What next from Mr Brown and Mr Darling?
Note for the Diary - Budget Day – 22^nd April 2009

As we approach the end of the tax year and the prospect of another Budget speech, I wondered if I could try (once more) to predict the Chancellor’s targets.  It has to be said, that’s a tough one this time around.  Before I think about the doom and gloom we face, I thought I should remind you of the usual “pre-tax year end checklist” –

1. Individual Savings Accounts (“ISA”) – if you place money into an ISA the interest/growth is tax free – this is a “Use it or lose it” scheme so if you don’t use your ISA one year, you have lost the ability to shelter the money from tax forever.  Speak to our IFA team now if you wish to invest before 5/4/09.
2. Capital Gains – in the unlikely event you’ve made some gains this year you might remember your annual exemption is £9,600.  And you might note the current rate on most gains is 18% - generous – and one wonders if that rate will stay with us in the current climate.
3. Income planning-  if you are in the lucky position of having a family/private company from which dividends can be declared, make sure you review the potential for a dividend before 5^th April – you might want to take a dividend to “mop up” your basic rate band for income tax – even if the money is lent back the company immediately i.e. cash neutral.
4. Pensions – don’t forget to invest funds into pensions before 5^th April for the earliest tax relief possible, or where you make larger contributions near the limit and are close to being “capped”.
5. Charity – again, if you want higher rate tax relief this year….get that chequebook out now.
6. Inheritance Tax and gifts – although gifts mostly carry no IHT charge, if you die within 7 years of a gift the value is brought back into your estate.  However, small gifts of 3,000 per annum don’t count at all (£5,000 if it’s to a son/daughter in their year of marriage).  Also see my own prediction that we have a risk of a lifetime gift tax in the future (just my speculation!).
7. An odd one in my list – State Pension – It’s been pointed out to me that the rules for buying extra years are changing on 5^th April.  The main loser would typically be somebody who has contributed for a few years then had a break – benefits kick in properly with 10 years I’m told – it’s really not my own area of expertise.   However, if you have had (say) seven years the general advice seems to be to look at buying the extra three years – problem is you need advice….the best way to move quickly on this is for anybody who is worried to call the Helpline on 0845 600 0806 or alternatively there is a section on the website www.pensionsadvisoryservice.org.uk that will help work out whether it is worth buying extra years.  It’s complicated and, to be fair, it’s unlikely we can obtain the information necessary in time to advise individual clients – but worth a mention in case you or your partner have worked for several years but not reached the magic “10” for state pension purposes.

Okay, so that’s some pre-year end planning issues.  But, what about the Budget Speech next month…..?

Well, I won’t say I am famed for getting my forecasts right (I’ve had a few hits though).  Before that...here is the financial position the Chancellor is facing (according to a recent article by a well known economist) –

-         UK indebtedness is going to be £3 trillion (2 x national income)

-         Within that figure Government borrowing is at least £850 Billion (with the balance being the private sector and the unfunded public sector pension liabilities).

-         The “golden rule” was that total Government Borrowing should not be more than 40% of GDP and the annual budget deficit should be nil on average over an economic cycle.

-         There is a "Maastritch Treaty rule" that public spending should not exceed tax receipts by more than 3% of GDP in any year.

-         Where the above limits are exceeded the conventional wisdom has been that the currency value of the country would fall and the country would find it hard to borrow further money without clear plans to get back on track.

-         So, the actual result forecast in the last “PBR” were somewhat worrying:

o       a forecast of an 8% deficit (vs 3% max we are supposed to work to) with no hint of a return to the 3% limit until 2014 in the (generous) forecasts.

o       Government borrowing to be at least 49% of GDP.

o       Using “Maastritch Treaty” measures of borrowing, Government borrowing is said to be 60% of GDP or around 65% once the first phase of bank bail out funding is brought in.

Well, it’s easy to be negative and I don’t want my usual rant to be a summary of another person’s work.  However, what worries me is that the forecasts the Chancellor made in November seem to rely on the idea that the recession will end by the third quarter of 2009.  Only last week a leak from the IMF suggested they think the UK will be in recession right through 2010 and David Blanchflower (Bank of England economist) agrees (Telegraph 24/3/09).  And, not only that, but the figures above were drawn up before the Governments second phase of “bail out” in the form of additional capital and the insurance scheme for the banks!

The one prediction I do feel I can make with confidence is that the Budget speech will be a stinker for Mr Darling.  I actually feel a bit sorry for him.  He seems ready to admit to a fair share of the blame for the fact the country’s finances were clearly not “recession ready”.  But Mr Brown appears happy to let Sir Fred and our transatlantic cousins shoulder the responsibility.  If I hear the words a "global problem" from Mr Brown one more time....! 

Ms. Harman will know that the only real “Court of Public Opinion” is the election.  Let's wait and see if the public are happy to accept Mr Browns explanations.

Turning back to the Budget, what can we predict?  At a recent seminar I mentioned a number of potential targets for any Chancellor and I’ll stick with these – it’s hard to say how many measures could be immediate and how many will be “after the recession” (after the election) – and (of course) I could have them all wrong!....

