“Darling pulls a gerbil out of the hat”

That was the summary on Channel 4 news so don’t blame me for it!  Personally, I didn't see the hat but did notice that since becoming Chancellor he has lost a lot of hair (as well as money).

Personally, I liked this Budget.  Really!

After the Chancellor sat down (a poor speech), I noticed the Government press releases quietly announced in one short sentence that they had kicked the new “income shifting” anti-avoidance rules into the long grass (deferred for 12 months for consultation but that’s how they started the abandonment of Planning Gain Supplement – defer then blame consultation and applaud your own prudence Mr Darling – especially before the election!). 

These “Income Shifting” anti-avoidance proposals have been a labour of love for HMRC – they want to apply the maximum amount of tax on dividends and profit sharing within family/private businesses – rather than the “right” amount in law which can be inconveniently reduced by spreading income between spouses and siblings. 

We have published draft legislation for 2008(now 2009 at earliest!) that says that if a husband and wife business doesn’t split their profits/dividends in the right way they will push the income from the lower rate taxpayer onto the highest taxpayer – okay, that’s my quick summary.  There’s been HUGE amounts of time spent by the tax profession on this since it was announced in response to an “egg on the HMRC face” tax case at the Lords – mostly professionals are being very critical but sometimes constructive (like, “don’t do it, it doesn’t work”) and it’s obviously paid off! 

On this issue, I do want to ask how much public money was expended in several “key policies for fairness” that have now been delayed or abandoned and I include-

1.      the commitment to allow pension funds to hold residential property – which was backtracked due to “tax avoidance” before it even started!

2.      the “Planning Gain Supplement” which was to take money from “paper” planning gains and give it to local authorities – kicked into the long grass after several years of consultations.

3.      the income shifting rules – although they say they’ll do it in 2009!...watch this space!

So, my view is that this hidden gem (the delay from 6/4/08 to 2009 Finance Act) is the main news for tax advisers with family/private business clients.

What else in the Budget ? - Leaving aside the fact the Chancellor said we were well prepared for the economic storm and pulled lots of new forecasts out of the bag, I noted that borrowing of £43Bn for this year is £13Bn more than the £30Bn he forecast in the 2007 Budget.  What if he’s almost 50% out again!?....are their forecasts really that unreliable?

In any case, my job is really to try to work out how the tax news will hit home for clients.  I was unsurprised that such an apparently dull speech led to 107 different summary Bulletins spanning 270 pages.  I was even more surprised at how dull the 270 pages are – and that is from somebody who finds tax interesting!

The odd thing is that there’s not a lot of fresh news in the Budget on mainstream small business tax issues – mainly because the Chancellor will pre-announce his intentions one year, then re-announce them in advance and then confirm them in the Budget a year or two later.  Unusually the “pre-phony-Election” in October (usually Nov) Pre-Budget Report was much more interesting than the Budget.  That’s not a bad thing – he can announce it early and test the reaction and then climb down (Income Shifting, PGS and Resi property for pensions as noted above!).

Most of all our client will want to know about the big tax changes that I write about regularly as that is what makes or breaks them.

Firstly, the capital gains rules really are changing – so an 18% flat tax rate on gains with an effective 10% rate for a rather more limited range of gains for private business owners up to £1M.  The existing rules favour short term holding of investments (since there is no allowance for inflation in the computation) and people with non-trading assets.  Business owners selling a business at modest gains (e.g. under £100,000) lose out as do people with gains over £1M in their lifetime.  My guess is most labour voters aren’t terribly worried about the losers.

There’s changes to capital allowances and we are happy to update you further again if you are interested  - our written flyer and formal Budget Update which will appear here shortly have more details on this. 

Other changes that affect smaller numbers of taxpayers are changes to the Aggregates Levy charge, Landfill taxes and non-domicile rules.  The “non-doms” tax change is well covered in the press and I suspect that it’s reasonably fair in intent even if the effect in the City of London is such as to be a backwards step for the banking industry that underpins around a third of corporation tax receipts – in short, I think the financial benefit will be less than the loss over a long term period.  The sad thing is the Tories can’t even reverse it as they had the same policy. 

The Post Budget TV news was focused on cars, booze, fags and flying and with the exception of fags these are all my own vices!  The first thing I noticed was that my 2 year old 4x4 is about to get hammered for road tax at £440 pa (rising) from 2009.  At the moment it escapes the top band as it was registered before the current £400 band was set in March 2006. However, from 2009, it appears the reference point will be 2001 vehicles – so most older high CO2 cars will be caught too.  Do I buy an old Land Rover to escape this or do I accept that at US$110 per barrel I need to get a normal car?...

For our business clients I remain convinced this Budget was really just a confirmation and clarification of the agenda – down with capital allowances (tax write down for assets), up with car based taxes and a tinkering with a few other areas.

Whilst I think the current changes to the taxation of non-doms is naïve I am not that critical of the capital gains change apart from the failure to re-introduce indexation (inflation adjustments) – this means 18% of a short term gain is really a lower tax cost against true inflation adjusted gains than for a long term asset.  Farmers and other landowners will feel the difference-  even if a farm value rises with inflation there’s still a capital gain to tax – this is a fundamental shift in our tax system – for the worse.

An interesting area getting little attention is the reform to penalties, collection and administration of enquiry work.  Clients might be interested to note that HMRC will now offset overpayments of one type of tax against the underpayment of another.  Also, within the next year or two tax investigations will fall into the "VAT Visit" type remit-  where officers come to your place of business and inspect all and every record-  whilst the professional bodies are doing their best to prevent officers being given excessive powers it is clear the sentiments within Treasury reflect a belief that if you've nothing to hide you should not object to HMRC having greater power - in my role I have to say that HMRC have plenty power already and that more power won't stop avoidance/evasion and collect more money - but it will make the work of HMRC even more adversorial.

Unbelievably almost all of the Budget press releases are what I would call “minority interest” – e.g. changes for overseas insurance companies to IPT – I just wouldn’t waste your time relaying the change!  A slight tinker to EIS (500k limit), a small increase in EMI option valuation limits (120k), a confirmation of pre-announced changes in personal and corporation tax rates, a few anti-avoidance measures in Stamp Duty, and so it goes on – none of it really fundamental enough to merit comment on here.

I encourage you all to read our more glossy Budget releases once they appear on our website late on Thursday or early on Friday – especially for capital allowances if that affects your business.

A final comment – Mr Darling used the word “stability” six times in the first minute of his speech.  This probably says it all – he’s trying to convince himself isn’t he?

Must dash, off to Oddbins to stock up before the price rises hit.

Regards

Donald Parbrook

***The views of our tax partner, Donald Parbrook, are not necessarily those of the firm itself.  These articles are designed to be a light hearted commentary and clients and other readers should contact us, or their regular adviser before considering what the right response to the changes in the Budget is***