Budget 2009, predictions
Will the budget herald increases for higher rate taxpayers through additional NICs and income tax ?
"Alistair Darling is treading a very fine tax tightrope. He is under pressure to announce tax measures which support British business and hard-pressed families, but cannot afford to further re-mortgage our children's future. Ultimately, certain groups of taxpayers are going to have to dig very deep - and probably for a long time".
"Higher rate taxpayers should brace themselves. They will be paying more in National Insurance contributions from 6 April 2009 as the upper earnings limit will be aligned with the higher rate threshold for income tax (taxable income over £37,400 pa) from 6 April 2009."
"But the Chancellor will need further funds. He may look to generate additional revenue by increasing the rate of income tax for higher rate taxpayers, as early as this year. We know that the higher rate of tax rises to 45% in April 2011, but this date could easily be brought forward. Ireland, for example, has introduced a ‘temporary levy' for higher rate taxpayers. The UK government could choose to follow this approach," said Richard Mannion, national tax director at Smith & Williamson, the accountancy and financial services group.
What else will the Chancellor do in the forthcoming Budget? Smith & Williamson considers Alistair Darling's next moves.
Income generating policies
Alignment of CGT with income tax
CGT rate could be increased from its current flat rate of 18% to an individual's marginal rate of tax. This would immediately stop any perceived tax avoidance strategies which attempt to classify income as capital gains. Collections to the Exchequer arising from CGT were around £5.3billion in '07 / 08 and an increase in rate may be required to maintain this level, notwithstanding the fact that relief for indexation on gains made by individuals was effectively abolished in April 2008.
VAT
Much publicity has been given to the Chancellor's intention to return the standard VAT rate to 17.5% at 31 December 2009. However, it's worth noting that if the rate were increased to say, 18%, this would net an additional £2.5billion a year. Moreover, the UK VAT rate is one of the lowest in Europe.
Freezing personal tax thresholds
Thresholds for personal allowances and income tax rates may be frozen, given the current low inflation environment. However, the large government economic stimulus packages for the banking and car industries and ‘quantitative easing' (injection of cash in the economy through government purchase of bonds), means the risk of higher inflation may not be far away. In an inflationary environment, frozen personal allowances will help increase the government cash collection as income increases.
We already know that the personal allowance for those earning more than £100,000pa will be reduced in 2010, thereby increasing the government's tax-take and it's possible that that measure could be advanced.
NICs
A further option for a cash-starved government might be to accelerate some of the NIC increases announced in the PBR2008. However, the downside of increasing NIC for employers is that it acts as a tax on jobs, which would be counterproductive in the current environment. NIC could therefore simply be increased for individuals where it is effectively an extra tax rather than a ring-fenced levy to fund health and pension spending.
Saving jobs
To support employers who might increase the number of staff, employers' NI might be waived or reduced in relation to the employment of additional people. (This waiver might be capped at say, the first £10,000 of employers' NICs).
Help for businesses
Increased flexibility in treatment of losses
In the event a business makes a loss in one year, this can currently be carried forward until the organisation becomes profitable when the earlier loss is offset against tax. However, the government could enable businesses to surrender this right to a future tax credit for a cash injection in the short-term. (This approach has been successfully used for research and development costs).
Such a tax break could be a win-win policy: it would help struggling businesses now, inject cash into the economy and remove an uncertain future liability for the government.
Support for entrepreneurs and smaller businesses
Ease rules on Venture Capital Trusts and Enterprise Investment Schemes - the size and value of companies which can qualify for investment under these schemes was virtually halved a few years ago.
So, in light of the current difficult equity and debt markets, a return to the previous thresholds would be helpful to hundreds of small businesses
[From 6 April 2006, the reduction in the ‘gross asset' test reduced the size of companies which could qualify for investment under VCTs and EISs meant fewer companies were eligible to raise funds under the Venture Capital Trust or Enterprise Incentive Scheme. The revised upper limit for the ‘gross asset' test fell from £15m before investment and £16m immediately after to £7million before investment and £8 million afterwards.]
The government has consulted on the simplification of accounts for smaller companies and this could usefully be extended to partnerships and sole traders. The approach could allow ‘cash accounting' which means expenses are offset against profits in the same financial year. This generally has the effect of reducing taxable profits in the short term which is not only financially helpful but also simplifies related administration.
Help for the property market
A reduction in SDLT for, say first-time buyers, could give a useful boost to the property market.
Local authorities are likely to be given the ability to charge supplementary business rates as a means to fund large infrastructure projects such as cross-rail. Similarly the introduction of the community infrastructure levy - a charge that can be levied by local authorities on development value - could be used to fund local and regional infrastructure projects and could provide a welcome boost to the property sector.
The REIT industry has, in the past, lobbied for changes to stimulate the development of residential REITs, such as incentives for those who sold property to REITs and held REIT shares for a certain time, with the potential to roll gains into the shares.
Boost to international tax competitiveness
Many believe a gradual reduction in the main corporation tax rate is required to maintain the competitiveness of the UK tax system. The reduction of the main corporation tax rate from 30% to 28% from 1 April 2008 was paid for by reductions in capital allowances (in some cases reducing from 25% to 10%, together with the phased abolition of industrial and agricultural buildings allowances by 2011. This has had a significant adverse cashflow impact on some sectors such as asset heavy industries and infrastructure projects.
While the focus of this budget may be on maintaining government finances in the short term, the government should not lose sight of the medium and longer term direction of business tax policies and they may consider reducing the corporation tax rate over time. In order to be competitive with European neighbours, this would ideally be reduced as low as 15%.
Tax Havens
These are currently under the spotlight and we could well see further tightening up in the Budget as they are a major reason for the uneven international playing field.
Other stimulating policies for business
Options for stimulating future capital expenditure could include: increasing capital allowance rates, permitting short life asset elections for a wider range of qualifying assets and providing for an option to take capital allowances based on accounting depreciation rather than fixed rates.
Share schemes
With the emphasis on share based reward, especially in the financial services sector, it would make sense for the government to provide greater support for these employer share schemes. We may therefore see an increase in the taxable benefits of HMRC approved plans. For example, the Chancellor might increase the £30,000 limit on shares that can be held in a Company Share Option Plan (CSOP).Under a Share Incentive Plan (SIP) the maximum tax breaks are only achieved if the shares are held in trust for five years. To encourage greater participation, especially among lower-earners, this could be reduced to say, three years.
Green measures
There will doubtless be measures to boost our environmental credentials. These might include widening the range of ‘green' assets which qualify for enhanced capital allowances (while reducing allowances on certain environmentally-unfriendly expenditure) and extending cash repayment options to unincorporated businesses (they already exist for companies claiming enhanced capital allowances, research and development relief and land remediation relief. This would target smaller and start-up businesses which would be another boost to the entrepreneurial economy.
To help car manufacturers and to promote the use of greener cars, we could see greater tax breaks for employers to encourage green cars under company car schemes.
For further information, before or on the day of the budget:
Richard Mannion - National Tax Director
020 7131 4252 / mob 07799 761326
Tim Lyford - Head of Corporate Tax
020 7131 4213
Inez Anderson - Employment Tax and Incentives Director
020 7131 4919
PR queries:
Kate Harrison 020 7131 4228
Matt Rowe 020 7131 4550
Jess Koslow 020 7131 4264
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
