Phil Waller, a tax expert from the Birmingham office of accountancy firm Mazars, explains why Chancellor Alistair Darling must navigate an exceptionally narrow channel at next week’s Budget as he plots a course that avoids on one side the danger of excessive government borrowing and on the other the threat of a depression.
There is much to consider when assessing the changes Alistair Darling might announce on April 22: Will he increase taxes to reduce the ever-growing public sector deficit and the deteriorating state of public finances? Will the fear of causing damage to the fragile economy mean he leaves the tax take unchanged? Or, might he reduce taxes?
In the year’s Budget the Chancellor must navigate a path that offers only a handful of viable options - a number of which will no doubt prove unpopular - or he is at risk of completely submerging the economy in very murky waters.
The indications are that the Chancellor will not introduce significant alterations to the amount of tax taken but I expect that he will nevertheless announce some eye-catching changes. Possible changes that could be announced on April 22 include “Buying in” companies’ tax losses.
Many businesses are making tax losses, so reductions in corporation tax rates will not help them. There are some special reliefs in the tax system which companies can give up in return for a payment to HM Revenue and Customs. Research & Development credits are cashed in at 14 per cent and land remediation at 16 per cent. There is a possibility that this “cashing-in” could be extended to other tax reliefs. A company could choose to give up the future use of its tax loss and in return HMRC would give it an immediate payment at a rate below the current corporation tax rate. Alternatively, the three-year carry could be extended so that losses greater than £50,000 can be carried back.
Another issue that may be tackled by the Chancellor is VAT. In last year’s Pre-Budget Report the 17.5 per cent rate was reduced to 15 per cent for the 13 months to the end of 2009.
The indications are that the cut did not have much success in stimulating the economy. The current plan is for the standard rate to revert back from 1 January 2010. However, it’s possible that a new rate, higher than 17.5 per cent could be introduced and not have a significant negative impact on the economy – especially since the UK is at the lower end of EU VAT rates.
Then there are measures to support entrepreneurs. Last year saw the replacement of taper relief with the far less valuable “entrepreneurs’ relief”.
Coupled with increases to the small companies’ rate of corporation tax, and the withdrawal of first year allowances, small and medium enterprises were generally hit hard. It remains to be seen whether any amends will be made this year.
The Government will also inevitably continue its crackdown on tax avoidance with each Budget and Pre-Budget Report containing more anti-avoidance legislation and we should certainly expect further legislation aimed at tax havens, together with more targeted anti-avoidance, such as that being proposed for disguised interest and transfers of income streams.
