As you might have noticed, the PBR is unusually late this year, but then it has an unusual amount to deliver. Will shrewd government be able to save us from the worst of the coming recession? Now that Monday’s pre-budget report drawing near, Britain’s accounting firms are now making tentative predictions for the chancellor’s next move. Here’s what PricewaterhouseCoopers, Baker Tilly and MacIntyre Hudson have to say on possible policies:
A reduction in VAT
Consumer spending could receive a boost from a cut in VAT, although any reduction would almost certainly be limited to 2.5% thanks to European statute. PricewaterhouseCoopers calculate such a move would cost the Treasury about £12 billion, but it would deliver a “big bang” that helps those on low incomes as Christmas approaches. But not everyone agrees. Baker Tilly point out that as far as businesses go, a VAT reduction would mostly give cash flow savings rather than actual cost reductions. What’s more, the businesses least able to benefit quickly from this tactic would be precisely those that need short-term help the most, namely smaller businesses using flat-rate schemes.
Odds : 6-1 (PwC),
The temporary personal allowance increase becomes permanent
The extra £600 that fixed the botched 10p tax rate this May was supposed to be expire at the end of this year. This policy cost the Treasury a mere £1.7 billion, and making it permanent would only cost about half of that, discounting inflation related changes, at least according to PwC. With taxpayers’ purse strings growing tighter this seems like a likely move. Baker Tilly agree, but observe that the benefits would not kick in for a while, especially for the self-employed.
Odds: 1-3 on (PwC)
Align NICs with personal allowances
This basic simplification has been talked about for some time. Aligning the national insurance contributions (NICs) threshold (currently £5,435) with that of personal allowances (£6,035) would help low-earners but cost the government coffers £2 billion. Darling also needs to clarify whether the start point of the 40% income tax rate and the NIC upper earnings threshold will be aligned in April 2009 at £43,000, as planned, or if it will be at a lower figure given his changes to the 40% start point in May.
Odds: 2-1 (PwC)
Further adjustments for taxpayers who lost out from the 10p income tax changes
Those earning between £8,000 and £10,000, such as retirees, students, and part-time workers, have still not been fully compensated for the removal of the 10p income tax band. The chancellor already said these taxpayers could expect specific redress later in the year. Will he make good?
Odds: 1-2 on (PwC)
Extra for targeted tax credits
The tax credits system is a lumbering, fraud-ridden mess, but nevertheless, it could be seen as an easy channel with which to dampen the effects of hiked food and energy prices on Britain’s poorest families. These tax credits will have to rise in line with inflation in any case.
Odds – Evens (PwC)
Minimum age lowered for the working tax credits system
The minimum age for claiming working tax credits is a rather advanced 25. With unemployment on the rise, lowering it could make it easier for younger jobseekers to earn a crust.
Odds: 5-1 (PwC)
An increase in the annual ISA limit
You can currently stick £7,200 in an ISA every year, of which £3,600 can be cash. Interest rates have been dropping, so savers might need a bit of encouragement. Then again, the need to ramp spending could predominate.
Odds: 8-1 (PwC)
Smoothing small business cash flow concerns
Lord Mandelson has promised small businesses that the government will be providing some fiscal first aid. Many will be facing tax bills for the previous year’s good trading just as the downturn is kicking in. Those bills will have to be paid, but the speed with which SMEs can claim loss relief could be dramatically improved. Potentially, Darling could extend the period in which such losses can be carried back. Baker Tilly rubbishes the speculation about tax payment holidays with the consideration such a move would have an unbalanced effect: “while it might benefit those who had yet to pay tax on past profits, we can't imagine that the government would make temporary tax refunds to those who had already paid tax on past profits.”
Odds: 2-1 (PwC)
Cancelling the planned 1% increase in small company corporation tax
Corporation tax for small companies is due to increase from 21% to 22% from April 2009. A U-turn here would not only offer a life-line, it could be cost-effective for the Treasury too: struggling companies will probably dent the projected tax take in any case.
Odds: Evens (PwC)
A corporation tax cut for large busineses
Big business has been bleating about the UK tax system all year, and together with the nose-diving financial markets and slumping demand, a further reduction of 2007’s 28% rate would be timely, argues MacIntyre Hudson.
“Darling needs to either accept the flight of these companies abroad, or undergo a conversion on the road to Damascus,” says MacIntyre Hudson tax partner Nigel May.
Odds: 3-1 (MacIntyre Hudson)
Backtracking on the taxation of foreign profits
UK-based multi-nationals have been much in the headlines this year over off-shore earnings. In the States, the President-elect made the issue a prominent part of his campaign. Media attention on the matter here in Britain also means the issue will get a likely mention in parliament this Monday. There have already been long-running, high-profile discussions about overseas profits, but business will be hoping for an exemption on revenue already taxed abroad “to keep its faith in the prospect of an improved UK system”, says PricewaterhouseCoopers. Similarly, MacIntyre Hudson believe a new tax regime for foreign profits “is likely to die a quiet death”.
Odds: 1-2 on (PwC)
A freeze on council tax
Local councils will already be working out how much they can ramp their tax take as of April next year, but households are already under strain. George Osborne proposed a two-year freeze on council tax at the Conservative party conference, saving a typical Band D household £200. With nationalists north of the border looking at scrapping it entirely, will Labour pinch the idea?
Odds: Evens (MacIntyre Hudson)
Extend capital gains tax to all UK properties
If there are any left-wingers still standing in New Labour, Darling could appease them by going after the super-rich by making all UK property subject to CGT, regardless of the tax status of its owner (the exemption for a principal private residence would be unaffected). This is already common practice in other countries, so it could hardly be seen to affect the UK’s competitiveness.
“A tax which is simple to collect and levied on people who for the most part do not have the right to vote is a chancellor’s perfect solution”, says MacIntyre Hudson tax principal Patrick King.
Odds: 10-1 (MacIntyre Hudson)
So what does the AccountingWeb community make of that? Any bargains on offer here, or are all the long shots overpriced? Have the big firms overlooked an outsider or got the form wrong on a couple of favourites? Speak out!
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Links:
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