Richard Rose, Tax Partner at BDO Stoy Hayward’s Birmingham office, predicts the potential announcements in next week’s Budget - and scores them regarding their benefit to UK plc.
In these unprecedented fiscal times, the economy is at the forefront of the entire nation’s mind. Everybody is looking to the Government for strategies to help move us out of a recession but we are all keenly aware that fiscal stimulus comes at a cost to the taxpayers – there is no such thing as a “free lunch”.
The key issue, as recently highlighted by Mervyn King, Governor of the Bank of England, is whether the Chancellor will be able to reconcile the need to increase taxation in the medium term with the shorter-term perception that further fiscal stimuli are required
It will be of great importance for the Chancellor to indicate how, in the medium term, he intends to reduce the annual budget deficit. At the 2008 Pre-Budget Report, he forecast this to be £77.6billion, £118bn and £105bn in 2008/09, 2009/10 and 2010/11 respectively, but this will certainly be far higher due to multiple factors including falling tax revenues, bank bail-outs and rising unemployment.
There are areas such as VAT, corporation tax and pension relief for higher-rate taxpayers, where the Chancellor may be driven to significant changes.
We do not consider that this will be a budget of long-term giveaways or sweeteners despite it being in the run-up to an election. We hope the Government can provide the nation with a vision for its fiscal structure enabling the regeneration of businesses and the sustainability of Government finances. The Government must put economic priorities over political expediency. This Budget must set out a road map for Government finances of medium-term austerity.
*The Chancellor may respond to Opposition calls for the corporation tax rate to be cut from 28 per cent to 25 per cent (or lower) to restore tax competitiveness. This could be achieved without significant cost to the Exchequer if certain other reliefs such as capital allowances were reduced. [10/10]
*If the Chancellor introduces a further - but temporary - fiscal stimulus to support employment levels, he should consider a short-term reduction in the employers’ rate of National Insurance from 12.8 per cent to, say, eight per cent until April 5 2010. This could cost £20bn but it would boost the profitability of major employers and influence them to reduce redundancies as the recession in the real economy deepens. [7/10]
*He should comment upon the future VAT rates and indicate that this tax, which collects about £80bn, could, as a least-bad partial solution, be increased beyond the previous 17.5 per cent rate when the temporary reduction to 15 per cent expires on January 1 2010. The UK’s 17.5 per cent VAT rate is towards the lower end of the rate in major European countries. [8/10]
*A somewhat similar - but arguably more taxpayer-friendly - measure could include targeted reductions of VAT in more challenged sectors. A very recent example is the proposed dramatic reduction of VAT in France on restaurant meals from 19.6 per cent to 5.5 per cent. [3/10]
*The sheer quantum of losses being generated and carried forward are likely to shelter taxable profits for some years to come. For example, some UK banks may have sufficient losses to allow them to pay no tax for many years. The Chancellor may therefore introduce a limited life for losses which extinguishes the loss after a number of years. This would be similar, for example, to Italy which only allows ordinary trading losses to be carried forward for five years. [2/10]
*Having announced a new top rate of 45 per cent for income tax, to apply to income over £150,000 from 20011/12 onwards, the Chancellor, inevitably, will come under pressure to extract further amounts from the highest earners, perhaps by creating an additional top rate of 50 per cent or more on incomes over £1m. The proposed increase from 40 per cent to 45 per cent is expected to increase income tax receipts by only £670m. Further increases risk significant harm to the UK’s status as a place to conduct business but would not make a significant contribution towards curbing the budget deficit. [1/10]
*Will the Chancellor tamper with the extent to which higher-rate income tax relief applies for pension contributions? Income tax relief is available at an individual’s highest income tax for contributions up to £235,000 pa (2008/09). Substantial pensions are in the public eye but the maximum tax-exempt pension fund permitted under current HMRC limits would buy an index-linked pension of perhaps only £70,000 pa; a small percentage of the high-profile arrangements. [3/10]
*The Chancellor should clearly explain HMRC’s position regarding UK taxation (particularly of businesses) and the UK’s European Union Treaty obligations (notably the “Freedom of Establishment” and “Freedom of Movement” Articles). Increasingly, taxpayers are appealing tax cases from the House of Lords to the European Court of Justice, claiming that the UK tax legislation is invalidated by European treaty obligations. [9/10]
*The Chancellor should respond to the concern of UK-resident multinationals about the introduction of restrictions for interest relief (“worldwide debt cap”) combined with the introduction of the participation exemption for dividends received from overseas subsidiaries. HMRC is likely to be keen to curtail tax deductions for interest on debt to acquire overseas subsidiaries, the dividend stream from which will no longer be subject to corporation tax. [5/10]
*Whether he will “de-couple” the maximum rate of stamp duty land tax on commercial and residential properties which is fixed at four per cent to “kick-start” the ailing commercial real-estate market when a far higher percentage of commercial property sales are taxed at the four per cent SDLT rate. [7/10]
*On “carried interest” the Chancellor could increase the tax rate by partly replacing the capital gains tax treatment by an income tax treatment. To avoid being negative, this might be achieved by limiting lifetime capital gains from carried interest to £5m. [5/10]
*For PFI/PPP in the spirit of boosting privately-financed Government projects (in addition to the boosted level of Government funding) there could be a carve- out from the worldwide debt cap provisions for PFI/PPP projects that have, say, ten per cent or greater local authority (or similar “Government”-type entity) equity interest. [9/10]
*The Chancellor said in the PBR that he proposes to remove the benefit of basic personal allowance for those earning over £140,000 pa and reduce it by half for those between £100,000 pa and £140,000 pa. Will he apply this principle to all personal reliefs? [3/10]
*The Chancellor could give a targeted stimulus to equity investment in the small-to-medium business sector by removing restrictions on the Enterprise Investment Scheme and Venture Capital Trust scheme. Rules preventing companies with more than 50 employees from qualifying, limiting investment to £2m per year and barring companies with more than £7m in “Gross Assets”, should be swept away. [5/10]
*To encourage investors in the SME business sector, the rate of tax relief on the Enterprise Investment Scheme and Venture Capital Trust investment should be 40 per cent. [5/10]
*The Chancellor may be tempted to introduce additional anti-avoidance legislation following revelations concerning planning in the financial sector to reduce personal taxation on “excessive” remuneration/pensions/compensation packages. Almost inevitably poorly-targeted, such measures can increase the perception that the UK is becoming an unfavourable location for entrepreneurs and key executives to be located. [1/10]
*We expect confirmation that he does not intend to tamper with either inheritance tax or capital gains prior to the general election following his reforms to permit the transfer/aggregation of IHT reliefs between married couples (and civil partners) and the introduction of the flat 18 per cent rate of CGT. Despite being very high-profile, these two taxes collect only £8bn even in a good year (which this is not!) out of total tax receipts of £516bn. [8/10]