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PBR 2008: Analysis - Buy now, pay later. By Andrew Jupp, head of tax, Tenon

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24th Nov 2008
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Breaking opinion and analysis on the Pre-Budget Report. Andrew Jupp, Tenon’s Head of Tax, comments on Darling's consumerist mindset.

In his Pre-Budget speech today, the Chancellor talked of “extraordinary challenging times” and “exceptional economic circumstances” that have hit the UK economy. He acknowledged that the underlying structural position of Britain’s economy is weaker than he thought in March.

Public borrowing is likely to be in the order of £100billion in 2008/09. The peak of borrowing is likely to be in 2009/10 when £118billion will be some 8 per cent of national income. It will be 2013/14 before national debt starts to fall significantly.

The highlight of the speech was the announcement of a fiscal stimulus, with immediate tax cuts. The Chancellor said we need “action now to boost economic activity”. Andrew Jupp, Head of Tax at accountants and advisers to entrepreneurs, Tenon, said: “It is no surprise that taxes have been cut in order to provide an immediate boost to the economy. But these will only be temporary and without doubt taxes will have to rise significantly in the future to pay back the massive borrowing.”

The highlight of the package of measures is the cut in the rate of VAT from 17.5% to 15% effective from 1 December 2008 and returning to 17.5% on 1 January 2010. Andrew commented: “This is the first cut in the rate of VAT for 17 years, and 15% is the lowest permitted by the EU. This will cost about £12.5billion a year but I wonder whether it will really boost consumer spending which is what the Chancellor hopes will happen. The recent High Street sales have failed to have an impact, so I think it unlikely that a small reduction in VAT will do much to boost consumer spending”.

Income tax allowances that were increased to overcome the 10p tax furore will be made permanent. But there is to be a new higher 45% rate of tax for earnings over £150k, but this will not come into effect until April 2011, shortly after the expected General Election. Personal allowances will be restricted for incomes between £100K and £140K, and abolished for incomes above £140K.

With effect from April 2011 there will be a 0.5% increase in both employers’ and employees’ national insurance contributions, and the starting thresholds for NICs will be put in line with that for income tax. Andrew says: “The last thing small and medium-sized businesses need is a rise in employers’ NICs at a time when they are likely to still be struggling with managing their costs”.

A very welcome announcement is that small businesses will be able to agree with HM Revenue & Customs a payment schedule for all taxes which suits their cashflow. In addition the planned rise in the small companies rate to 22 per cent has been deferred for a year. Businesses will also be able to carry back losses of up to £50k against the previous three years’ profits, giving a repayment of tax previously paid. Andrew says: “These are very welcome measures for entrepreneurial and family businesses, although I had hoped the Chancellor would reduce the small companies rate back to 20% or even lower. These entrepreneurial businesses are the lifeblood of the UK economy and they need all the help they can get”.

Another very welcome announcement which Mr Darling did not mention in his speech, was the indefinite postponement of the so-called “income splitting” rules that would have affected many entrepreneurial family businesses. Andrew says: “We have been saying that the rules would be unworkable ever since they were first announced. This is a welcome relief for these businesses which can now concentrate on creating wealth rather than worrying about how they are going to be taxed”.

Large and medium-sized companies will welcome the announcement that dividends from foreign subsidiaries are to be exempted from tax. Andrew says: “we have already seen some major UK companies leave the UK and this announcement will be a real boost to the competitiveness of our major companies.”

Summarising his overall thoughts, Andrew concludes: “The total package of tax reductions amounts to some £20billion. Spending alone will not bring down the public borrowing sufficiently to restore prudence. We will see very significant tax rises in the future, probably by further increasing employer’s national insurance contributions, and maybe a rise in VAT to 20%. We just hope that the good news for entrepreneurial businesses announced today is not reversed in the future”.

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