UK Autumn Statement 2016: A Summary for US Companies Operating Abroad
By Tom Lickess, Director, International Tax
Everyone knew Brexit would have a strong impact on the British economy, but until now, no one has plotted exactly how things would shake out. With the UK government’s release of the Autumn Statement 2016 on November 23, it has produced a new economic forecast that takes Brexit — and many other factors — into account.
Though there will be few changes for multinationals operating in the country, the Statement points out some important macroeconomic trends, and anyone who does business in the UK should take heed.
The latest Autumn Statement said that Brexit will lead to “lower trade flows, lower investment and lower net inward migration." Over the next two years, growth will slow and inflation will rise. After a further two years, growth is expected to return, with half a million new jobs to be created by 2021. The government cut its forecast for growth in 2018 from 2.2% to 1.4%. In subsequent years, it projects growth to be around 2%.
The UK Treasury has given up on its goal of balancing the budget by 2020, and will instead borrow an additional £122 billion (US$151.11 billion) over the next five years. Personal income taxes are forecast to rise and government spending to increase.
Good News: Corporate Tax Rate Reductions
In a bright spot for businesses, the Chancellor confirmed that the UK will honor its rolling schedule of corporate tax cuts. The corporate tax rate was lowered from 28% to 20% in 2010, and will be cut again to 17% by 2020. That will make it the lowest rate among the G20 nations. The rate reductions are expected to benefit over a million businesses.
Other Effects on Business
The UK is clearly “open for business” and wants to continue to attract foreign companies with its low tax rates, but it also wants to make sure they earn their keep once they’ve arrived. Businesses will face more restrictions on tax relief from corporate interest expenses, and they will no longer be able to avoid tax by borrowing “excessively” in the UK to fund ventures overseas. In years when they make sizeable profits, they will be paying sizeable taxes on them.
For those in the insurance business, a tax on insurers (the Insurance Premium Tax) will increase from 10% to 12% starting in June, 2017.
Changes Afoot for the Autumn Statement
The Autumn Statement is one of the two most important economic statements the UK produces. The other is the Spring Statement, which is released along with the annual budget. Traditionally, tax changes were reserved for the budget, but in recent years, lines have been blurred, with new tax plans often announced in the Autumn Statement.
In an effort to end the muddle, the UK — the only advanced economy that makes tax changes twice a year — has decided to switch from a semi-annual to an annual schedule. Spring 2017 will be the last spring budget, and future budgets will be set forth in autumn. This may be the last Autumn Statement.
The change will allow Parliament a greater opportunity to analyze and approve proposed tax changes before the start of the new tax year in the spring. It will also make life easier for businesses, which will no longer be negotiating potential tax changes every six months.
More Spending, Higher Wages
A major thrust of the new plan is increasing investment spending in an attempt to boost UK productivity, which lags behind that of other advanced economies such as the US and Germany. The government plans to spend money to speed the development of innovative small businesses. Export finance capacity will be doubled.
Over five years, the government will spend a total of £23 billion on innovation and infrastructure, improving local transportation networks and reducing traffic “pinch points.” Over £1 billion will go towards digital infrastructure, including fiber optics.
Employers of locals, take note: The country will raise the national minimum wage and crack down on businesses that don’t pay it. In addition, it has introduced a new penalty for those who help someone else avoid taxes.
Doom-and-Gloom Commentary Balanced by McDonald’s Announcement
Not everyone agrees with the government’s new projections. Suren Thiru, head of economics at the British Chambers of Commerce, said the forecast is overly optimistic in the near-term, when higher inflation and Brexit jitters are likely to stifle business growth.
Paul Johnson, the director of the Institute of Fiscal Studies, warned of a "dreadful" period ahead, in which real wages will not grow for a decade. “We have certainly not seen a period remotely like it in the last 70 years," he said.
Amid such bleak predictions the UK last week received a major vote of confidence from at least one major multinational: McDonald’s. As Bloomberg.com reports, the company “shrugged off Brexit by announcing plans to switch its non-US tax base to the UK, ditching tiny Luxembourg where its fiscal arrangements are under attack from European Union regulators.” This kind of activity goes some ways towards justifying “leavers” and, perhaps more importantly, the UK’s decision to forge ahead with planned corporate tax cuts.
In an age when multinationals are increasingly moving to simplify their corporate tax structures, the attractiveness of operating a more vanilla European HQ tax structure out of the UK — with its well-educated workforce, advanced economy and infrastructure and tax benefits — cannot be overlooked.
In the end, it must be acknowledged that sweeping and unexpected changes like Brexit are bound to have psychological as well economic impact for people living in the UK. But Britain has survived Viking invasions, plagues, financial crashes and two world wars. It will surely find its footing in the new post-Brexit world.