On Budget day, 30 October, The Scotsman gathered a range of experts to dissect the contents of the lengthy statement from Chancellor Rachel Reeves, covering everything from VAT on private school fees to Inheritance Tax (IHT) changes, and more.
Some key points from their discussion, and the impact of the Budget on Scotland, have been captured for the latest Scotsman Money Budget-special podcast.
Taking part in the roundtable discussion, co-chaired by The Scotsman’s Rosemary Gallagher and Josh King, were Bruce Hendry, executive director and head of Edinburgh office at Calton; Euan Fernie, partner at MHA accountancy group; Tom Gillingham, partner at Charlotte Street Partners; and Christine Yuill, partner and head of tax at Burness Paull.
Some key points from their discussion, and the impact of the Budget on Scotland, have been captured for the latest Scotsman Money Budget-special podcast.
Taking part in the roundtable discussion, co-chaired by The Scotsman’s Rosemary Gallagher and Josh King, were Bruce Hendry, executive director and head of Edinburgh office at Calton; Euan Fernie, partner at MHA accountancy group; Tom Gillingham, partner at Charlotte Street Partners; and Christine Yuill, partner and head of tax at Burness Paull.
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NewsTranscript
00:00Hello, I'm Rosemary Gallagher, and welcome to our latest Scots and Money podcast, focused
00:09on the UK budget. The first in current Labour government, and the first delivered by a female
00:13Chancellor. We brought together a panel of experts to watch the budget with me and Scotsman's
00:18Josh King. During a roundtable discussion where Bruce Hendry, Executive Director and
00:23Head of Edinburgh Office at Calton, Euan Ferney, Partner at MHA Accountancy Group, Tom Gilliam,
00:29Partner at Shallow Street Partners, and Christine Newell, Partner and Head of Tax at Burness
00:34Paul. And thanks to Calton for hosting us at the Edinburgh office.
00:37It was a lot done, picking a lengthy budget, so turning first to inheritance tax, including
00:42changes to agricultural relief. How do you think the changes will impact agriculture
00:47in Scotland? Can we start with you please, Euan?
00:50I think it is disappointing that they've taken the relief down, what could be potentially
00:54100% relief down to 50% relief. That puts a huge burden on families who don't really
01:02see the farm as being an asset that has a particular value, or just as we were saying
01:07earlier, the custodian of the farm for the next generation. What that does is then brings
01:12in a liability at a time when there's not necessarily cash to pay it. So a dry inheritance
01:18tax charge when somebody dies. So what it will mean is that people have got to plan
01:22ahead now, they've got to look at other alternatives. We haven't seen the detail on whether a lifetime
01:28transfer will be chargeable to inheritance tax, it doesn't look as if it will be. So
01:33rather than retaining things until they die, it may well be that assets have to be given
01:37away at an earlier stage. There are other implications other than tax around that, but
01:43that will be something that has to be looked at. It might change how people look at funding
01:49that, it might need to be saving into other mechanisms to do that. An insurance policy
01:54might need to be put in place, which wasn't really required when there was 100% relief,
01:59but if there's going to be a tax liability, you're trying to spread the pain over a number
02:03of years by putting the money away. And you're also, with an insurance policy, you're also
02:08insuring against the calamity of an early death, which isn't part of the planning normally.
02:14And still on inheritance tax, what do you think the impact of including pensions in
02:17IHT will be? Bruce, what are your views on that, please?
02:21I think it will, with regards to pensions thrown into IHT, that's going to be the,
02:27probably the biggest change. A lot of plans have been centred around spending other assets
02:32to maintain pension assets passing down intergenerational. So they, also the impact of the lifetime allowance
02:41going means people have been funding into pensions, so some of them have got substantial
02:44funds, which will be liable. It's going to be interesting to see the detail, how it
02:50works, because if it's liable for inheritance tax, will it in turn also follow through,
02:54it's going to be liable for income tax at marital rate after ransomware, because you
02:58could considerably end up paying 8% tax on your pension if you want the inheritance tax
03:03and income tax. So again, the actual mechanics of that, it has to come from somewhere. I
03:11think the problem is, though, that just under lifetime allowance changes in legislation,
03:15now there's further burdens on calculation and legislation to say this will work. I'm
03:21trying to explain it to Client Award 3, but to take Mu's point there about the insurance
03:28element, that potentially could be a route people go down. They think, well if my fund
03:32is going to be taxed at inheritance tax, I'll take some income now. And sure, again, situate
03:37can pass it down as well.
