The Autumn Statement will be held on Wednesday 03 December 2014 and will provide updates on growth and borrowing forecasts, and outline planned tax and spending measures.

What will George Osborne get out of his red box when he delivers his fourth Autumn Statement next week? Mark Barrett, Sage Business Expert and Practice Manager at accountants Cannon Moorcroft, takes a look at what the Chancellor may be announcing.

The announcement will come just six months before the general election in May 2015, so expect plenty of political sparing from all sides.

I expect that most of the announcements will concentrate on the outcomes from proposals launched at earlier Budgets, together with some technical changes. There will also be the first consultation on how the UK should implement the initial proposals from the OECD on international corporate tax – the Base Erosion and Profit Shifting project.

The statement will include modest upgrades to the Office of Budget Responsibilities forecasts for GDP growth in 2014 and 2015. While the pace of year on year growth is set to slow, we see the OBR forecasting a respectable rate of about 2.5% for 2015, slightly higher than its 2.3% forecast made in March. Sharp declines in inflation over the summer suggest that the OBR may well downgrade its forecast for inflation in 2015 below the Bank of England’s 2.0% target. The OBR is also likely to forecast that 2015 will see the first significant growth in real earnings in more than seven years.

What can we expect the Chancellor to announce?

Here are a few of the areas I think are most likely to come in for some attention this time around.

• Business Rates
• Changes for SMEs
• Pensions  & Pensioner Bonds
• Scrapping of Airport Duty for under-12s
• Property Tax
• Personal Tax
• NHS
• Welfare Spending
• Tax Avoidance And Evasion

Business rates

Retail and small business groups have been reiterating their calls for business rates reform. The CBI and FSB have made business rates reform the top of their Statement wish list. Analysis by the OBR indicates the amount that British companies pay in business rates is increasing at almost the same level as council tax and fuel duty combined. The figures show that between 2008 and 2018, business rates will grow by 41% (9.4bn) to generate £32.3bn for the Treasury. By comparison, fuel duty will increase by 21%, or £5.2bn, and council tax by 26.6%, or £6.4bn.

The figures come as a growing number of retailers and businesses call on George Osborne to extend a period of relief measures he put in place in last year’s Autumn Statement. The package, worth more than £1bn, included capping the annual inflation linked increase in business rates at 2% and offering a £1,000 discount for small businesses. Based on the rate of RPI inflation recorded in September, business rates are due to rise by 2.3% next April; however, the BRC is calling for this to be capped at 2%.

Around 67,000 SMEs in England face above-inflation rises in their bills next year, as the end of transitional relief for small businesses in April 2015 has coincided with George Osborne’s decision to postpone a revaluation of the property values used to calculate the tax. The FSB has said business rates are among the biggest concerns of its members, with online competitors increasingly able to undercut those paying for physical premises.

The controversial tax, which rakes in around £25bn a year for the Treasury, has been blamed for the demise of British high streets in recent years.

Vince Cable has suggested that business rates for SMEs may soon be cut, declaring that small business owners should expect something “positive” in the Autumn Statement. The business secretary said he had hoped to offer something definite regarding business rates for SMEs this week, but is yet to finalise an agreement with George Osborne. “We haven’t quite got to the conclusions of these discussions but I think there will be something positive in the pipeline at the autumn statement,” Mr Cable said.

There has been a lot of clamour around business rates for some years now, but very little action on reform. I therefore think that there will be an extension to previous relief measures, a cut or cap on future raises, but I do not expect any fundamental reforms of the business rate system.

Changes for SMEs

The Centre for Entrepreneurs wants George Osborne to promote corporate venturing by creating incentives for large firms to draw on their combined £488bn of capital for investment in SMEs.

HMRC has been consulting on how the current venture capital reliefs can be made more accessible. We anticipate that some of the proposals may be brought into next year’s Finance Bill and this could be announced in the Autumn Statement. For example, the existing annual limit of £1m could be replaced by a lifetime limit for a business of say Euros 15m.

The government is considering a shake-up of SME accounting. Amongst the proposals is the suggestion of raising the threshold at which companies are no longer considered “small”, which could allow up to 11,000 more businesses to file abbreviated accounts cutting red tape.

The Annual Investment Allowance (AIA) for small businesses, which provides tax benefits to encourage business investment in new plant and machinery, should rise to £250,000.

In his March budget statement Osborne temporarily increased the limit from £250,000 to £500,000 from April onwards. However this will fall to £25,000 a year from the 1st of January 2016. This has been a favourite area for the Chancellor, and it may now be time for a consistent rate rather than the ever changing rates which cause uncertainty, making it difficult for businesses to make long term plans for their capital investment.

Pensions

Following on from the raft of changes announced in Budget 2014 and included in Finance Act 2014, a missing piece of the jigsaw was the treatment of the pension pot on the death of the pensioner. The pot had been taxed at 55% but the Chancellor announced at the recent Conservative Party Conference the following:

On the death of an individual aged under 75, currently in drawdown or who has not yet started to take a pension, the fund can pass to beneficiaries tax free as a lump sum.

