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BUDGET 2008: Raise taxes or cut spending? That is the question

Written by Helen Sant of KPMG
Friday, 07 March 2008
Helen Sant, Head of Tax for KPMG in Cambridge and East Anglia On March 12, Alistair Darling will deliver his first Budget as Chancellor of the Exchequer in what many view as the most difficult budget background since Labour came to power. Helen Sant, Head of Tax for KPMG in Cambridge and East Anglia takes a look at what could be in the Chancellor’s briefcase. Notification of the Budget date came amidst much volatility in the financial markets, the ongoing review of the taxation of companies’ foreign profits, and on the back of announcements made following the Pre-Budget Report around Capital Gains Tax (CGT), non-domiciled individuals and a new principles-based approach to anti-avoidance. The Chancellor has already warned that 2008 will be a challenging year as the economy deals with volatile global stock markets, a credit crunch, falling house prices and the continuing uncertainty over the future of Northern Rock. While the Chancellor himself could not have done anything to prevent these events, it does mean that he will have less money to spend as a result of them, so tax cuts look unlikely – even though he has hinted at them in recent interviews claiming: “We are able to do what is right to support growth in these uncertain times.” In his pre-Budget report in October, the Chancellor forecast Government borrowing would be £38 billion this tax year, but recent disappointing public finance figures means most analysts expect an overshoot. He may also be forced to revise up borrowing figures for the coming years. A recent study, the Institute of Fiscal Studies has predicted that in order to avoid breaking the Government’s self-imposed fiscal ceiling, 40 per cent of GDP, over the coming five years, the Chancellor will have to increase taxes by £8 billion – equivalent to about 2p on income tax. Other analysis suggests he needs to find another £6-10bn by 2011 to finance the NHS as generously as the Wanless Review called for, and £3.4bn to meet its child poverty reduction target. So should we be bracing ourselves for tax hikes across the board? Andrew Smith, Chief Economist at KPMG believes: “The Chancellor should be tightening policy to stay within the fiscal rules; but tax increases or public spending cuts would reinforce the economic slowdown expected this year. “Given current uncertainties it may be best to opt for a neutral package. Cutting taxes looks dangerous on public finance grounds but raising them carries economic risks.” So what can local businesses and individuals expect to hear in Alastair Darling’s first Budget? Capital Gains Tax (CGT) This has been one of the most fiercely debated issues over the last six months! If you sell an asset, such as shares, land or buildings you may have to pay CGT on some of any profit you make. The rate you currently pay depends on your income tax band — normally either 22 or 40 per cent. The first £9,200 of any gain is exempt from the tax for individuals and £4,600 for some trustees for this financial year. But the Chancellor announced that from 6th April, there will be a flat rate of 18 per cent CGT. Indexation and taper reliefs, which could substantially cut CGT based on how long you held assets, are being abolished. This has created winners and losers. The move was welcomed by stock market investors and buy-to-let property owners, who currently pay up to 40 per cent CGT on any profits. But small business owners and workers in share-option schemes, who currently pay as little as 10 and 5 per cent CGT respectively, will lose out. After heavy lobbying from small businesses, the Chancellor back-tracked slightly and announced details of the “entrepreneur’s relief” which is heavily modelled on the old retirement relief, and is targeted at business owners. There will be an effective 10 per cent CGT rate on disposals of one or more businesses by individuals and trustees up to a ceiling of £1m. This £1m ceiling is a lifetime limit so a serial entrepreneur has his lifetime to reach this. Thereafter gains will be taxed at 18 per cent. There has been no announcement however on for the other losers from the changes, who previously paid the basic rate and now will have to pay a rate of 18 per cent, so the Chancellor could use this Budget to address this issue. One thing we will be receiving in this Budget though is the exemption levels for 2008/09 and the Chancellor could possibly redeem himself here. Non Doms This issue has occupied many column inches since the Chancellor announced his changes in the Pre-Budget Report back in October. The most publicised proposal is the annual charge of £30,000. This will apply to non-doms who have been resident in the UK for more than seven out of the last 10 tax years and who wish to continue to benefit from the remittance basis of taxation. Despite reports that this will drive away talent out of the UK, including many of the City’s most important financiers, when our economy most needs it, and the Government themselves admitting that they expect 3,000 non-dom expats will leave Britain in April when the changes come into force, this annual charge looks set to stay. We wouldn’t imagine there is going to be climb down on this issue, however, the Chancellor might announce some kind of review or consultation on the issue. Corporation Tax While many businesses will welcome a reduction in the main rate of corporation tax from 30 per cent to 28 per cent, small businesses will be hit by a rate hike over the next year as their rate of corporation tax rate is increased to 22 per cent from 19 per cent by April 2009. However, to balance out the tax rise, there will be a 100 per cent relief on new capital investments of up to £500,000, an environmental tax credit and an increase in the tax credit for research and development investment to a new rate of between 150 per cent and 175 per cent. The past year has seen small businesses receive a series of legislative changes from which they are still trying to recover, including the increase in corporation tax in last April’s budget, and changes to CGT. It would be nice if the Chancellor could give small businesses some respite in the Budget this year and the Government has already announced moves to simplify and lessen the burden of business administration on small businesses as part of his 2008 Budget. Reviews of; anti-avoidance legislation, VAT and corporation tax, are scheduled for 2008/2009 so I wouldn’t expect any further announcements to any of these areas until after the reviews have been completed. With the Pensions debate continuing, we could expect to see the following changes in store for employers and employees; in the form of cash reward and benefits. Pensions We do not expect to see any major changes to the taxation of pensions and pension schemes in the Budget, although minor tweaks to the major Finance Act 2004 changes (effective 6 April 2006, ‘A’ Day) are always possible. The Government is known to be looking at the issue of commutation of trivial pensions – with difficulties currently stemming from an HMRC requirement to aggregate benefits across all schemes for the purpose of the triviality test. However, making it easier to fully commute pensions might be seen to conflict with the Government’s wider policy intention of pension schemes being there to provide an income stream in retirement. Another possible area for change is unauthorised payments charges. A number of problems have been drawn to HMRC’s attention both in terms of the scope of the charges and the practicalities of their collection. Company Cars It would be very surprising if there were no changes to environmental/green taxation in the Budget, and company cars and travel are likely areas where changes could be announced to promote environmentally friendly forms of transport. A change to the way that the Authorised Mileage Allowance Payment (AMAP) scheme operates would not be a surprise. This is the scheme which allows employees to claim a tax free amount (up to 40p/25p per mile) when using their own car for business mileage. The Government has been consulting on this area for sometime and in the 2007 Budget said: “The Government will consider the case for changing the structure of AMAPs to align the tax and NICs treatment and ensure that the rates and thresholds are set at an appropriate level to promote environmentally friendly business travel.” It’s not clear what changes the Government might make in this area, but a higher rate for lower mileage, combined with a lower rate for higher mileage has been suggested. There has also been some speculation that the Government might seek to tax employer provided parking spaces as a benefit in kind, to deter people from driving to work. The Chancellor might want to encourage more use of home working to reduce the number of employees travelling to work. Increasing the tax free allowances for home workers from £2 per week is therefore a possibility. 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