03:40Is the inclusion of pensions in IHT an unwelcome message, when trying to encourage people to
03:44save for the long term?
03:46It is unwelcome, but you can see where they're coming from, because the argument is there
03:50are substantial tax reliefs to go into pensions, which are there to sustain you throughout
03:55your life. It's not meant to be a later generation, all this handwriting. So it was a nice, helpful
04:03break for people, but it's almost like an easy target to go after, because you've had
04:08the income. They haven't changed income tax contributions, which was a big win, I think,
04:14for it. But the quid pro quo for that is they're going to get taxing elsewhere.
04:20And no change to the tax-free cash, as funds were aware of, certainly?
04:25No.
04:26At least that's something.
04:27But that was a big concern before, from clients worried about that. And that was going to
04:33be difficult, because potentially people have taken the tax-free cash out, and now you put
04:40themselves in a disadvantageous position by doing that, because of all the stipulations
04:44they're bringing in.
04:45Turning now to VAT, it was confirmed that independent school fees will be subject to
04:50that at 20%. How do you feel this will impact schools and individuals?
04:54I think it is. It hugely impacts Edinburgh schools, hugely. I mean, you look at the percentage
05:01of the school population, it's about 25, 20 or 6% enrols to a private school year, so
05:07it's 6% across the rest of the country. So it does have a big impact. We're already seeing,
05:12there's a couple of schools that went to the wall, one through in Glasgow, one up in Perthshire.
05:17We've seen, just this week, there was an announcement about Stewardswell and Mary Erskine merging.
05:24So they're having to look at ways to try and reduce costs, cut overheads. I think they
05:29will do it. We might see a few more mergers coming, with some of the schools, some of
05:34the smaller schools, where you need a critical mass of numbers just to keep the thing going.
05:40But yeah, I think it's here to stay, unfortunately. It's one of those things that the parents
05:49are going to have to pick up some of the cost and the schools will try and do it themselves
05:52as well.
05:53One of the things that might change is about all the extras that these schools actually
05:58provide to people because of their business rates and because of all the other things
06:01that they have. They might not provide so many of the bursaries and other things that
06:07do happen and might use that more entirely to their own pupils, rather than taking in
06:12external pupils and funding them through school. So it might just change the way some of them
06:18have to think.
06:19There's also a slight political challenge with raising that tax, because obviously that's
06:23raised to the UK level, then redistributed back to Scotland through Barnett consequentials.
06:27There's no guarantee that the SNP will use the funding in the same way the UK government
06:32intends. So I think there's a few measures in this budget that have a disproportional
06:36impact on Scotland. I mean, look at the whisky industry, rates are up. The energy profits
06:42levy is causing consternation in the gas industry. So at Charlotte Street Partners, our clients
06:47always want to know what the political impacts are, but I think that goes to the personal
06:51impacts because we're going to have a Scottish budget in December, where there'll be a second
06:56round of all of this, where people will be thinking about the indications there. So I'm
07:00kind of looking forward to that as well.
07:02It's an interesting moment, talking about energy and particularly Aberdeen, obviously
07:07GB Energy was what trailed, we already knew it was going to be in Aberdeen. They're treating
07:11that as a big success story for the North Sea, oil and gas for Aberdeen. Do you think
07:16your clients are going to look at this budget and feel good about the direction the industry
07:21should go?
07:22It's a big question. I mean, I think GB Energy is welcomed in theory, but there's still not
07:28enough detail on, you know, in practice, how's it going to interact with the sector? How's
07:32it going to interact with private investment, which actually goes into this wider piece
07:35about positioning the UK as an investment destination. Interestingly, I didn't hear anything
07:41about the ACORN project, carbon capture and storage, beat our head. And that'll be a key
07:46attack line for the S&P, I think, because they were talking about cost or a downside.
07:50So they've been working quite well together, these two governments, but I just don't, that
07:55I can't ask.
07:58Something that I was speaking to an economist from NatWest the other day, and he was saying
08:02that taxes on work, no taxes on increase for working people was obviously something that
08:07they kind of set themselves up quite a challenge. And then they were kind of operating on some
08:11of the kind of smaller or more niche taxes. And the big challenge there is that you have
08:16to make a much more dramatic change to raise the kind of revenue you could raise with small
08:20changes or big taxes. And that can sometimes have unintended consequences, because it's
08:25much harder to model people's behaviour on some of the smaller taxes that affect smaller
08:28groups of people. It's obviously early out of the budget. Do you, is there anything in
08:32there that you suspect might be an unintended consequence, that you might see behavioural
08:36change that hasn't been planned for or modelled?
