefully to see if the economist gives any clues as to the wisdom of all this; be sure to watch for subtle stuff like steam coming out of the ears or heavy sobbing.

I don’t comment on macroeconomics though (not much, anyway). I’m focused like a stern and watchful Oompa Loompa on the tax announcements affecting businesses and entrepreneurs. So let’s see what the Chancellor had to offer in his pick ‘n’ mix bag.

Creative Sector (aka the Candy Design & Aesthetics Department)

Lots of good news for various creative businesses in today’s Budget. Nothing new, sadly, on Video Games Expenditure Credit, which will be disappointing to those who have asked the Chancellor to look at the generosity of that regime.

Independent Films

The new Audio-Visual Expenditure Credit (AVEC) will include enhanced credit (53% of qualifying expenditure) for accredited films with a budget of less than £15m. This enhancement will apply to films commencing principal photography from 1 April 2024, so if you are about to start cameras rolling in the next few weeks maybe hang on for a bit!

Theatre, Orchestras, and Museums & Galleries

All of the above have their own special tax relief regimes (which sit outside AVEC). The rate of relief was set back in Budget 2022 at 45% (or 50% for touring productions and orchestras), which was a substantial increase on previous rates, but these super-rates were (until today) due to taper down after 1 April 2025. The Chancellor has announced that enhanced rates of 40% and 45% (rather than 45% and 50%) are now expected to be made permanent.

Visual effects

After being trailed in the Autumn Statement last year, the Chancellor confirmed that the credit for spend on visual effects as part of AVEC is expected to increase to 39% from 1 April 2025, with a consultation due to be published shortly to help scope exactly what qualifies for relief.

Studios

Eligible film studios will get a 40% discount to their business rates bill.

Business Taxes (aka Oompa Loompa Operations)

After the announcement last year of the ‘full expensing’ regime for expenditure benefiting from capital allowances, the Chancellor is back to try and plug one of the holes in that announcement, being the associated regime for leased assets. We are told to expect draft legislation and a consultation document shortly.

We’ve become so used to allowances and thresholds being frozen, by a plucky young Chancellor Sunak back in March 2021, that it almost passes without comment. But it remains a huge source of revenue for the Government in recent years, especially in light of inflation. Anyway, Chancellor Hunt has found an allowance he wishes to unfreeze. Unfortunately it’s exactly the allowance which many economists and tax experts think should go in the other direction. We’re talking about the turnover threshold above which you are obliged to register and charge VAT, which is going from £85,000 to £90,000 from 1 April 2024. This seems harmless enough (even positive) but in fact it creates massive distortion for consumer-facing businesses. Many of them deliberately avoid going over the threshold because of the cliff-edge effect it has on their after-tax profits. The depressive effect this has on productivity will be very slightly eased by raising the allowance. But many experts would instead push for a reduction in the allowance to put all but the smallest businesses on a level playing field and remove the perverse incentive to cap their ambition.

Personal Tax (aka Oompa Loompa payroll)

The worst-kept secret in Westminster is that the Government has cut the main rate of employee national insurance contributions from 10% to 8% (and the equivalent self-employed rate from 8% to 6%). This is where most of the piggy bank is going. The combined effect of these cuts is around £10bn in 2024-25. Spicy stuff. Although at this rate the Chancellor might inadvertently achieve at least one thing that tax experts have been clamouring for, which is the merger of NICs into income tax to create a simpler / more transparent system. I suppose if you reduce NICs to zero then that is a form of merger.

Reform of the High Income Child Benefit Charge was also announced. This charge is how the Government claws back child benefits from so-called high earners, but it leads to extremely high marginal tax rates for some unfortunate families. The design of this reform contains some novel aspects for the UK tax system, including potentially having to calculate tax based on household information (whereas most UK tax is assessed at the level of the individual). This definitely falls into the category of ‘something is better than nothing’ but whether it's enough to make the system work fairly remains to be seen.

