Against the backdrop of the most serious economic turmoil for more than 60 years, the nation’s eyes were on Alistair Darling as he delivered his second Budget as Chancellor of the Exchequer. Nigel Pickard, head of tax at Deloitte in the Midlands, reviews the key points of the Chancellor’s speech
The Budget is full of headline-grabbing measures, however, many of them will apply to relatively few people.
This is of little surprise, given that we knew that the Chancellor had little to play with, and it is surely right that it is the individuals most in need who will benefit.
The top rate of income tax will rise to 50 per cent for the 350,000 people earning over £150,000, and apply from April 2010, which is a surprise. This is higher than the 45 per cent rate announced in the Pre-Budget report last autumn and will come in a year earlier.
At the same time, those earning more than £100,000 will lose all personal allowances – which will cost some 700,000 people around £220 per month. Tax deductions for pension contributions for those earning more than £150,000 will be limited to the basic rate, from April 2011, with some new rules applying from today to stop early contributions. The Treasury expects to raise £7 billion per annum from these measures.
One of the main focuses of this Budget was supporting businesses. However, the tax reliefs announced in Mr Darling’s speech were modest. The £50,000 loss relief rule will be extended for a second year – allowing loss-making businesses to recover tax paid in the three previous years. However, the refund for a company is only £10,000 – so not a huge help.
On the plus side, the Chancellor confirmed the Business Payment Support scheme will be extended. Some 100,000 taxpayers in financial difficulties have deferred £1.8 billion across all the taxes, and the extension beyond the current six month limit is much welcomed.
There is an increase in capital allowances for expenditure in the year to April 2010 – a measure aimed at encouraging investment. However, the net present value (NPV) is very small and, therefore, we don’t believe it will encourage much extra investment. The money would have been better targeted at loss-making businesses. Disappointingly, there is no further help for businesses with empty properties. However, as previously announced, inflation-linked increases in business rates, amounting to some £60 million for West Midlands businesses, will now be deferred.
Other measures announced to help businesses included a ‘top-up’ trade credit insurance scheme of up to £5 billion. It is too early to say whether the proposals will be a success or not. However, over the last 12 months the reduction in credit insurance and in some instances its withdrawal has hurt both retailers and suppliers and created much uncertainty in the sector. Any move to boost confidence must be supported, but as always it is the ability to quickly execute the plans that will make the real difference.
There was some good news for the ailing car industry with the introduction of the much heralded scrappage scheme, which will offer £2,000 to those who buy a new car.
The West Midlands has been particularly badly hit by the downturn in the automotive sector and it is hoped this could jump-start new car sales which are at their lowest level for over a decade. Similar schemes have proved successful in both France and Germany.
New car sales in Germany rose by 40 per cent in March, bolstered partly due to the €2,500 subsidy for people who turn in their old car and buy a new one. This suggests that a similar scheme could also have a beneficial affect in the UK and get car sales rising again.
Some have argued that such a scheme would have a limited impact in terms of boosting the UK economy since over 80 per cent of cars sold here are manufactured overseas.
However, this is to overlook the many automotive component manufacturers which make parts for overseas manufacturers which will be buoyed by this news and any measures which could boost consumer activity are likely to be welcomed.
Another area Mr Darling was keen to address was tax evasion, and there are important new powers in relation to this and tax reporting. There will be a defaulters list, to name and shame those who deliberately evade tax of over £25,000. Separately, finance directors will need to take personal responsibility for company tax filings. New measures to close perceived tax loopholes are to be introduced which the Chancellor hopes will raise £1billion over three years.
Finally for business, the reform of the tax system for foreign profits will come in this year. The dividend exemption will apply from July 1, 2009, but the tax-raising interest restrictions will apply only from accounting periods starting on or after January 1, 2010. This is a welcome delay, as it will allow HMRC to get the rules right, however, we will reserve judgement until we see the detail
Overall, with public debt forecast to hit £175 billion in the current year, the Chancellor had very little room for manoeuvre. He could find no quick fixes, just some highly targeted measures to assist business and job creation which will be welcomed in the region. The main surprise has been sharp tax increases for higher earners which will start to bite from next year.