On the death of an individual, aged over 75, regardless of whether the individual was in drawdown or not, the beneficiaries can either:

• Drawdown themselves from the fund, which will be taxed at their marginal tax rate, or
• Take it as a lump sum, which will be taxed at a flat 45% tax rate. From 2016/17, the 45% will be replaced by their marginal tax rate.

Pensioner bonds

The UK's biggest building society has warned that George Osborne’s new pensioner bonds could hurt bank deposits and affect mortgage lending as a result.

The Chancellor will unveil the final details of plans for National Savings & Investments, the state-owned savings bank, to sell market-beating bonds to over-65s.

Pensioner bonds are being introduced as a concession to older savers who have seen their returns plummet as a result of low interest rates, but Nationwide said that they are likely to take money away from the real economy.

Building societies, in particular, need to attract savers because they do not borrow on the wholesale financial markets. Nationwide yesterday said the pensioner bonds, to be introduced in the New Year, would “affect savings flows”.

Mr Osborne announced plans for the pensioner bonds at March’s Budget and said they would pay “market-leading rates”. Mr Rennison said banks and building societies would potentially improve their own savings rates in response, but that this could have a knock-on effect on lending.

Airport Duty

David Cameron is thought to be in favour of a proposal by aviation and travel groups for aviation duty on the flight tickets of under-12s to be scrapped. 33 MPs are backing an Early Day Motion for the tax to be abolished. Experts estimate the measure would cost the Treasury 1.6% of the £3bn it takes annually from APD, costing the Treasury just £48m.

Property Tax

Budget 2014 announced that the measure to extend Capital Gains Tax (CGT) to non-UK residents who dispose of UK residential property would apply from 6 April 2015.

We can expect further detail on the proposals as the detail showed that the plans would affect both UK residents as well.

The main point at issue will affect both UK and non-UK residents. Under existing legislation, where an individual disposes of a property which has been his or her main residence throughout the ownership period, Principal Private Residence (PPR) relief means any gain on disposal of the property is exempt from CGT. At present, where an individual has more than one residence, he or she can make a PPR election in order to specify which should be regarded as the main residence for tax purposes, and so benefit from PPR relief. There are proposals to abolish this election for both residents and non-residents, and instead if more than one residence is owned that the exempt residence should be the one which is factually the main residence, either based on all the facts and circumstances or by a consideration of the days spent at the respective residences, some clarifications in this area following the consultation process.

The Government intends that CGT should apply to disposals by non-UK residents of both rental properties and properties used personally as a residence. The tax will only apply to gains arising on or after 6 April 2015. It is likely that the tax will be collected by a withholding tax to be collected by the agent dealing with the disposal.

Personal Tax

We already know the personal allowance and higher rate threshold for 2015/16 as these were announced in the Budget earlier this year.

The personal allowance will rise from £10,000 to £10,500 from 2015/16 and the higher rate threshold will increase by 1% for 2015/16 from £41,865 to £42,285, giving a basic rate tax band of £31,785 in 2015/16. These changes will save basic rate taxpayers £100 in 2015/16 and higher rate taxpayers £184. Those with income of more than £120,000 will actually have a slightly higher tax liability.

David Cameron has said that tax cuts for people on the 40p higher rate will start to take effect before Britain is “back in the black”. Mr Cameron’s comments go significantly further than his speech to the Conservative Party conference, when he promised to raise the threshold from £41,865 to £50,000 by 2020.

The primary earnings threshold for national insurance for 2015/16 has not yet been announced. At present this remains some way apart from the personal allowance at £7,956, so people whose earnings are between £7,956 and £10,500 will continue to have a national insurance liability, despite paying no income tax.

It should encourage low-paid workers by raising the threshold before Employee National Insurance Contributions from £7,956 to £10,500 over five years.

David Cameron has indicated that the threshold for inheritance tax could be raised to £1m from next March; soaring house prices in some parts of the country had made the allowance £325,000, or £650,000 if passed between husband and wife inadequate. The OBR warned earlier this year that the proportion of estates attracting inheritance tax would double from one in 20 today to almost one in 10 by 2018-19.

Possible withdrawal of personal allowances for non-residents

The government initiated consultation in the summer on whether non-UK residents should no longer be eligible for a personal allowance in taxing their UK source income unless they have a strong economic connection to the UK.

Granting the personal allowance to non UK-residents is estimated to cost some £400m annually. It is thought that removing the allowance in its entirety would be contrary to European law as well as damaging to the UK’s international competitiveness

NHS

With the NHS likely to be the main battleground in next year’s general election, we can expect a pre-emptive strike from the Autumn Statement.

Nick Clegg believes next week’s autumn statement will contain a pledge to spend an extra £1.5bn on the NHS, not only to meet the demands of the winter of 2015-16, but also to signal a wider longer-term “step-change” in the funding of the National Health Service, adding it was very much on the agenda of the autumn statement.

