The Pre Budget Report 2008
Old Mill Overview
In yesterday’s Pre-budget report the Chancellor announced far reaching measures designed to stimulate the economy. These included tax cuts of around £20 billion and a significant increase in public sector borrowing, all of which are designed to counter the current and sharp decline in economic activity across the country.
The Government’s analysis of the depth and length of the recession is arguably optimistic as they predict signs of recovery in the last two quarters of 2009 with growth of between 1.5% to 2% in 2010 rising to 2.75% in future years. Their fiscal projections anticipate a return to “normal” by 2015-16.
There will be tax rises to pay for the announced spending plans (and borrowing), many of which will likely take effect after the next general election.
In a quite radical shift of policy, an announced change in the marginal rate of taxation for high earners was announced (along with other measures to restrict the value of tax free personal allowances).
Even if there is a change of Government, they will be constrained by yesterday’s announcements which have arguably set the blue print for UK fiscal policy for the next eight years.
The capital markets seemed to approve, with a rally in share prices yesterday afternoon.
Support for businesses
The measures proposed by the Government are largely aimed at improving companies’ access to funding and putting in place schemes to ease cash flow pressures.
Measures targeted at overcoming problems obtaining finance
The government would appear to have drawn on its close relationships with the banks to offer two schemes via the Small Business Finance Scheme and the Exports Credits Guarantee Department.
The Small Business Finance Scheme will be launched early next year. This is a new temporary guarantee scheme to enable up to £1billion of new government lending.
The Export Credits Guarantee Department will offer another temporary guarantee scheme, offering a £1billion facility to provide exporters with better access to working capital.
In addition to this the Government will also put aside £50million for equity investment into companies which are too highly geared. For other companies without leveraging issues there will be an opportunity to approach RDAs who are launching loan funds to help businesses over the next 6 months.
Cash-flow improvers
A new Business Payment Support Service is to be launched to help businesses in temporary financial difficulty pay HMRC bills on a timetable they can afford.
Business rates
The government is to temporarily increase the threshold at which an empty property becomes liable for business rates to those with a rateable value up to £15,000.
Companies receiving backdated business rates bills issued before 31 March 2010 will be able to pay their liabilities for previous years in equal interest free instalments over 8 years rather than immediately.
Corporation Tax cuts / deferrals
The one year loss carry-back relief has been extended to 3 years for up to £50,000 losses which may help generate tax repayments in certain cases.
The planned increase in the small companies rate up to 22% from April next year has been deferred and will remain at 21% until 2010.
Foreign business
Here, the Chancellor is evidently aiming to improve the UK’s global trading position and to that end most foreign dividends received by large and medium sized businesses will be exempted from tax though there will be targeted anti-avoidance legislation to protect against schemes aimed at exploiting these rules. As part of the changes there will be a worldwide debt cap on interest, extension of the unallowable purpose rules, and other changes to the CFC system.
Cars – Duty
Many of the recently proposed changes are now being delayed. In April 2010 the differential first-year rates on new cars will go ahead, but the proposed new rates for older cars will now be phased in. All cars will now see an increase in duty of only £5 from next year. This will rise to a maximum of £30 per car in 2010 (rather than £90). Less polluting cars will see no increase or a cut of up to £30.
Cars – Capital Allowance
The rules will change so that allowances are based on emissions as announced. There are currently no specific details, but these changes will be effective from 1st April 2009 for companies and 6th April 2009 for unincorporated businesses and individuals.
Tax Planning
As usual the Chancellor took a look at closing perceived tax loopholes. This year there is the threat of more to come – but perhaps surprisingly little direct change. Perhaps this may come out in small print.
Review of Offshore Financial Centres:
A review into” the long term opportunities and challenges for the UK’s crown dependencies and overseas territories as offshore financial centres”. Interim conclusions will be announced within the 2009 Budget. In his speech the Chancellor specifically mentioned the Isle of Man and the Channel Islands. No doubt the review will look at the use of these countries as tax havens. This could end up with long term ramifications for tax planning – but no immediate effect.
Avoidance Scheme Disclosures
Amendments are to be made to the disclosure regime to clarify how and when users of schemes report to HMRC.
A particular scheme involving plant & machinery and film leases has effectively been closed from 13th November 2008.
