Charity Finance Group Autumn Statement 2016

Charity Finance Group Autumn Statement 2016 23rd November 2016 This briefing provides a summary of the highlights of the Budget 2016, including those of particular interest to the charity sector. We have also asked some of our corporate subscribers to put forward their initial responses to measures announced in the budget which are placed next to relevant announcements.

Useful links: • • •

CFG’s Autumn Statement Live Blog Autumn Statement In Focus: What is the economic outlook for charities? Autumn Statement In Focus: What the announcements mean for charities

Overview Overall, the Autumn Statement did not give much to charities. There was additional support for charities through the Gift Aid system, welcome improvements to the Museums and Galleries Exhibition Tax Relief and changes to the Social Investment Tax Relief, but these were all relatively small. The big message for charities to take away is that deficit reduction has become more flexible. The government’s new target is to get the deficit down “as soon as is practicable” and this means that there is going to be potential for policy changes throughout the Parliament as events unfold. There is going to be much more borrowing and the Chancellor, given that there are significant new tax cuts and spending pledges, appears comfortable with this. Brexit may create more unknowns and could lead to further changes next year. The scene is set for the next Budget (or “Spring Statement”) where the Chancellor will lay out his business tax roadmap. This is a billion pound opportunity for charities to lobby and campaign for our priorities.

The current climate The charity sector is operating in a tough national economic environment. With the uncertainty around Brexit and the effects that will have on the UK economy, being able to make accurate economic forecasts is never been harder. 1

The recent media scrutiny of charities has not abated, the funding environment continues to be volatile and with increasing core costs from the introduction of the National Living Wage, Apprenticeship Levy and potentially new charges to fund the Charity Commission. The expected £4.6bn funding deficit for the charity sector in terms of spending power( by 2018/19) is still relevant. Charities have seen a fall of £1.7bn in income from government in the last Parliament. If you would like to discuss any of the issues arising from the Autumn Statement 2016, please contact our Policy and Public Affairs Officer via email [email protected] or on 02078715476

Charities There were few significant charity specific announcements but here are the key proposals that we have identified: •

• • •

The National Living Wage (for workers aged over 25) will increase by 30p to £7.50 to help ease in the national living wage by 2020 to £9. For charities that have a high amount of employees on the national living wage. This will cost the charity sector £500m by 2020 excluding national insurance contributions and pension costs. Charities might struggle to introduce the increased national living wage as grants and contracts are unlikely to increase funding to compensate. £102 million of Libor fines will be given to support Armed Forces and Emergency Services charities over the Parliament. Comic Relief will be given £3m from The Tampon Tax Fund to distribute to women charities. From 1st December 2016 women charities will be able to apply for the next round of Tampon Tax funding. “In today’s Autumn Statement the Chancellor, Philip Hammond, made some references to supporting charities. In particular, £102m of LIBOR fines are to be released to Armed Forces and Emergency Services charities. Many will welcome this announcement given the, some would say, unfair and adverse publicity that Armed Forces charities have received in recent weeks. The comments surrounding the future prospects for the economy will cause concern. Although continued growth is predicted, it is uncertain and dependent on significant borrowing. This uncertainty will impact on charities’ business planning in the medium to long term. Hammond also announced that funds raised from the ‘Tampon Tax’ would be given to women’s charities through comic relief. Although welcome news for these charities, it would be better to simply not charge VAT on sanitary products to begin with, rather than collect it then redistribute it. However, EU tax law does not currently allow that, so perhaps this might be something that changes as a result of Brexit, when our split from the EU takes effect.” Subarna Banerjee, National head of charity and not-for-profit, UHY Hacker Young LLP 2

“A very welcome extension of the museums and galleries tax relief has been announced, now to include permanent exhibitions. HMRC previously proposed to limit the relief to temporary and touring exhibitions only, so this should ensure that many more exhibitions can benefit when it comes into effect in April 2017. A welcome increase to the amount that young social enterprises can raise via ‘Social Investment Tax Relief’ was announced in today’s Autumn Statement publication, although nursing and residential care homes will initially be excluded. The limit will increase over five-fold to £1.5m next April, which should encourage investment in this growing sector. It is encouraging that the revenue raised from the Tampon Tax and LIBOR fines continue to be routed to worthy charitable causes. Women’s charities have also been invited to apply for funding from 1 December 2016 for the next round of Tampon Tax funding, giving those who have missed out so far a chance to benefit. A consultation document will be published during the 2017 spring budget on employer-provided living accommodation. Any changes, which are likely to affect many schools and faith based charities, are unlikely to come into effect until April 2018 at the earliest.” Louise Veragoo, NFP Director, Haysmacintyre