1. New income tax rate at 45% - this is a “known” but maybe it will be revised to affect more people, more quickly – or increased a little further.
2. VAT – 20% - France and Germany hover close to this – so why not UK?
3. National Insurance – hard to see where this one may go as it’s so high but we’ve already had the Chancellor promise 0.5% rise – maybe he’ll hit this one harder with an increase in the “uncapped” 1% rate that applies to top earners.
4. Capital Gains- a simplification saw the rate changed to 18% last year but that’s surely too generous for those making large short term gains? – I think he might make an “anti-avoidance” type change….to collect a "fair" amount on large gains on “non-business” assets.  Then again, there's not many gains about.
5. Fiscal Drag- he can freeze all sorts of rates and allowances so that more tax is taken by reference to true values of money, after inflation (when we get some inflation again).
6. Offshore / non-residents.  Although they’ve had a go at foreigners living here recently, I think UK passport holders living abroad might get some new anti-avoidance measures to try to bring more tax into the net.  What about the American system where you pay US tax even if you live abroad – the price of citizenship, so to speak.  Maybe he’ll have another go at those choosing to live in designated Tax Havens or “non-treaty” countries.  There's certainly an active anti-tax haven drive at Westminster.
7. Inheritance Tax – there’s pressure to increase the limits here to ensure more people escape IHT but this could come at the price of a new tax charge on transfers of assets during your lifetime – thus making people suffer IHT whether their assets transfer to the next generation now or after they die.  This would be a return to the “old days” before the current IHT regime –and might be quite popular if it applied to £1M+ transfers (say). 
8. Booze! – as we’ve had a definite anti-smoking success I think alcohol has come up the agenda as fair game for tax.  And as I write this the debate on minimum alcohol prices continues.
9. Environment – more changes to punish pollution, especially for businesses e.g. ideas to tax your staff car park, road charges, business rates pegged to CO2 in some way – lots of nonsense and regulation and more staff for HMRC.
10. Some additional "recession relief" – he might well further extend the use of tax losses further through new offset and /or carry back relief.  He will almost certainly confirm the continuation of the business support service which allows HMRC the ability to structure payment plans for late tax on a "non-penal" basis.

The problem is none of these ideas are likely to offer an instant way by which we can repay our national debt.  Returning to the economists….there is commentary in what I read that  it is an established consensus that most countries cannot sustain a tax system where the tax take is more than around 36% of GDP.  At the moment we are already at 38% and we have potentially hazardous borrowing levels.  I’ll be interested to see how the Chancellor balances the need for a competitive and welcoming tax environment for international business with the requirement to continue to fund the ever increasing bills the Government commits to.

So, as ever, prepare yourself for the worst.  Whilst the Chancellor might choose to borrow his way into 2010 along with a bit of money printing to keep things moving along…..there is a disastrous deficit that needs to be dealt with soon and tax will be higher overall. 

The Guardian is currently running an interesting “Tax Gap” series on tax avoidance.  It’s a fairly biased commentary which probably reflects the broad profile of the Guardian readership and the fact that people who contribute tend to be those with strong feelings!   However the theme is that by closing loopholes more tax will surely arrive at the doors of No11 Downing Street.   Sadly these predictions are rarely very accurate.  Other ways to avoid tax are found and if that can’t be done big companies will simply move their tax base elsewhere.  We have to accept corporation tax is in a “marketplace” for many multi-national companies.  By having a good legal structure and a competitive tax system people will chose the UK – but there’s no scope for assuming people will pay ever higher taxes without complaint. 

Some of you may also have noticed more bad news on Tax Credits.  The Tax Credits scheme is a flagship anti-poverty policy of Gordon Brown.  It is popular with many lower earners as it tops up income.  However, I find the idea of taking tax/ni off all lower earners then redistributing it according to a range of factors (joint income and number in family) slightly offensive.  Not because the idea isn’t good but because it creates layers of administration are not proportionate to the benefit.  The news that £1 Billion PER YEAR in credits is still being overpaid is a disgrace (that means 1.3 million families have been overpaid).  There is already £3Bn of overpayments accepted as being irrecoverable.  This is shocking and reflects badly on the implementation and operation of the whole scheme.  A radical overhaul or complete replacement will surely be a Conservative priority if they are elected.  The worst of it is that the £1Bn is after an amendment to the rules which allows people to continue to receive credits for some time even after their income has increase substantially i.e. the margin for error/clawback was increased by changing the rules. 

To finish with a reminder, think about the end of the tax year and look to use your capital gains, pension and ISA tax reliefs wisely.  After all, it may be some years before we see the FTSE1000 below 4,000 again (or maybe not- I’m not going to predict that one).

THIS ARTICLE WAS PREPARED BY DONALD PARBROOK AT MILNECRAIG.  HIS VIEWS ARE PERSONAL AND MAY NOT BE THOSE OF THE FIRM OR HIS PARTNERS.  ALWAYS TAKE PROFESSIONAL INDEPENDENT ADVICE BEFORE MAKING ANY PLANNING OR INVESTMENT DECISIONS.