Such extra funding, amounting broadly to an additional £8bn spending on the NHS over the five years of the next parliament, politically might undercut Labour, which is hoping to make its commitment to the health service a central feature of the election campaign. The £1.5bn extra spending for health for 2015-16 would be on top of the £700m set aside for this winter and is broadly in line with the call for an extra £8bn funding for the five years of the next parliament proposed by the NHS chief last month.

Welfare spending

The Chancellor has previously used the Autumn Statement to be tough on welfare spending, and the Conservatives have already proposed an additional £12bn of cuts to welfare if they form the next government. However, cutting welfare has not proved to be as effective for reducing the deficit as the Chancellor had hoped.

According to the Institute for Fiscal Studies, the Chancellor has only made £2.5bn worth of savings instead of the £19bn that he had hoped. This is because the costs of providing housing benefit and disability living allowance have risen and cuts to tax credits have not been met.

The government has also created a “welfare cap” which is supposed to limit the amount that can be spent on welfare, but further unexpected rises in spending could cause a breech

Therefore watch out for the Chancellor’s comments about welfare and whether he announces further cuts in order to meet his target.

Tax avoidance and evasion

The government is currently consulting on proposals to strengthen the current civil penalty regime for offshore tax evasion and extend it to IHT, as well as introducing a new criminal offence of “strict liability” for failing to declare offshore income and gains. The consultation ended on 31 October 2014. The results of the consultation are likely to be published with the Autumn Statement but the government has not indicated when the legislation would be introduced.

HMRC could raid new “super-ISAs” in order to reclaim unpaid tax. George Osborne is expected to confirm in the Autumn Statement that anyone who owes £1,000 or more in tax could find their savings seized. Under the current consultation, HMRC is looking to prioritise “recovering debt from accounts that appear to be used primarily for savings over those used for day-to-day expenses”. An HMRC spokesman confirmed that ISAs were being considered as something to target.

Speaking at the Conservatives’ annual party conference, George Osborne said that technology companies, such as Google and Microsoft, “that go to extraordinary lengths to pay little or no tax here” will be hit with new anti-avoidance rules. “If you abuse our tax system, you abuse the trust of the British people,” he said. The crackdown, dubbed the “Google tax”, comes against the backdrop of progress made by the G20 economies and Paris-based OECD to redesign international rules. An analysis by the FT of seven US technology giants found they paid just £54m in UK corporate tax. Their UK turnover was just £1.7bn in 2012, even though their overall sales to British customers totalled $15bn. The new legislation will prevent global technology firms from doing what is known as a “Double Irish”, using artificial arrangements to divert profits earned in the UK to offshore tax havens.

The UK is one of the leading countries supporting the G20’s Base Erosion and Profit Shifting project being conducted by the OECD. The OECD continues to work on the detail of proposed counter-action but both the Chancellor and the Chief Secretary announced that consultation on aspects of the changes would be introduced at the Autumn Statement. Although it is unlikely that legislation would be introduced before 2016 due to the need to coordinate the plans with other G20 and OECD countries.

There may be trouble ahead…

Despite strong growth over the past year, everyone expects the Office of Budget Responsibility (OBR) to report that the government will struggle to meet its deficit target for this year. This is because income tax revenues are likely to be lower than expected due to wage stagnation. The OBR has revised this years’ revenue forecast down to £636.5bn, or 37% of GDP. The FT notes that public finances are becoming more reliant on income tax receipts as revenues from corporate tax fall: £41.1bn is forecast for this year, about £10bn less than was expected four years ago. Corporate tax rate cuts and the increase in the income tax personal allowance are costing nearly £20bn a year while figures from HMRC show the proportion of self-employed people who earn less than the tax-free allowance has risen from 20% in 2008 to 35% now.

Over the weekend George Osborne has highlighted that he believes that there is further capacity within the government departments for further savings and that welfare spending can be cut further, so it’s certain that there will be announcements in these areas.

The chancellor also stated that there would be no unfunded “giveaways”, to the protestations of the shadow chancellor Ed Balls.

Summarising the discussion to the key parts, it looks like the Autumn Statement will announce NHS will receive an additional £2bn this year, reduce non-ring fenced government department spending, include a welfare “freeze” rather than an outright cut. The giveaways will probably be limited to increases in the personal allowances which will benefit those who are working and pensioners, but will do very little for those living on benefits. In addition I expect business rates to receive some attention, but not the reform being asked for. Changes to the Capital Gains Tax regime with regard to expensive properties rather than a “Mansion Tax”, further measures to counter “Tax Avoidance” and at least one Ace up George’s sleeve that he will deliver with a flourish to grab the headlines in the newspapers.

Prepare for the unexpected

There has been significantly less pre-briefing of this Autumn Statement than last year, probably because the Chancellor has less room for manoeuvre given the state of the public finances. This means the chances for surprising policy announcements are higher, so prepare for the unexpected.