• •

•

An extra £10 million has been committed to the Rough Sleeping Fund to help cut homelessness, particularly in London. The tax relief to museums and galleries announced in Budget 2016 will be widened to include permanent exhibitions. Touring exhibitions will see rates of relief set at 25% and non-touring exhibitions will see relief set at 20%. Both will take effect from April 2017. The change to non-touring exhibitions could help a large number of small museums and galleries. Charities that work overseas will be pleased to note that the government remains committed to spending 0.7% of GDP on overseas aid. However, due to the low economic forecast means that the actual amount will fall by £80m in 2017-2018 and £210m in 2018-19.

3

“The first and last Autumn Statement from the Chancellor, Philip Hammond as it was announced that going forward there would be an autumn Budget and a spring statement, to allow any tax changes to be announced in good time before the new fiscal year. Although this was a statement focused on ending austerity and investing in the country, there was little news for charities within this statement. Military charities are given a further boost as it was announced that £102m of bank fines monies would be donated to military charities, just as the LIBOR fine monies were donated to them in 2015. There was some good news for social welfare charities in that no further welfare cuts were announced, as this has increased the demand on charities in recent years. The national living wage is due to increase from £7.20 to £7.50 which will, however, have an impact on these charities staff costs and bottom lines. This is something that charities will have to incorporate into their budgets and cashflow forecasts and should also factor in when preparing their proposals in tendering for services. In an already competitive market however, this is a further cost that may be difficult to pass on.” Moore Stephens

“So what does this mean for UK charities? We predict: 1. The commitment to devolution in the Autumn Statement will mean that Local Authorities will have more control over budgets and spending will be more localised. Focus on what are the needs of the community in which you operate (and what services are the local authorities committed to providing) Are your applications tailored accordingly? 2. Better (whether increased, or more targeted, or both) fundraising should naturally counterbalance reduced income from government. Be aware of the raft of regulations and reporting provisions that have recently come into effect. Are you compliant? 3. Charities may contemplate trading activities in order to raise money. However, trustees should be aware of the bear traps as not trading activities may be chargeable to tax. Do you know what these exemptions are, and where tax may be chargeable? Harriet Edwards, Tax Solicitor, Mills & Reeve LLP

4

Tax •

•

One of the main changes to tax has been in the removal of salary sacrifice schemes and ensuring that all employees pay the same tax for salary benefits. However, there will be exemptions for arrangements relating to pensions, childcare, Cycle to Work and ultra-low emission cars. The government plans to consult on valuation of benefits in kind and a valuation of all other benefits in kind by the 2017 Budget.

“As was widely predicted, the chancellor announced restrictions to the tax advantages of salary sacrifice arrangements from April 2017. The most widespread arrangements, particularly in the charitable sector, including pensions, childcare and Cycle to Work will be unaffected. If the arrangement is in place before April 2017 transitional rules will apply with the changes not coming into effect until April 2018. Consequently, some popular employer perks, such as gym memberships and mobile phones will become less attractive. The changes will be delayed until 2021 for certain benefits, including cars, accommodation and school fees.” Nick Bustin, Director of Employment Tax, Haysmacintyre

•

•

•

Small businesses in rural areas will receive a business rates relief of 100%. Rural charities that pay some business rates may be eligible for this, although we are awaiting confirmation. From April 2017 the personal allowance will be raised to £11,500 with a target of £12,500 by the end of the Parliament. The threshold for the higher tax rate threshold will be increased to £45,000 with a target of £50,000 by the end of the Parliament. Charities will need to ensure that they are reminding donors of these changes when they are soliciting Gift Aid-able donations. The government has committed to amending the Gift Aid Small Donations Scheme to help small charities. These changes are expected to provide an extra £20m for charities by 2020.

