Background
With the stock market at its most volatile for many years, reaction to the Chancellor’s announcements is likely to have an immediate impact on asset values and the wider economy: the Chancellor will need to choose his words with great care.
All new measures that are announced will be examined in great detail for signs of how the Government will try to help the economy and fund its record borrowing. It seems unlikely that the Chancellor will follow the lead of his Irish counterpart and raise taxes. Instead, the expectation is that the Government will borrow to fund substantial tax cuts. It is also expected that a long list of the capital investments the Government is making will be announced to show what it is doing to boost the economy.
It is, however, clear that the Government is now prepared to take prompt action, so, conceivably, major and immediate tax changes could be announced to bolster the economy.
PKF’s predictions
Business taxes
Tax rates
Recent comments from the Chancellor about the dangers of increasing taxes in a recession mean it is unlikely that there will be significant increases in business tax rates. Indeed, it is possible that the proposed increase in corporation tax for small companies to 22% from April 2009 could be deferred.
While a tax cut for large companies would help the UK remain an attractive location for international businesses, it is unlikely that the Government could afford to lose any further tax revenues at the moment.
Family businesses
The rules taxing the profits of the ‘husband and wife’ owned companies have been in doubt for a number of years – ever since the Jones v Garnett case surfaced. The Joneses established their jointly owned company, purchased one share each in the company, drew salaries and distributed profits equally as dividends. HMRC argued that Mr. Jones had effectively created a settlement to divert his earnings to his wife and avoid tax. When the case reached the House of Lords, their Lordships agreed with HMRC but still found in favour of Jones because of a specific exclusion clause for settlements created by outright gifts between spouses.
After the ruling, the Treasury quickly announced that it would act to block such tax ‘income splitting’ but, after much outcry over its initial proposals, they were deferred at the time of the 2008 Budget to allow for further consultation. How far this consultation process will progress remains to be seen but we expect any changes again to be deferred until the economy moves into recovery.
Capital allowances
To boost business investment during the recession, the Chancellor may announce that the Annual Investment Allowance (currently £50,000 for all businesses) will be increased for small businesses for the period April 2009 to April 2010. Setting this new allowance at £75,000 or £100,000 for small businesses only would cost little and be welcomed by small business owners. However, the Government’s apparent oversight on the way this allowance interacts with claims for Working and Child Tax Credits may be rectified with specific measures to limit the relief that can be claimed.
Download a copy of the October 2008 Capital allowances update.
Business rates
Since April 2008, owners of empty business properties have had to pay full business rates within just three months of acquiring the property. With the property market stalled, the Government may decide to halt this new charge on empty property to avoid sound buildings being demolished by property companies that can neither sell them on nor afford to keep them empty.
Foreign profits
This is another area where a public outcry has caused a delay and rethink of the Government’s proposals. With businesses still leaving the UK for more favourable tax regimes, the Chancellor will want to be seen to be making the UK corporate tax regime more attractive for international companies. How he can do this without significant loss of tax revenue is less clear.
The US Government has announced temporary tax changes to facilitate repatriation of overseas profits to the US. There is an outside chance that, with cash flowing out of UK bonds as interest rates have fallen, the Government may be tempted to introduce some form of temporary exemption or relief for dividends paid to UK parent companies from EU based subsidiaries to help restore some balance.
VAT
The idea of deferring VAT payments for small businesses has been floated by the opposition so it is possible that some VAT concessions will be announced. These are more likely to take the form of red tape reductions than payment holidays. For example, a significant increase in the VAT registration limit is possible. In addition, the Government may apply to the EU to increase the turnover limit for the cash accounting scheme to help improve the cashflow of medium-sized businesses.
In the longer term, it would not be a huge surprise if the standard rate of VAT – low by EU standards – does not rise to help the Government balance its books. Increasing the rate of VAT does have an inflationary impact, so the safest time to make an increase is when inflation is low or falling, as is now expected to be the case in the next few years.
Shares schemes – relaxing the limits
With the Chancellor backing share options rather than bonuses for city executives as a way to counter ‘the bonus culture’, it is possible that we may see some changes to the current range of approved share schemes. Increasing the value limits for Company Share Option Plan would cost no additional tax revenue for three years and would perhaps be a less controversial move than widening the eligibility criteria for the more flexible Enterprise Management Incentives scheme.
Gambling levy
A new levy is to be imposed on gambling companies to raise funds for ‘education and research into problem gambling and the treatment of addiction’. The voluntary levy that is currently in place has not raised the desired amount so the Government plans to impose a statutory levy from April 2009.
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Personal taxes
Tax rates, bands and allowances
The political debacle of the 10p tax band may deter the Chancellor from making any changes to personal tax rates but there are some interesting options available to quickly inject funds into the economy. He may choose to increase personal allowances immediately as he did in September, although it is probable that any increase will be adjusted to benefit basic rate taxpayers only.
If the Chancellor is prepared to give tax allowances a radical overhaul as he did with capital gains tax, then he may restructure these as ‘tax reducers’ to give the lower paid more benefit from them than those on higher incomes. Altering the tax bands and the national insurance contributions (NIC) bands could also allow the Chancellor to direct funds to low and medium income households.