VAT – A worthwhile cut?
The Chancellor of the Exchequer, Alistair Darling, has announced a temporary cut in the rate of VAT to 15%. The rate cut is effective from next Monday, 1 December, and will go back up to 17.5% on 1 January 2010.
The rate cut is part of a package of measures designed to stimulate the economy out of recession. The stated logic behind choosing VAT was that as so many people now fall below the threshold for direct tax the most effective way of helping the lower paid to have more to spend was to reduce VAT, which everyone pays. But will this expensive gamble work and who will actually benefit?
Most commentators agree that a 2.1% (2.5/117.5) reduction on the price of goods in the shops will have a marginal impact on retail sales, particularly when set against discount levels of 20% or even 30% we have seen lately. A saving of a couple of pence in the pound is probably too small to influence consumer spending even if it is passed on in full. And for those on low incomes, whose main purchases are essential items, the impact will be negligible as items such as food carry no VAT anyway.
No advantage for fuel, tobacco and alcohol
For drivers, smokers and drinkers the cut in VAT will be matched by a rise in duty, leaving this large segment of the population no better off. The puzzling aspect of this policy is that whereas VAT is routinely reclaimed by businesses the new duties will not be. In effect, this could be considered as a new stealth tax on businesses in contradiction to the other efforts to help them in this pre-budget report.
Retailers who do pass the reduction on will face practical difficulties re-pricing their product lines at what is already their busiest time of year. Many retailers, particularly mail order suppliers are likely to have sent their Christmas catalogues out already, and could face significant reprint costs. And those that do reduce prices will have a further headache next year– will they be able to increase their prices when the rate goes back up again?
Businesses that sell higher value goods and services such as cars or kitchen extensions are likely to benefit more. Here the VAT saving, typically £250 on an average car could be just enough to stimulate extra spending.
Advantage for businesses who cannot currently claim back VAT
But the real winners will be exempt businesses who cannot claim VAT back on their costs, such as those in financial services, education, and charities or those businesses who operate below the VAT threshold. The Chancellor has quietly injected a significant cash sum into the banking industry, much of which they now own. It is to be hoped that the banks respond by lending more to businesses.
Personal tax changes - income tax, tax credits and national insurance
The emphasis was on helping people fairly, by providing immediate help for low and middle income taxpayers through increases in personal allowances, tax credits and the state pension, mainly by bringing forward proposed increases.
The £600 increase in income tax personal allowances made in May 2008 will be made permanent, with a further increase of £130 above indexation to £6,475 in 2009-10. It means 22m basic rate taxpayers under 65yrs will pay £145 less tax in real terms the year 2009-10. The government will also maintain additional £130 of personal allowance in April 2010.
Child Benefit
The Government remains committed to eradicating child poverty by 2020 and has increased tax credits to boost income for lower income families. The proposed increase in Child Benefit will be brought forward from April to 5 January 2009, worth an additional £22 on average to families. It also proposes the increase in child element of the benefit be brought forward, increasing it by £25 above indexation from April 2010 to April 2009. All elements of the Working Tax Credit, apart from the childcare element, are increasing in line with inflation.
Encouraging Savings
The government will contribute 50p for each pound saved in the new National Savings Gateway. This will be introduced nationally in 2010 and will offer an incentive to save for around 8m people on lower incomes. People on qualifying benefits and tax credits will have an opportunity to open an account.
Pensioners
The Government will pay £60 to all pensioners in January, which is the equivalent of bringing forward the April increase in basic state pension for a single pensioner.
Future Tax Rises
The Government will attempt to consolidate public finances from 2010 onwards by introducing a number of measures to increase tax for higher rate and higher income families.
The income tax personal allowance will be restricted to half its value for those with incomes over £100k from April 2010, so that it is worth the same as to a basic rate tax payer, and to zero for those with incomes over £140k.
A new additional higher rate of income tax of 45% will be introduced for those with incomes above £150k from April 2011.
The employee, employer and self-employed rates of NICs will increase by 0.5% from April 2011. However to compensate the lower paid the point at which people begin to pay NICS will be aligned with the income tax personal allowance.
This is a preliminary analysis only and professional advice should be sought before relying on the above or undertaking any transactions. Please speak to your Old Mill contact or a member of the Tax Team.