The Autumn Statement is regarded as the second most significant economic event of the parliamentary year after the Budget. The statement provides an update on the government's plans for the economy based on the latest forecasts from the Office for Budget Responsibility, which will be published alongside the Autumn Statement. Accountant and Sage Business Expert Mark Barrett, of Cannon Moorcroft, shares his views on how it might affect small businesses.

Marks view on the autumn statement

The Autumn Statement is not meant to be a Budget, but with the current economic situation, and the return of growth to the economy, it’s more than likely that the Chancellor will take the opportunity to roll out the same messages around fostering and attracting enterprise to the UK and Britain being open for business as he has been for some time now.

We can expect quite a few tax announcements in the Autumn Statement. The income tax allowances and the rates and thresholds of national insurance and tax credits for 2014/15 are also likely to be published. But there is still little room for manoeuvre, as in previous Budgets and Autumn Statements, if he gives with one hand, he’ll take away with another.

Leaks are giving a good indication of what the chancellor will say when he stands up in the Commons, with George Osborne himself started a string of ‘leaks’, looks like he is taking a page out of his friend Mark Carney’s book on “forward guidance”.

Firstly with the duration of his austerity measures, these are expected to be in place for the remainder of this parliament and beyond as government borrowing continues to grow.

Then popular measures are being floated to take the pressure off the cuts for the poor with a proposal for £145m to be spent on measures to ‘blitz’ the rich and large companies that are dodging taxes, but not prepared to go as far as introducing a property tax for the super rich living in the UK with no UK earnings to tax.

George Osborne provided some insight as to the content of the Autumn Statement 2013 in a statement at the IMF annual meeting in Washington on 11 October 2013. He has effectively “ruled out the possibility that Britain’s improving economy will lead to immediate tax cuts or spending increases” being announced in the Autumn Statement 2013.

George Osborne said: “I will provide a fiscal forecast on 5th December. I would just remind everyone that I still sit down at the table at the G20 with one of the highest budget deficits. Britain still continues to have some very serious public finance challenges that need to be addressed. Although we've brought down the deficit by a third, it is still too high. And as we demonstrated with the proceeds of the recent disposal of the Lloyds shares, where we've got the resource available we've got to make sure that we are doing what we can to reduce our deficits and debts.”

This could be interpreted as meaning that tax cuts are likely to have been deferred until closer to 2015.

However, it is expected that the Autumn Statement 2013 could also include some measures designed to help position the Conservative party for the 2015 general election. With the UK deficit expected to be more than £100bn, George Osborne's speech will concentrate on how to plug the hole, tweaking the balance of cuts to tax rises. The chancellor is said to be aiming for 80% cuts to 20% tax rises. This 80:20 ratio will mean that the fiscal adjustment will mainly be shouldered by people with lower incomes, especially those who are beneficiaries of the welfare system and more likely to use public services.

There have also been some interesting messages about government welfare spending.  A government minister interviewed on Radio 4 announced that those on benefits would be among the few that would not have less to live on, as benefit spending has actually gone up under the coalition. Although the chancellor has told us that there will be four more years of cuts for welfare spending.

Welfare Cuts

There will be no let-up in the coalition's spending cuts, George Osborne has said, to do so would mean "complete catastrophe for Britain". The government has already stated that it must cut another £10bn from the welfare bill by 2016.

Breaking the link between benefits and inflation next April may contribute to some of this. Last year, for example, benefits rose by 5.2%, while wages increased by just 2.5%. The savings from this move are potentially substantial. If benefits had been increased by just 2.5% last year, the benefits bill would be £5bn lower.

Although a compromise with the Lib Dems on the plans to freeze welfare benefits will result in a below-inflation rate rise of around 1%.

Corporation Tax

He’s likely to continue with reforms to corporate tax. In the past, he’s announced a reduction in the rate of corporation tax. Now he may look at expanding the scope of corporate tax reliefs.

Personal Tax

We've heard about his measure about owner employees delivering tax advantage shares in return for giving up employment rights. He may know announce some more measures; growth related pay for example, delivering tax-free pay linked to growth in your company.

Anti-avoidance measures

We’ll be hearing more about some of the anti-avoidance measures that he’s previously announced and have been out for consultation; such as the limitation of income tax relief, the taxation of high value residential property and the general anti-abuse rule, which we expect to see further details in the publication of the Finance Bill on 11 December.

Over the next two years, HMRC will see its funding rise by £154m with that sum going towards targeting tax avoidance, as part of a scheme to raise £10bn. One thing that could be targeted is the loopholes which allow multinationals selling digital goods to avoid UK VAT.  It is estimated that the UK is losing over €2bn (£1.6bn) a year in VAT on digital services bought by British consumers from suppliers such as Amazon and Apple.

Under the EU's VAT rules, digital supplies to non-business customers, such as ebooks, music downloads and online apps, are classified as services rather than products. VAT on electronic services is imposed at the rate applying to the country in which a company is headquartered rather than the rate applied by the country in which it is bought. Amazon, for example, is based in Luxembourg and therefore charges its customers 3% VAT for ebooks, compared with 20% in the UK.

Contractors

With George Osborne reportedly saying there was ‘no pot of money for tax sweeteners’ in his upcoming statement, both ISAs and Entrepreneurs’ Relief are at risk of significant cutbacks.

This would be an unwelcome development for contractor companies as these have been two vehicles commonly used to legally reduce their tax bills.