08:40So the one thing I think we will see is the taxes, so income tax, you know, if you earn
08:45you have to pay it, there's no choice. Capital gains tax, there's always a choice, do you
08:49sell the asset, do you not sell the asset? It'll be interesting to see when that change
08:53is coming in. Will we see a huge influx, which it looks as if we will, of people turning
08:59over assets before the 5th of April, where they can. And you'll see a big tax take coming
09:05in January 26, which is when you pay your capital gains tax for the current tax year.
09:12But it might then be a much lower tax take as people sit tight and wait to see what's
09:15going to happen going forward. Or is it not big enough to make that decision? Maybe just
09:20everybody sits tight and says, if we need the money, we'll pay the tax. It's much more
09:27of a choice than your income tax. As we all know, as you earn money, you pay tax on it.
09:33Income tax, national insurance, you can't really avoid it. There are very few national
09:37insurance avoidance schemes nowadays, because there used to be lots of them, but there are
09:40not many nowadays at all, because it's become so difficult to do that. I think capital gains
09:48tax is the one that will be interesting to see what does happen with that. If it is the
09:535th of April, I think we'll see a lot of people looking at that position. Of course, the good
09:58sign is your capital gains tax losses are worth more money now, because the rates of
10:01tax have gone up, so they're a bit more valuable. Anybody that's got a loan should keep a hold
10:06of them until the new rules come in, if they can. The business asset disposal one, it was
10:14trailed a wee bit. There might have been a change, but it was just said it was going
10:18to come out. I think it's useful. I'm not sure why they've stepped it in. All that does
10:23is forces people into trying to get disposals done too early, I think.
10:28The lower rate of capital gains tax has gone up by 8% rather than 4%, which doesn't seem
10:32very Labour government. You would expect them to go down that route that early?
10:39I guess that over half of the money is going to be used by Employers' Asset Insurance,
10:45so the other ones are, as you say, they're going to be on the peripheries at 9, relatively.
10:50I think, as you said earlier, they're not anywhere you can go from Employers' Asset
10:57Insurance. You can't really put a breaking strategy into it, really.
11:02The one that she hit very early on was umbrella companies and things like that. That's been
11:06a sort of festering sore for the last, I don't know how many years, five years or whatever.
11:11The legislation was supposed to have been brought in to stop that happening. This doesn't
11:15seem to happen. They're needing to do something just to get on top of that, because that's
11:20just naturally insurance avoidance.
11:22You're listening to the Latest Scotsman Money podcast, focusing on the UK budget. If you'd
11:26like to know more about podcasts from the Scotsman, please email podcasts at scotsman.com.
11:31Now back to conversation around the budget.
11:34Christine, what is your view on some of the announcements made around HMRC, including
11:39investment in systems and a crackdown on umbrella companies?
11:42I think the news about systems are meant to get better as a result of the new law coming
11:46in. It will be interesting to see when that comes into effect and how it actually works,
11:51because I know we've got a lot of frustration from our clients trying to use the HMRC systems.
11:56Likewise, having more people on the ground is welcome as well. It's very difficult to
12:02speak to another HMRC person in the wards. I guess from the perspective of having more
12:10people to take on tax evasion and looking at umbrella companies, I think, again, would
12:15be welcoming by our clients. The more money we can raise from that means, hopefully, there's
12:22not so much money to be raised from doing business. We tend to go forward and make
12:28profits. I think that's all very welcome, but there might be a bit of shenanigans when
12:33it takes effect and what the benefits to taxpayers will be.
12:39I think we've all grown in the background when we hear that they're going to improve
12:42what HMRC does and change the systems. The systems get worse and worse and worse. We
12:50saw the great example of that was when they closed the helpline for three months to try
12:54and get up to date. You think, but it's the helpline. That was the whole point. They don't
12:59get there early, unfortunately, where the helpline's closed because they're too busy.
13:05I think for most taxpayers, one of the big frustrations is just being able to speak to
13:11somebody and then once you do get to speak to somebody, speak to somebody that actually
13:14understands your position. It's so frustrating.
13:17You're someone who's always a people being on the helpline waiting for hours and hours.
13:25It's great having everything online, but there's a need. You can't put something into a box.
13:30You feel that they can't do it. What do you do when you're at the helpline and there's
13:33no one there? Hopefully it will improve, but as you say.
