Chris Sharpley, head of tax for professional services firm Ernst & Young, in Birmingham, believes the Chancellor will have to strike a difficult balance in his speech on Wednesday – but needs to act to stimulate the economy.
The context of this Budget is clearly the hardest of this Chancellor’s limited experience and with the public finances in turmoil, the course chosen will need to be a careful compromise between the need to stimulate the economy and the need to raise revenue, if not immediately, then in the near future.
The question of higher taxes is no longer ‘if’ but ‘when’, and many will look at the message this Budget sends about the future direction of policy.
Will we see a Budget aimed at securing future tax revenues through building a strong base of companies to deliver economic prosperity, or one that seeks merely to grab additional taxation in the near term from businesses currently in the United Kingdom?
CORPORATE TAX PREDICTIONS
A key focus of the Pre-Budget Report (PBR) was providing cash to smaller businesses through a series of temporary measures. With little sign of a recovery or ‘green shoots’, the Chancellor may have little option but to extend and enhance these measures.
In the PBR, the loss carryback rules - a tax benefit allowing firms to reduce a tax liability by applying net operating losses in the current fiscal year against income reported in earlier years - were temporarily extended from one year to three years, capped at £50,000.
The Chancellor may decide to allow this to continue beyond November 23 through to December 31 2010, as well as increasing the cap for the same period.
The deferral of the rise in the small companies’ rate from 21 per cent to 22 per cent still has a year to go and it’s unlikely that the Chancellor will move any further on this. Instead, we may see some measures to simplify tax calculations for small businesses but the main focus is likely to be on the existing business support service, launched to help manage payment of tax liabilities for businesses affected by the current economic conditions.
Getting cash back into the UK
In terms of protecting and potentially expanding the UK tax base, the next steps in the proposals for the taxation of the foreign profits of companies are expected to be announced. The proposed dividend exemption is likely to be confirmed and there is still hope that the worldwide debt cap proposals will be put on hold as part of a longer review, with the aim of developing a competitive and viable system for the future.
At the same time, the Chancellor is likely to focus on evasion to ensure that the UK tax base is not eroded.
Long-term revenue generation
In a recession, measures aimed at profits are unlikely to generate revenue so the Chancellor may have little choice other than to look at indirect taxes.
The Organisation for Economic Cooperation and Development has recommended that European Union countries should shift their tax base towards goods and services and property. Following this advice in the UK would mean that, rather than reverting back to the 17.5 per cent rate of VAT on January 1 2010, the Chancellor would increase it over and above that; perhaps to 20 per cent, something that he is understood to have considered before the PBR.
The Chancellor could also announce a consultation on the impact of expanding the tax base for VAT - perhaps by removing the zero-rate status of some goods and services. These much-protected items have also been criticised by the OECD and the recession may prove to be their undoing.
A longer-term increase in employers’ National Insurance contribution (over and above that announced for 2011/12 may also be a necessity.
Attracting business from around the world
On a more positive note, the Chancellor could position the UK to maintain its pre-eminence as a location for inbound foreign direct investment.
In order for the UK to stand out from the competition, the Chancellor could announce a programme of future post-election reductions in the mainstream corporation tax rate. Building a competitive tax base will be key to ensuring that businesses are here to provide employment, innovation and taxes.
PERSONAL TAX PREDICTIONS
Out with the old?
Taxpayers will be taking an avid interest in the Budget to see how the measures will impact on their pockets and how the Chancellor intends to pay for the unprecedented spending that has taken place over the past few months.
The challenge for the Chancellor is to design a tax system that will give us the economy that we want and the services that we need.
In terms of predicting what is going to happen to the tax system over the next few years, however, we are starting with a blank sheet of paper.
The key targets for the Chancellor will be those who have been disproportionately impacted by the economic downturn.
Pensioners, particularly those who rely on their savings for income, will be struggling with the current low interest rates. Above-average increases in the age-related allowance and the related income limit would be a significant help here.
At the same time, the Chancellor will be hoping to encourage employers to retain staff and, despite the 0.5 per cent NIC increase already announced for 2011/12, the Chancellor may implement an interim deferral or reduction of employers’ NIC to encourage employment in the short-term.
Temporarily reintroducing the mortgage interest relief at source (MIRAS) scheme, which is capped at the basic rate and at a mortgage level of up to £30,000, would provide the Chancellor with the tools to reduce interest costs for those on fixed-rate mortgages or those who have to remortgage.
Getting cash back into the UK
The Chancellor is likely to focus on evasion, including the use of tax havens. In particular, he will be stressing the importance of transparency and the exchange of information with other countries to ensure that the UK tax base is not eroded.
We should also expect a stronger line in terms of compliance and collection so that the tax regime is operating as efficiently as possible.
Long-term revenue generation
On the basis that the Chancellor needs to raise money over the next five to ten years, the tax system provides a menu to choose from:
* Reforming the ‘slab’ system of stamp- duty land tax in favour of a new tiered tax system would provide the Chancellor with the tools to avoid the house-price distortion and complexity associated with the current regime. Such a reform could also be associated with a rate increase.
* The PBR announcement of a new tier of ‘higher’ rate taxpayers and the mechanism under which personal allowances are tapered, which results in two small 60 per cent income-tax bands, will bring complexity to the tax system and contrasts with global trends over the last decade.
This could have serious implications in terms of maintaining the UK as an attractive place to live and work. The Chancellor should, therefore, be giving serious consideration to withdrawing or amending these proposals.
It is possible that, instead of the regime announced in the PBR, we will see a simpler system based on a 50 per cent higher rate with additional tiers up to 50 per cent for those further down the income levels.
Alongside the conflicting demands of short-term stimulus and long-term revenue-raising, the Chancellor will also be facing a general election next year. A new approach is clearly on the cards.