Small and medium-sized businesses have been identified as the biggest contributor to the UK’s ‘tax gap’, with SMEs reportedly being responsible for half of the shortfall between expected and actually collected tax revenue by HMRC, compared with large businesses, which account for a quarter.

In 2011-2012, HMRC think that business and individuals paid £35bn less in tax than expected, compared with £34bn in the 2010-2011, with more than £9bn lost over the 12-month period to evasion and avoidance.

Individual Savings Accounts (ISAs) were reported to have been privately consulted on in Whitehall, with a view to introducing a cap on how much funds can be held in these tax-free investments, with talk of a proposed cap of £10,000.

Entrepreneurs’ Relief 

Entrepreneurs' relief may be targeted for cuts based on how much capital gains tax has been missed out on due to this relief. As the economy recovers, the amount that the government could receive in CGT will rise and it may be seen as an easy target that the general public isn't interested in as it doesn't affect them directly, therefore the government can expect little backlash, save from bodies like the IOD and FSB etc.

Pensions

We can expect a raid on pension tax relief for the wealthy. The plan is to further reduce the tax-exempt amount people can pay into their pension pots by up to a third in the hope of raising nearly £2bn. The government is said to be examining proposals to reduce the amount from £50,000 to either £40,000 or £30,000. The chancellor has already cut the annual allowance on pension tax relief from £255,000 to £50,000. Another option is to cut the level of pension tax relief that high earners can claim, which stands at 50% for those earning more than £150,000 a year.

Successive governments raiding the nation’s pension pots have already shaken the public's faith in saving for retirement. A further raid on the remaining reliefs will simply underline the message to pension savers that it isn'’t worth saving.

Mansion Tax

The chancellor has ruled out Lib Dem calls for a "mansion tax" on homes worth more than £2m, but there are rumblings of a "son of mansion tax". Apparently the chancellor has been consulting on a new holding charge on properties valued at over £2m owned by non-doms. There’s also the possibility of a further increase for stamp duty on properties over £2m, in addition to the recently introduced 7% rate.

Fuel Duty

Historically the Chancellors favourite area for tinkering, I’d therefore expect a delay or cancelling of the 3p rise in fuel duty scheduled for January. The IPPR estimates this measure will cost the Treasury £550m.

Energy

George Osborne, well known for his dash for gas views, is expected to approve up to 30 new gas-fired power stations to produce 26 gigawatts, replacing old coal, nuclear and gas plants. With the amount of public focus on green levies and household bills, it looks like the coalition will get an agreement in time to take at least some of the green levies off energy bills.

Growth

The chancellor has already announced £5bn-worth of investment in schools, transport and science over the next three years, funded by a squeeze on Whitehall departments.

We can also expect him to reveal infrastructure projects benefiting from the £40bn of guarantees the government has offered to underwrite returns on privately funded infrastructure.
The chancellor may also signal the adoption of some elements of Lord Heseltine's review of growth in the regions. The central recommendation of the report was the devolution of up to £58bn of Whitehall spending to local enterprise partnerships.

We can expect some revisions to growth. The current forecasts are for 0.6% GDP growth in 2013, 1.8% in 2014, 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017. I believe that 2013, 2014 and 2015 will see moves upward, given the growth already experienced for the three quarters of 2013, 0.6% looks low therefore we should expect something around 1.6%.

Unemployment will be revised down, inflation down and wage growth up a bit reflecting lower unemployment. The OBR may expected real wage growth to turn positive in the first half of 2014.

Growth will likely be driven by consumption in 2013 and early 2014 before business investment is expected to pick up in late 2014. Therefore the outlook should show sustained and increasing growth and a marginally better picture of living standards with weak real wage growth in 2014

PFI

The government has trailed plans to revamp the private finance initiative. PFI was a tool Labour used to finance the expensive public sector investments by asking the private sector to bear the costs, in return for regular payments from the government.

George Osborne's revamped Private Finance 2 (PF2) will include a greater role for the public sector in every project, with the taxpayer having a seat on the board of every project company and a share of any financial returns.

The deficit

Stronger growth will mean a lower deficit. The public finances are beginning to improve as output growths. The headline deficit numbers for 2013/14, 2014/15 and 2015/16 will be revised down.

The current estimates for those three financial years are public borrowing of £120bn, £108bn and £96bn. Faster growth could reduce this borrowing by around £15bn a year relative to these forecasts.

The structural deficit

Due to the central role of the structural deficit in the government’s fiscal rules, what happens to the structural deficit is of huge importance.

It is suspected that the OBR will react to stronger growth by revising up its estimate of the output gap, therefore down its estimate of the structural deficit.

If estimates were revised up by 2%, the £33bn hole in the government’s finances would almost disappear. I don’t expect such a substantial revision at the Autumn Statement. The OBR will want to see a lot more evidence of productivity growth before considering such large revisions, but it’s fair that the process may begin this December with the first of many downward revisions to the size of the structural deficit.

We can expect further downward moves in next 2014’s Budget and Autumn Statement.

We may all be surprised by how quickly the structural deficit which has dominated much of the politics of the past few years turns out to not be quite such a big problem as we all feared.

 Mark is an accountant at Cannon Moorcroft, with over 15 year’s management experience working with small businesses. Cannon Moorcroft are experts in providing individuals and businesses with modern, flexible and forward thinking business advice and accounting services. Their blog at www.cannonmoorcroft.com offers a wide range of business advice and technology news for SME’s. Mark also co-founded Internet Accountants Ltd with the directors of Cannon Moorcroft, using SageOne cloud accounting software to provide online accountancy and taxation services to small businesses nationwide