13:37When I go into our tax department, it's always on the speakerphone. I can almost hum you
13:42the tune because it's so ingrained in our heads as we walk past it, because all day
13:47somebody is trying to get through to us. That's where the agent helpline, which is supposedly
13:50the hotline, and it takes us hours to get through to speak to anybody.
13:55On that, the tax system, there's always a balance between fiscal responsibility and
14:00what's politically expedient. Politicians always like the tax system to appear transparent
14:04and easy to understand and easy to communicate, but what the nuance of being able to raise
14:08money, do you think that the changes have made the tax system more transparent? Do you
14:13think clients and the public will understand it, or is it complicated?
14:16I think it's just so complicated that nobody understands it. You need a degree just to
14:22start looking at it sometimes. Most taxpayers will understand whatever packs them, and they'll
14:33have done some research to make sure that they understand what their position is like.
14:37When you get into some of the more esoteric stuff, I think they will struggle to understand
14:43what's going on. Certainly, some of the numbers that we're getting talked about today, when
14:47numbers and a speech like that get rattled off, everybody starts to zone out. Once you
14:51get beyond three or four years' worth of forecasts of this, that, and the next thing, everybody's
14:55kind of switching off going, what's next? I think from a political point of view, some
14:59of the ones that came up today, so going back to inheritance tax, the first million is okay,
15:04but anything above that is going to get taxed. That's hitting a demographic, I think you said
15:08something like 75% of taxpayers wouldn't pay any more tax because of that. That's a political
15:13decision. The ones that potentially, it's not that they need it more, the ones that
15:19will have a fundamental impact on decision-making are going to be the big ones. I think that one
15:26of my concerns, we've talked about this already, one of my concerns was the impact it has on
15:30volumes, so on the agricultural sector, land volumes. If you're not bothered about the
15:36land volume, that could be a good thing if it comes down, because it means you pay less
15:39tax in the future if there is an issue, but it means if you're going to be selling, it
15:43could have an impact. When you look at down south, some of the big, you know, the sort
15:46of Dyson of this world, you know, the people who invest huge amounts of money in agricultural
15:49and property, it could have got a big impact for people like that. There's quite a few
15:53people who invest in Scotland because the land prices compared to either Northern Ireland
15:58or down in England are, were cheaper, so it was a good place to come if you wanted
16:06to invest your money and get 100% relief. You know, is 50% relief going to be enough?
16:11Probably not, and they'll probably go and try and do something else with it, and there'll
16:16be other things that they can invest in. We've also got to remember there's a product market
16:19for BPR schemes, and all of these schemes are now going to be 50% less effective than
16:26they were, so that's investing. You can start with AIM stocks. That was specifically mentioned,
16:31but there's a whole raft of other products that are available. EIS at the moment, you
16:37know, gets 100% relief. It looks as if that's going to be 50% relief, but that's not going
16:41to be quite as effective, and that's about investing in companies that are investing
16:47in early stage technology, whatever it is. You know, there's a specific demographic for
16:51EIS of growth companies, so there's less incentive now, particularly to look at those
16:57companies for your IXT protection. Okay, there'll be income tax relief, capital gains tax protection,
17:02but, you know, it changes the way some investors will invest.
17:07I think it was Linda Spilett, she didn't mention it being simple, and that was one of the aims,
17:12and, you know, I guess the IXT impingement, I think, will get more complicated, I think,
17:17for sure, and you also mentioned, you know, obviously non-DOM and it being a new residence
17:22tax, that they can invest in simple new residence, that they have DOM and GED a lot, because it's
17:27already so complicated, but it just means we're flipping from DOM as out of residence you have
17:31already, or if it is a truly new scheme, I think that is, that's going to make life more complicated
17:36as well. You know, the VAT and school fees we mentioned earlier, that's so complicated, because
17:41we talked about the fact that VAT on the school fees, that's easy enough to understand, but what
17:46does it mean for, you know, the VAT that's been incurred in capital expenditure in the last 10
17:50years? There might be a recoverability in that, there might not be. I think there was an article
17:55saying that, you know, Eaton had spent something like 42 and a half million on capital expenditure
18:00recently, so it might actually be in a situation where it has a lot of VAT to recover, which
18:04obviously doesn't do the job that the government is wanting, and, you know, schools which don't
18:09have that level of expenditure don't have that recoverability, so again, it could end up with
18:13skewed results and, you know, with a lesser impact on the richer schools and more of an
18:19impact on the ones that are not, that don't have those kind of high level or high profile
18:24investors, so I think there are certainly some areas which will be more, you know, more complicated,
18:30I guess the big ones, where it's just an increase in rates, it doesn't make it any more complicated.