“Purchasing insurance is an unavoidable cost for charities, either because they are legally required to, or because it provides sensible protection for their activities and assets. Similar to the public sector, charities’ incomes are under pressure at the moment and an increase in IPT will further increase their costs. This is the third time in the last two years that IPT has been increased and has now doubled since October 2015. This further increase is a very hard thing for charities to take in a tough financial environment” David Britton, Charity Director, Ecclesiastical Insurance

5

•

•

Fuel duty has been frozen again, saving the average car driver £150 a year. This will be particularly beneficial to charities that work in areas such as community transport, social care and education. Insurance Premium Tax (IPT) will rise to 12% from June 2017. This is an increase of 20% and will conservatively cost an estimated £17m for charities per year. Charities which carry out fundraising events will need to factor in this increase cost.

Social Investment Tax Relief changes “From 6 April 2017, the amount of investment social enterprises aged up to 7 years old can raise through SITR will increase to £1.5 million. Other changes will be made to ensure that the scheme is well targeted. Certain activities, including asset leasing and on-lending, will be excluded. Investment in nursing homes and residential care homes will be excluded initially, however the government intends to introduce an accreditation system to allow such investment to qualify for SITR in the future. The limit on full-time equivalent employees will be reduced to 250. The government will undertake a review of SITR within two years of its enlargement.” Helen Elliott, Partner, Sayer Vincent

•

Social Investment Tax Relief (SITR) – social enterprises up to 7 years old can raise through SITR up to £1.5m from April 2017, a significant increase. However, the size of charities that can access the scheme has been reduced, with only those with fewer than 250 employees now being eligible.

“The forecasts announced for inheritance tax receipts show the anticipated sum to be £5.7 billion by tax year 2021/22. This is double the level of inheritance tax paid in 2008/9. More and more individuals are leaving money to charity in their will. Figures show around 7,500 estates claimed this exemption in 2010/11 rising to almost 9,000 estates in 2013/14. Charities will no doubt continue to focus on developing this aspect of their income.” Julie Hutchison, Charities Specialist at Standard Life Wealth

Welfare •

•

There are no further plans for welfare savings in this Parliament, though a cap for welfare spending will continue to be set by the government and monitored by the OBR. Welfare spending is due to be £3.3bn higher than planned over the course of the Parliament.

6

•

There has been a cut in taper rate of the Universal Credit, effectively a tax cut worth £700m by 2022. This is to help families on low income keep more of the income that they earn, but this does not offset the originally set steep cuts in welfare.

“The Chancellor finished his speech by announcing the end of the Autumn Statement. In reality, it ended before he even stood up from the perspective of most charities. There isn’t much for charities to cheer this time. The extension of museum and galleries tax relief to cover permanent exhibitions will be viewed positively by the sector, even though the Chancellor took the unusual step of announcing that the measure will be reviewed at a pre-determined date in the future. The confirmation of a greater role for intermediaries in administering Gift Aid is also welcome news. And it’s hard to argue against the use of LIBOR banking fines and the proceeds of the socalled Tampon Tax to support good causes. “That aside, most charities will be looking at the increase in Insurance Premium Tax and working out how to rebalance their already squeezed budgets.” Ian Mathieson, Head of the Not for Profit, PKF Littlejohn

Devolution Hammond has committed to furthering devolution across the UK with policies in: • •

•

• •

• •

The government has reconfirmed commitment to the Northern Powerhouse and will publish the Midlands Engine strategy shortly. The Local Growth Fund has be allocated £1.8bn Local Enterprise Partnerships across English regions: - £556m to the North of England - £542m to the Midlands and East of England - £683m to the South West, South East and London LEPs have a legal requirement to involve the voluntary sector and charities should therefore be encouraged to help decide where the above funds should be allocated. Further devolution city deals have also been announced and the government has committed to continuing with the current signed deals. London will receive £3.15bn from the national affordable housing fund to deliver over 90,000 homes. London will also have devolved power over the adult education budget from 2019-20. Birmingham will receive government investment of £5million for funding for the Midlands Rail Hub. Under the Barnett formula devolved nations will receive additional funding which they can allocate according to their own priorities 7

Infrastructure and industry investment While there were no major investments in social infrastructure, the government is working on the belief that investment in infrastructure and industry will produce real GDP growth. The below investments might help to benefit charities and their beneficiaries in certain areas: •

