Budget 2017 - (planned) changes, and their consequences on small businesses
On 8 March 2017, Philip Hammond, Chancellor of the Exchequer and member of the UK’s Conservative Party delivered his first budget as chancellor.
He announced large increases to the National Insurance contributions (NICs) for members of class 4, which mainly include self-employed individuals and small business owners. The NICs were planned to increase from 9% to 10% until April 2018 and a further 1% in 2019.
Additionally, tax allowances on dividends for company shareholders were planned to be reduced. As Mr. Hammond explained, the changes were meant to stop recent tendencies of people founding companies in order to avoid taxes.
What was planned to be an approach to stop these tax-problems backfired spectacularly as politicians and the public heavily criticised Hammond’s budget plans. Experts and leaders of self-employment associations claimed the planned tax hike to be a “wrong move” as it penalised the wrong people. In particular, the tax increases would disadvantage genuine hard-working self-employed people and make their already tough life even harder. They highlighted the contribution of the self-employed in the UK’s labour market in the recent years. The tax hike was expected to lead to a decline in the number of small businesses as self-employment would become even more unattractive.
Hammond was even criticised by members of his own party, as Conservatives accused him of breaking one of the parties general election manifesto commitments not to increase National Insurance, income tax or VAT.
The government reacted with a complete U-turn on their plans, as Hammond declared on 15 March that he would scrap the tax increase plans. First justifying the plans last week by claiming Britain's circumstances had "moved on" since the 2015 election as a result of the vote to leave the European Union, he admitted to have broken the voters’ trust after Prime Minister Theresa May forced him to turn the plans down. In a letter to the tory MPs, Hammond said that last week’s protests in public and politics had showed that the “spirit” of the election manifesto had been broken. In a letter to the readers of The Sun, Hammond tried to justify his U-turn stating that “Trust matters in politics. And this Conservative Government sets great store in the faith and trust of the British people.” He also claimed that he hopes this reaction showed that the Government “are listening”.
While leading to reactions of glee in faction of the self-employed, politics labelled the U-turn as “humiliating”, “embarrassing” and “hugely damaging” for the government, especially Hammond’s reliability. Some claimed the U-turn within only 7 days showed the government was in chaos and summoned Hammond to apologise to the self-employed.
The scrap of the tax hike plans leads to a £2 billion deficit in the government’s budget, which Hammond explained to try to address with new tax measures in the autumn Budget. The Prime Ministers decision to overrule Hammond’s Budget plans is thought however as an undermining of the chancellor’s political power. It also emerges an impression of instability and chaos inside the government which May is now forced to address. The press already discussed who could succeed Hammond as chancellor if the Prime Minister should decide to cut him off.
So, last week’s political events will remain the subject of discussion for a while. What was planned to be a smart move to mitigate malicious tax evasions turned out to be a huge disaster for the already struggling Conservative party. While the parties concerned with the planned tax increase can sigh with relief, the government, especially chancellor Hammond, will have to win back the public’s trust as latest polls showed Hammonds personal ratings as well as the public’s optimism in economic growth ‘freefall’.
This should act a welcome U-turn for sole traders operating in the UK. Whilst this has provided a period of calm and clarity for small businesses, the instability in the current economic climate and forthcoming Autumn Budget means the question still remains, how do the government intend to address the current deficit whilst maintaining an element of balance and future certainty for all UK businesses?