Increases to Child and Working Tax Credits can be expected and an increase to Child Benefit seems likely.
A new rate of NIC for the highest earners, perhaps those earning £100,000 or more per year might be politically acceptable to offset other tax cuts. However, a direct attack on the city bonus culture is much more likely as the Chancellor has already announced that executives in the newly ‘nationalised’ banks should get share options rather than cash bonuses in future. A new special rate of income tax or NIC on large cash bonuses cannot be ruled out.
To soften some of the blow of the recession, the Chancellor may decide to up-rate some of the longstanding tax exemptions and allowances. For example, the £30,000 limit for tax free ex-gratia payments (where stringent qualification criteria are met) has not be increased for many years and increasing it when many taxpayers are losing their jobs would win public support.
Capital taxes
With major announcements on capital gains tax in last year’s Pre-Budget Report, it is unlikely that there will be significant changes this year – particularly as asset values are falling and the tax take for capital taxes is expected to fall. However, anti-avoidance measures to prevent abuse of the new entrepreneurs’ relief are possible now that the final structure of the new rules has become clear.
Download a copy of the April 2008 Capital gains tax changes.
After a dramatic inheritance tax giveaway last year - by effectively doubling the nil band for married couples and civil partners - the Chancellor may claw back some tax . Abolishing tax-free lifetime gifts could immediately increase tax revenue, as could removing the current exemption for transfers between spouses.
Residential Property
As the Government is eager to get bank lending and the property market moving again, a dramatic increase in the nil rate band of SDLT could be announced. Exempting residential property purchases of up to £1 million would grab attention, but cost relatively little, as the amount of SDLT collected will fall more dramatically than property prices this year.
Pensioners
Many expect significant giveaways for pensioners to include higher winter fuel allowance payments and perhaps a generous increase in the basic state pension. For individuals about to retire, and especially for those approaching the age of 75, at which a pension annuity must be purchased, there could be an extended time limit so that individuals are not forced to lock themselves into an annuity at a time when the value of their pension fund has fallen dramatically.
Non-domiciled individuals
After the headline grabbing changes announced in 2007, the Chancellor stated in his 2008 Budget speech that no further changes would be made to these rules ‘during the life of this Parliament or the next’. However, this Pre-Budget Report is likely to contain a few proposals to clarify the new rules introduced in Finance Act 2008. In addition, it would simplify this area of taxation for all parties if the Government were to create a statutory definition of tax residence in the UK and we expect this issue to be covered, if only by the issue of a consultation document.
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Green taxes
With energy and fuel prices falling, the Government’s promise to defer the fuel duty increases originally scheduled for autumn 2008 now looks rather hollow. While it will not wish to be seen to raise taxes in a recession, a return to fuel duty increases can be expected in 2009. Car tax increases on the most polluting cars also seem likely to be postponed for at least a year.
Greener buildings
The longstanding problem of finding a replacement to council tax and business rates could perhaps be addressed by proposals that would allow Local Authorities to charge higher rates for energy inefficient residential and commercial buildings. This would give individuals and businesses a longer term incentive to buy or rent green buildings. Given the level of controversy that local taxes can cause, a long process of consultation can be expected on any changes that affect the country’s current building stock.
Green energy
The Government continues to claim that it wants the UK to be at the forefront of green energy technology. It is likely that the Government will announce significant investment in the sector, financed by the energy companies (under threat of a windfall tax if they do not).
A formal announcement of a guaranteed rate of income for small green energy generators is also likely. It will cost the Government nothing (as the price will be paid by the energy distributing companies) but will encourage investment in renewable energy.
It is possible that a new tax relief for investing in green energy generation may be announced if the Government accepts that it cannot afford to fund significant new generating capacity and incentives are needed to encourage private sector investment.
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Tax avoidance
Clearly, clamping down on tax avoidance is likely to feature in the Pre-Budget Report as a way of recouping tax revenues. Alongside giving further powers to HMRC as part of its ongoing project, the Chancellor may also announce a ‘spend to save’ initiative, allowing HMRC to recruit and train more investigators to boost the extra money it collects from tax enquiries.
Offshore bank accounts
The 2007 Offshore disclosure facility helped to generate significant sums of additional revenue for HMRC and it has announced that a second project will take place in 2009. The terms of the second facility will almost certainly be less generous and HMRC is expected to make clear that this is the last opportunity it will give to tax avoiders to come clean and suffer reduced tax penalties.
Tax relief for travel expenses
The Government is concerned about the abuse of the tax relief rules for travel expenses incurred by temporary workers. A consultation on expenses claims made by temporary workers who operate within structures using overarching employment contracts provided by umbrella companies and employment agencies is due to report. It is expected that further restrictions on expenses claims will be announced.
Substantial donors to charity
The tax relief rules for those making large donations and the administration requirements for charities could be overhauled following a consultation exercise to establish whether or not the current rules are strict enough to deter tax avoidance.
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