With a hung parliament after the general election, what is now likely to happen on tax and Brexit?

[NOTE: this article has subsequently been updated, taking account of post-election events]

With the results in from the 8 June poll, there is uncertainty over the political landscape. A party requires 326 seats in Parliament to have an overall majority. With results giving the Conservative Party 318 seats, they are forming an informal alliance with the Democratic Unionist Party (DUP), who have 10 seats, to form a government with effectively 328 seats - a slim majority of 2.

And with Sinn Féin's 7 MPs who never take up their seats in Parliament, and Speaker John Bercow and his three deputies (two of whom are Labour MPs) do not take part in votes, the government has a slightly bigger majority of 13.

But future by-elections could easily erode this number. Indeed, whether this minority government can be sustained for more than a couple of years, only time will tell. There was a minority government in place in 1974 which lasted only 8 months. There could certainly be a change of Prime Minister this year.

There is also the issue of the House of Lords, which may try to block any measures the new government tries to enact.

Under the Fixed Term Parliament Act, another general election could be called "if the government is defeated in a vote of no confidence and parliament does not vote to express confidence in a government within two weeks". There is a guide to what happens with a hung parliament on the UK Parliament website.

There is also a guide to what happens when there is a minority government.

In addition, the Cabinet Manual sets out how a government is formed where there is a hung parliament. Where an election does not result in an overall majority for a single party, it says "the incumbent government remains in office unless and until the prime minister tenders his or her resignation and the government’s resignation to the Sovereign".

It adds: "An incumbent government is entitled to wait until the new parliament has met to see if it can command the confidence of the House of Commons, but is expected to resign if it becomes clear that it is unlikely to be able to command that confidence and there is a clear alternative."

The next State Opening of Parliament was due to take place on Monday 19 June 2017, the same day as the Brexit talks begin.

Both of these events have to happen, so the new government has to act quickly. The Queen's Speech was delayed until 21 June, and was a slimmed down version of what was in the manifesto - as the government only wants to present what it thinks it can get through Parliament without defeat.

Brexit after the election

The big issue for the new government is Brexit. It will now be much more difficult to get any Brexit deal through the House of Commons without cross party support. This could mean a move away from the so-called “Hard Brexit” to a much softer one that prioritises economic considerations and free trade above immigration policy. MPs will demand proper scrutiny of any deal, and there could even be a second EU referendum for the public to decide on the eventual deal.

There may now be a more concerted effort to effect a Norwegian-style agreement, so that the UK remains part of the European Economic Area in order to benefit from the single market and the Customs Union. This would mean a continuation of free movement of people, capital, goods and services.

The Norway option could be the best way forward for businesses, in that whilst it will distance the UK from EU institutions, it does maintain single market access as well as continued participation in the EU’s science and education programmes. Powers currently vested with the EU would return to the UK and the devolved assemblies, allowing the UK government to negotiate new free-trade agreements with other countries.

The downside to this, from some points of view, will be that the UK will remain subordinate to EU institutions on some issues, but without the ability to influence any new laws. However, a substantial body of single market law is now made at a global level and handed down to the EU, which in turn hands it down to member states. As an independent country, the UK could seek a seat at the top tables on global laws to exert its influence.

The DUP certainly wants a soft border with the Republic of Ireland and free movement across the boundary, which is not in keeping with a hard Brexit, and that also means the DUP will not accept a "no deal" stance that the pre-election government had threatened.

The first issue to deal with will be the timetable for talks with the EU, which are meant to start shortly. The UK is meant to be leaving the EU on 29 March 2019.

The new government could request a one-year extension to the Brexit negotiations if they become bogged down, though the EU will be reluctant to allow this. The UK Parliament could also decide to scrap Brexit altogether, though that appears unlikely in view of the June 2016 referendum result. Both scenarios would in any case require unanimous approval by the other 27 EU countries and the European Parliament.

Useful Brexit articles:

Taxation

There may now follow a mini-budget and another finance bill to legislate for all the measures that had to be dropped at the last minute from the last Finance Act. We can also expect to see the locks on rises to income tax and National Insurance Contributions removed, particularly as that will then allow for the dropped proposed increase in Class 4 NICs for the self-employed.

