Pre Budget Report 2008 – The Initial Reaction
VAT at 15%- NEXT WEEK!
“I was in despair this morning; a hand fell on my shoulder and said “cheer up, it could be worse”…so I cheered up and, sure enough things got worse”.
Although there is a sensible “glossy” pdf summary of Mr Darling’s second Pre-Budget Report on our website (see right hand side of page for menu with documents), the PBR merits a “tax blog”. It was billed as “the most important financial statement in eleven years” but it turned out to be a fairly dull speech. This was not helped by the fact the “juicy bits” were in yesterday’s papers.
In any case, not long ago “The Budget” was just an annual thing. Lawson’s “red box” coming out of no 11 was an exciting event and Ken Clarke was good on fags and booze. The Chancellor’s “Autumn statement” was really nothing more than an update on the public finances. The PBR has now become a farcical “second Budget”. The juicy bits were given to the media in advance of Parliament. So much was disclosed I actually wrote the first draft of this blog on the morning ahead of the speech (I’m not joking). I half hoped he’d disclosed a load of rubbish to wrong foot the media! Why do they prefer the media to Parliament?. You almost ask why Mr Darling and Mr Brown didn't simply get together and leave the whole speech on (say) Mrs Thatcher’s answer phone earlier in the day - with obscene suggestions that they had done offensive things to her economic legacy. Perhaps that's unfair as I actually think Mr Brown and Mr Darling are trying hard to get it right and am quite depressed at how wrong their past forecasts have been, and how serious the consequences will be if their new forecasts are equally wrong.
After the dust has settled, surely 24th November 2008 must go down as a depressing day for the UK. The Government confirmed we face levels of borrowing that, if the economy does not recover as forecast, will leave us “for dead” financially. If the economy does recover as forecast we simply have the "hangover from hell" on taxes.
I felt the speech was akin to the Chairman of one of the major banks disclosing the scale of some nasty Bank losses – only without the apologies to shareholders! Watching on TV, we got Mr Darling making a very worthy stab at rationalising the mess whilst glossing over the past. Mr Brown was found smiling away (why is he so happy at presiding over this mess?). And two of the very largest MPs in the House were sitting directly behind snorting away with pleasure as Mr Darling revealed the true extent of our economic misery and his magic plan to keep spending. Somebody needs to point out that if the overweight MPs stood up during the PBR/Budget speech, the Chamber would be big enough for most MPs to be seated (whilst the image of the party was enhanced). A 52" waist with a lunch stained cardigan over it is no televisual treat for the millions tuning in to the PBR. Bad planning but I guess the "weight equality rules" would prevent asking them to sit to one side of the line of the camera during the speech.
I’ve been consistently cynical about “tax by stealth and spend the wealth” strategy. I can’t help but think we should have had more in reserve after a benign decade of steady growth. Mr Darling has done his best to convince us that a "billion" is a small number (he's got 118 of them to borrow even if the economy returns to positive growth during 2009) and that it's all a global problem. My worry is his masterplan is founded upon a little local trickery via borrowing getting the "global" impact on the UK offset by local growth. If the global position remains weak into 2010 his masterplan will come unstuck - that genuinely worries me as I can't see how the UK will get back on track if the recession lasts longer than Mr Darling thinks - he's gambling on a short recession with no contingency for the alternative....
In any case, before I get too political, let’s have a quick look at the “meat in the feast” today…..and I’m only looking at tax here….
1. VAT is to be cut to 15% on 1/12/2008. This sounds good, doesn’t it? Well, not entirely…we’ve all to change our software and invoicing “pronto” which is a real pain in the neck…and it’s only for 13 months….so, as usual, we have a fudge of a change. The flat rate scheme rates are changing too. And we’ve got this week to get it ready if you want an invoice after the weekend…..We will put more on our website this week on the MAJOR change. Big question – will 2.5% make you go out and spend to help us out of recession?
2. Corporation Tax for small businesses was to rise to 22% in April – will remain at 21% (U-turn).
3. For international companies foreign dividends are to be largely exempt – good news as it shows the Government has worked out that scaring international firms head offices away to Eire is silly (U-turn).
4. For accounting periods of a business ending in the next 12 months a loss of up to £50,000 can be carried back against 3 years profit.
5. Vehicle Excise Duty reforms for next April have been “toned down” and the first year duty is not being introduced until 2010. Cars pre-23/3/2006 are to be left on the lower tax disc bands even if they have high CO2 (that makes me personally quite happy!) (U-turn).
6. Duty on fuel, alcohol and tobacco will be adjusted to recoup the vat loss.
7. Air Passenger duty adjustments to come in next year (not too punitive in economy class) – backtrack on former proposals (U-turn).
8. The “income shifting” rules are shelved – this is a bit of good news. The Government wanted to change the law to ensure that family companies who paid dividends to spouses and others could be successfully attacked if the dividends did not reflect the remunerative interests i.e. to prevent diversion of dividends to lower tax rate paying family members. Unworkable draft rules were published and, thankfully, we have a complete acceptance that it's too hard to achieve a fair anti-avoidance measure. (U-turn)
9. The new regime for tax relief for business cars (leased or purchased) is to be clarified in forthcoming guidance but appears to encourage contract hire over purchase for most businesses.
You may notice that I’ve not yet mentioned the promised “tax hikes” that have captured the imagination of the press. Well, none of them bite until April 2010 at earliest and I’ve no reason to believe they will actually happen!
I’ve seen so many future tax plans shelved or changed in the last couple of years I am almost inclined to stop here without talking about them….but….for the record, if Labour are re-elected they have committed to
1. Halve the value of the income tax “personal allowance” for persons with income over 100k, and remove it entirely for those earning over 140k (April 2010).
2. Introduce a 45% tax band for those earning over 150,000 and the corresponding increase in the tax rate on dividend income at that level (April 2011).
3. Put 0.5% on employer’s and employee’s National Insurance – and the “uncapped” 1% of NI we have now will be 1.5% (April 2011) meaning for earned income the top tax rate is 46.5% in truth or 59.8% with employer's NI - there's a figure - 60%....
4. Increase the tax rate paid by trusts on dividends and other income- in line with the 45% rate I suspect (April 2011).
5. Review the arrangements the Channel Islands and Isle of Man have with the UK – this may be mostly for non-tax financial regulation but…watch this space.
"Cheer up, things will get worse”.
Regards
Donald Parbrook
donald.parbrook@milnecraig.co.uk
Tax Partner
0141 887 7811
Please remember the views expressed above are Donald’s personal thoughts on the PBR. This is not the view of the firm, or any partners or directors in the business. This is intended to be a light hearted commentary - persons seeking to rely on tax commentary here should contact our office for formal advice.
