Chancellor’s Budget will struggle to gain top marks, say experts

A TAX specialist believes Chancellor Alistair Darling must put economics above politics in tomorrow’s Budget.

Terry Jones, tax partner at accountants and business advisers BDO Stoy Hayward, in Leeds, said that the Chancellor faces tough decisions over whether to increase taxation in the medium term or whether to further stimulate the economy in the short term.

“Now is the time for the Government to put economic priorities over political expediency,” said Mr Jones. “This will need to be a Budget setting out a road map for Government finances of medium term austerity.

“The key issue, as recently highlighted by Mervyn King, is whether or not 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?

“There are a number of areas such as VAT, corporation tax and pension relief for higher rate tax payers, where the Chancellor may be driven to implement 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.”

Mr Jones said it is of great importance for the Chancellor to indicate how, in the medium term, he intends to reduce the annual budget deficit. In last November’s Pre-Budget Report, he forecasted this to be £77.6bn, £118bn and £105bn in 2008-09, 2009-10 and 2010-11 respectively.

“But this will certainly be far higher now due to multiple factors including falling tax revenues, bank bail-outs and rising unemployment,” he added.

TheBusinessDesk.com will be providing up-to-the-minute coverage of tomorrow’s Budget in association with BDO Stoy Hayward. We will send a Breaking News Email within minutes of the end of the Chancellor’s speech and then providing full coverage, comment and reaction to the Budget tomorrow afternoon.

BDO Stoy Hayward has drawn up a list of predictions of what the Budget may hold and given marks out of 10 as to how each measure may benefit the UK economy:

• The Chancellor may respond to Opposition calls for the corporation tax rate to be cut from 28% to 25% (or lower) to restore the UK’s tax competitiveness. This could be achieved without significant cost to the Exchequer if certain other reliefs (eg capital allowances) are reduced. [10/10]
• If the Chancellor wished to introduce 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% to, say, 8% until April 5, 2010. This could cost approximately £20bn but 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 currently collects around £80bn, could, as a ‘least bad’ partial solution, be increased beyond the previous 17.5% rate when the temporary reduction to 15% expires on January 1, 2010. The UK’s 17.5% VAT rate is towards the lower end of 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 French reduction of VAT on restaurant meals from 19.6% to 5.5%. [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 of the UK banks may now have sufficient losses to allow them to pay no tax for many years.  The Chancellor may therefore be considering the introduction of a limited life for losses which extinguishes the loss after a certain number of years.  This would be similar, for example, to Italy which only allows ordinary trading losses to be carried forward for 5 years. [2/10]
• Having announced a new top 45% rate of income tax, to apply to income over £150,000 from 20011-12 onwards, it is inevitable that the Chancellor 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.  It should be noted that the current proposed increase from 40 per cent to 45 per cent is only 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? Currently, income tax relief is available at an individual’s highest income tax for contributions up to £235,000 pa (2008-09). Substantial pensions are very much in the public eye but it should be emphasised that the maximum tax exempt pension fund permitted under the current HMRC limits would only buy an index linked pension of perhaps £70,000 pa; a small percentage of the high profile arrangements. [3/10]
• Whether he will “de-couple” the maximum rate of Stamp Duty Land Tax on commercial and residential properties which is currently fixed at 4% to “kick-start” the ailing commercial real estate market bearing in mind that a far higher percentage of commercial property sales are taxed at the 4 % 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. However, to avoid being perceived as being too negative towards encouraging investment, this might be achieved by limiting the 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 recently announced boosted level of Government funding) there could be a carve out from the worldwide debt cap provisions for PFI/PPP projects that have, say, 10% or greater local authority (or similar “Government” type entity) equity interest. [9/10]
• The Chancellor has already announced in the PBR 2008 that he is proposing to remove the benefit of the 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 be tempted to apply this principle to all personal reliefs? [3/10]
• 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%t rate of CGT. Despite being very high profile these two taxes collect only £8bn in total even in a good year (which this is not!) out of total tax receipts of £516bn. [8/10]