Despite speculation that he would be replaced after the election, Philip Hammond remains as Chancellor. There will, however, be a new Financial Secretary to the Treasury (FST), as the incumbent (Jane Ellison MP) lost her seat at the election. The position is responsible for providing a strategic oversight of the UK tax system and for steering through Parliament the Making Tax Digital project. It has since been announced that Mel Stride MP will take up this role, having had previous junior ministerial roles and 20 years experience of running his own business.

The new Finance Bill may contain:

  • Making Tax Digital (though this could now be delayed by a year)
  • The reduction in the dividend tax allowance from £5,000 to £2,000
  • The reform of non-domicile tax
  • Changes to employee benefits
  • Changes to the corporate loss relief rules
  • Simplification of the substantial shareholdings exemption
  • Restrictions on interest deduction for larger companies

We may also see a return of the shelved increases in probate fees, which proved to be very unpopular. However, as the Justice Secretary, Liz Truss, has been demoted, it may now be shelved.

All these measures are now going to be much more difficult to get through Parliament, without major concessions to other parties in many cases.

Conservative party manifesto

[Download the manifesto]

Income tax and National Insurance Contributions (NICs)

  • The personal allowance is meant to increase from its current £11,500 to £12,500 by 2020,
  • Also by 2020, the higher rate tax band (before paying 40% tax) will rise from £45,000 to £50,000.
  • The previous lock on rises in the rate of income tax will be scrapped.
  • There is no mention of rises in NICs, leaving the option open for a rise. (Expect to see Class 4 NICs increase as announced in the Spring Budget.)
  • There is a promise to simplify the tax system, though it is not clear how this will occur when every new Finance Bill adds yet more complexity.
  • There is also a promise to review employed/self-employed status once the ongoing Matthew Taylor report into the “gig” economy is published in the summer. Whether this is just to do with employment law, or tax law as well, remains to be seen.

Corporation tax

  • As previously announced, corporation tax will fall from its current 19% to 17% by 2020.

Employment tax

  • There will be a one year employer’s NICs holiday for veterans, former wards of care system, former prisoners, the disabled and those with chronic mental health problems
  • The current non-EU migrant worker charge on employers who recruit skilled workers from overseas will be doubled to £2,000
  • There will be a crackdown on excessive corporate pay.

Business Rates

  • As well as a promise of more frequent revaluations, there is also a promise to conduct a full review of the business rates system “to make sure it is up to date for a world in which people increasingly shop online.” The planned devolution of business rates to local authorities will continue.

VAT

  • No rise planned,

State pensions

  • The triple lock on state pensions was to be removed, so that after 2020 they would rise only in line with a double lock of either the Retail Price Index or earnings. However, the DUP wants to keep the triple lock in place, so it may well remain.

Social Care “Tax”

There is likely to be a watered down version of the proposed social care measures, that will require those who are elderly and unwell to pay for their own social care costs using all their assets (including home and investments). Originally, the manifesto said a person would have to pay their own costs until they were left with assets worth just £100,000, though it was later “clarified” that there would be a cap on the costs a person has to pay.

It is not clear what that cap will be. The 2011 Dilnot report suggested a £35,000 cap, and the former Prime Minister David Cameron went into the 2015 election with a figure of £72,000. The manifesto provides very little detail, and it is understood that a green paper outlining the proposals will follow during the summer. We shall have to wait and see whether this green paper ever emerges now that there is a minority government, as other political parties were not in favour of the social care measures.

Without a cap on costs there could be a greater use of trusts in future to protect assets, though the manifesto does say there will be a “more proactive approach to transparency and misuse of trusts”.

Future changes

Subject to the new government surviving, and fruitful Brexit negotiations taking place, we may see further changes in the future on such matters as:

  • Further reforms to pension tax relief
  • A relaxation of EU imposed restrictions on such tax incentives as the Enterprise Investment Scheme, R&D tax credits and Patents Box, making company investment more attractive.
  • Further reforms to the gig economy affecting the self employed and their tax position and employment rights

There could be other important tax measures that are brought forward under pressure from the DUP and other parties, so the tax landscape may remain unclear for some time. Another general election later in the year could further delay any progress on major projects such as Making Tax Digital.

 
 
 
 
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