• •

• • • •

A new National Productivity Investment Fund (NPIF) will allow the government to add £23 billion in high-value investment from 2017-18 to 2021-22 into the UK economy. There will be a £2.3bn fund for infrastructure, though whether this will include social infrastructure is debatable. £1billion to be invested into superfast broadband. The government is also investing £750 million roll out full-fibre connections and 5g communications. This could benefit charities working in communities which have poor broadband access. Business with full-fibre infrastructure will receive a 100% business rates relief for a 5 year period from April 2017. Extra £1.4bn to build 40,000 new homes and letting agent fees to be banned, with England and Wales to be brought in line with legislation in Scotland. The government will provide £13m to support improvement in management skills for firms. It is not clear whether this will include charities at present. £7.2bn of the NPIF will be used to support the construction of new homes, including spending by Housing Associations.

Other key department news In this Autumn Statement it was announced that government Departments will continue to deliver overall spending plans set out in the Spending Review 2015. •

•

HMRC has received £160 million of funding to help with administration and operational measures. This will hopefully mean that positive initiatives such as the Charities Outreach Team can continue. The Ministry of Justice (MoJ) will receive up to £500 million additional funding to help with prison safety and reform and to help fund wider reforms to the justice system.

Changes to fiscal policy Under the first Autumn Statement since Brexit and the new Chancellor there are been significant changes to fiscal policy: •

•

The Office of Budget Responsibility (OBR) predicts that the impact of Brexit will cost the UK £58.7bn by 2021. This has been predicted to be because of lower migration and weaker productivity. The government has also announced an extra £122bn in borrowing. The fall in the pounds will put a squeeze on households’ real incomes. Relative earnings growth is expected to call close to zero by 2017. 8

•

The UK’s national debt is expected to rise to £1.945 trillion by 2021-22, with a continue rise in the next Parliament.

“Charities face more red flags to contend with from the Autumn Statement; the public are faced with higher inflation and consumer confidence is lower. Those organisations reliant on public support appear likely to face a continuation of the challenges of the last decade in raising income in an environment of uncertainty and rising costs for all. The pressures on the charity sector to find new funding and income streams, whilst faced with increased costs, have been notable in past few years; despite the Chancellor’s Autumn statement focussing on protecting the recovery, many in the charity sector are yet to see a financial recovery. Whilst certain policies including devolved borrowing powers and tax giveaways will help some sections of the charity sector, a strategic approach for all appears to be missing.” James Pike, Head of Charities, Waverton Investment Management

Latest data on the UK economy To accompany the Budget, the OBR also publishes forecasts for the economy and public finances, updated to reflect the budget policy measures. The OBR uses the forecasts to judge whether the Government remains on course to meet its medium-term fiscal objectives. •

•

•

• • •

Growth for 2017 has been revised down from 2.2% in March 2016 to 1.4%. Growth has also been revised down for the subsequent years. Growth will be 1.4% in 2018, 1.6% in 2019, 2.1% in 2030 and 2.1% in 2021. Forecasts for the deficit (public sector net borrowing) as a % of GDP have been revised up since March. It has been revised up this year by 0.2%, 0.6% in 2017-18, by 1% in 2018-19, by 1.2% in 2019-20 and by 1.4% in 2020-21. There is also expected to be a deficit in 2021-22 of 0.7% of GDP. The total amount of borrowing in cash terms, has increased by £35.3bn over the Parliament in comparison with March. Unemployment is expected to rise to 5.2% in 2017, 0.2% rise than predicted in November 2015. It will then rise slightly to 5.4% by the end of the Parliament, with a peak of 5.5% in 2018. Employment is due to rise slightly by 0.1% in 2017 to 31.8m and then rising to 32.3m by 2021. Inflation (CPI) forecasts have been lowered in since March 2016 to 1.0%. Inflation is predicted to be 2.5% in 2017, 2.5% in 2018, 2.0% in 2019, 2.0% in 2020. Average earnings have been revised down. Average earnings will grow by 2.5% in 2016, grow by 2.4% in 2017, grow by 3.0% in 2018, grow by 3.4% in 2019 and grow by 3.7% in 2020.

9