Mixed news for all the Oompa Loompas who might be claiming non-domiciled status and its attendant tax benefits. The Government is going to consult on a new regime for newcomers to the UK to replace the existing regime. The good news is that it will continue to offer substantial benefits (relating to non-UK income and gains) for people recently arriving in the UK, and crucially the new regime will not disincentivise individuals from bringing overseas income and gains into the UK. The bad news is that the new regime is expected to provide tax benefits for a maximum of four years, after which the current indications are that individuals will be treated like any other resident / domiciled UK individual. Reform of a regime like this will take a while and it seems plausible that a different Government to this one might end up driving this idea home, so we’ll have to see how it shapes up. Changes are expected to come in from 6 April 2025, with transitional provisions for those already claiming non-dom status.

Start saluting now, it’s going to get patriotic.

Jeremy Hunt is also concerned about all the ISA money which is invested in (shock! horror!) overseas companies. Just to make sure that people don’t invest on the basis of silly notions like expected return, and actually show a bit of goshdarn loyalty for once, we might soon have a BRITISH ISA allowance of £5,000 per year in addition to our tawdry global ISA allowance. Consultation will follow on what fine upstanding BRITISH shares are allowed in a BRITISH ISA.

You can stop saluting now.

Real Estate (aka Oompa Loompa Housing Division)

The Government consulted a couple of years ago on the operation of two very important features of the SDLT system. Multiple Dwellings Relief (MDR) is a relief available when you purchase multiple residential dwellings as part of one transaction. The rationale for the relief is sound (residential SDLT rates are swingeing, and if you pile multiple small transactions into one acquisition the additional costs can be very high) but there’s no question it sometimes worked in an odd way. The mixed-property rules on the other hand are a set of principles (part legislation, part case law) which determine whether property falls into those swingeing residential SDLT rates in the first place, or whether its treated much more gently, as a non-residential or mixed-property acquisition, with lower rates.

Having consulted on the possibility of all sorts of interesting and exciting reforms, the Government has gone for the bluntest tool available (and this Government is no stranger to blunt tools). MDR has been abolished, and the mixed property rules are untouched. That will increase the cost of a lot of residential acquisitions and the risk for the Government is that there might be an uptick in the use and abuse of the mixed property rules, which are already the subject of various hopeless marketed avoidance schemes.

The abolition of MDR will take effect for all transactions completing after 1 June 2024 (excluding transactions where contracts were signed on or before today, 6 March 2024).

The Government has also decided that the special tax regime for Furnished Holiday Lets provides too great an incentive for investors, and have abolished it. This is expected to take effect from April 2025 and will remove much of the incentive that had been created towards short-term holiday letting. We might reasonably expect those properties to slowly be transitioned to longer-term rental housing stock, which might go some way to easing housing challenges. Anti-forestalling legislation will apply from today to prevent existing owners of furnished holiday lets from banking capital gains reliefs before the new regime properly kicks in.

It's not all bad news in the residential property sector though; the special rate of capital gains tax which applies to residential property will come down from 28% to 24% - the Government forecasts that this will actually increase revenues, by encouraging transactions which might otherwise be deferred. The Chancellor claimed this as a victory for the much-maligned Laffer Curve. However to be truly Lafferian I think it would need to lead to sustainably increased revenues, whereas the Government’s own forecasts predict that the revenue bump plummets after a couple of years. Less charitable commentators than me might think the Chancellor is playing short-term games with public finances as a fig leaf for his electioneering tax cuts. Not me though.

Anti-avoidance & Compliance (aka the Oompa Loompa Disciplinary Council)

As part of its public sector productivity drive, HMRC is getting some extra cash to help with management of taxpayer debts, which is expected to increase revenues. But the Government also has plans to tighten up offshore avoidance (through reform of the snappily named ‘Transfer of Assets Abroad’ regime) and a plan to crackdown on failures to comply with the tax rules in the umbrella company sector.

In an extension of the recent trend towards OECD cooperation on tax matters, the Government has published a consultation on its implementation of the OECD Crypto-Asset Reporting Framework (or CARF). The purpose of the CARF is to provide for a standardised automatic exchange of information in respect of crypto-asset transactions. This in turn is expected to help tax authorities around the world identify tax non-compliance in a market which in its short history has had a mixed approach to regulatory compliance.