18:34Yeah, and I think on the political complexity of it, you know, that budget required you to
18:40subscribe to Rachel Reeve's view of the world, you know, she set out the OBR being misled,
18:45her words, by the previous government, so everything that followed that had to require
18:49that you accept her assessment of where things were, which is a big, is a big leap, you know,
18:54so politically setting her stall out, but also trying to deal with the fiscal reality that she's
18:59painted, so I think you could almost see the point in the budget where she remembered to switch into
19:03Good News Bot, she sort of perked up a bit and started talking about investment, but I think
19:08you have to bring investors with you, you have to bring private individuals with you, you have to
19:13get everyone to believe this, so I think the next days and maybe even weeks will prove whether she's
19:17done that, and it's a high-stakes act, you know, I think the markets are watching carefully, I think
19:22they started off down pretty substantially this morning, so we'll see where we get to.
19:27It's interesting that the, when you're talking about going to a ban on this budget, fairly quickly,
19:32but the impact on growth wasn't terribly significant, you know, you would have thought
19:37to switch from being such a deficit to a £10 billion surplus over a period of time would have
19:42had a far bigger impact on growth, so it does beg the question whether you actually believe that all
19:48the measures have been taken are going to have an impact on the UK. I think that macroeconomic
19:53focus is interesting, a lot of what we've talked about so far has been direct impact, immediate
19:57impact on individuals or businesses, obviously the overall picture of the economy has a similar
20:03impact on businesses, do you think that this will point to growth or confidence in a way that
20:11previous or recent fiscal events have not? Well, I mean, I think there's been a lot, there's been
20:19a long time between, it feels like there's been a long time between the election and this budget,
20:22and I think that uncertainty in itself has been a problem, and people will digest today and then
20:28they'll react, and I think, you know, having concrete steps to react to helps, I mean, whether
20:34all of them are good or bad will come out in the wash, but I think having the certainty of having
20:38had the budget announcement will help. I also think the amount of borrowing that, I'm not sure
20:45I caught the actual number that you talked about in terms of borrowing, but that's the one that
20:49gets the confidence to the markets. We saw that with Listrust, sorry to mention Listrust again,
20:54the Listrust situation where the markets just looked at that and said, whoa, what's going on here?
20:59I don't think you'll get that from today, actually, I think you'll get a bit of confidence that it's
21:03been, and it was well presented, well thought through, well structured, I think she did it in
21:09the right way this time, she took all the tax changes first, because usually what happens is
21:14you've got all the public sector, what we would call the tax world, the boring bit, at the front
21:18and everybody's sort of falling asleep, and then suddenly she says tax, and we all thought, she did
21:22all that first and took it round the other way, so she said this is what's going to come forward,
21:25here's where I'm going to invest it. I wanted to talk about something that didn't change,
21:29corporation tax, perhaps this is the only question for you, she pretty clearly names
21:32caps to the length of the parliament, I'll just check it back, she said alongside the changes
21:36I'm making today in publishing a corporate tax roadmap, it's more detailed obviously to follow,
21:40but that's a bit of stability and not changed, what's your kind of initial reaction to that?
21:46I think that's useful, I mean I don't think there'd been much chat before in the budget that
21:50it was going to change, so I think again from a forecasting perspective I think that's useful,
21:55I guess it's important to say that, you know, cast of gains tax for individuals
22:00has increased, companies pay a gain, a tax on their gains at the corporation tax relief, so
22:05that won't change for them, so I think that would be welcome in the corporate world for sure,
22:10I'm keeping that cap. It's not that long ago that went from 19 to 25, so we've already seen
22:16that roughly, we've seen a six percent rise already, so I think businesses are saying yeah
22:21that's fine, and if Labour want to be the party of business and growth and everything else,
22:25the people that are going to do that are the big companies that are going to be hopefully investing
22:29in the UK, and to do that they need the funds, and if you take it all by way of tax then they
22:34won't have the funds to spend in the future. I hope you enjoyed listening to our slots and
22:38money podcast focusing on the recent UK budget, thanks to participants from Carlton, MHE,
22:44Charlotte Street Partners and Burnis Paul for taking part in a roundtable discussion with
22:48myself, Rosemary Gallagher and Josh King.