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Budget 2007: Opinion - Sleight of hand and election fever! By John Newth

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22nd Mar 2007
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One of the television commentators on the 2007 budget referred to Gordon Brown as a conjuror. I tend to agree. Many of the so-called ‘give-aways’ were counterbalanced by ‘takeaways’, and the budget was notable in some respects, not for what was in it but what was not in it. The budget was clearly designed to appeal to the electorate before the government leadership change and even possible General Election. It will only be the headlines that the ‘man on the Clapham omnibus’ will understand – not the small print.

I have only been able to skim through the 81 Budget Notes and 190 pages of script, but it is clear that many of the provisions are extremely complex. Goodness knows how long the Finance Bill and Finance Act will be. Whatever else results from the 2007 budget, it will be a bonanza for accountants, lawyers and tax advisers.

Business taxation

Much will be made of the reduction of the corporation tax rate by 2% to 28%. However, this does not commence until 1 April 2008, and in the case of small companies is counterbalanced by an increase in the small companies rate by 1% a year from 1 April 2007 for three years, resulting in a final rate of 22%.

The extension of the initial allowances for small businesses and the introduction of an investment allowance look attractive. Remember, however, that the industrial buildings allowance is being abolished, and the writing down allowance on plant and machinery is being reduced from 25% to 20% a year.

Personal taxation

Much will be made of the reduction of the basic rate of income tax from 22% to 20%. Once again it does not commence until 6 April 2008, and is largely counterbalanced by the starting rate of 10% on employment and pension income being abolished.

Middle income taxpayers have again (surprise, surprise) been the target of the Chancellor, as the increased higher rate threshold of £43,000 is being aligned with the limit for national insurance imposition.

Much is made of a joint family CGT exemption of £18,400. All that has happened is that the individual exemption has been increased to £9,200.

The increase of the IHT exemption to £350,000 in 2010 is welcome, but based on the current inflation in residential house prices, all this does is to partly keep in touch with inflation. It was too much to hope for a relaxation of stamp duty on residential properties. That is a real ‘cash cow’ for the chancellor.

Pensioners

As a pensioner I welcome the increase in the personal allowances for those of pensionable age. It is also good to note that the government is at last recognising the plight of those whose occupational pension schemes collapsed.

Nothing will recompense pensioners and charities, however, for the theft by the government when the tax credit on dividends was abolished in 1999 (with the help of Andersen). I personally lost £thousands as a result of this, and I know many others in the same situation. It is one of the reasons that I have worked almost full time until age 70.

Tax penalties

The budget notices need to be studied in detail. BN79 is an ominous one, as it confirms the new penalty regime for tax offences.

Government spending

How are all the ‘goodies’ going to be paid for? The Chancellor was silent on total government borrowing. While ‘throwing’ money at the NHS and education is welcome in theory, it will be money ‘down the drain’ unless those particular services are managed properly.

Overall view

This is a budget that flatters to deceive. It may in fact be almost neutral in its tax effect. Time will tell about its real effect when all the small print has been studied carefully.

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Richard Murphy
By Richard Murphy
22nd Mar 2007 10:37

The NHS was reasonably managed...
until somone thought about introducing market rules for reasons of pure dogma.

Then it all went horribly wrong.

Funny that.

Richard Murphy

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By naomi2000
22nd Mar 2007 12:52

EIS/VCT/CVS changes
Some EIS, VCT & CVS changes have not been reported widely because they werte buried on page 35 of the master notes and did not get their own press release.

The proposal relates to the EIS & VCT rules . EIS & VCT finance are an important source of cash for technology start ups. The new rules will limit investment from £7m to £2m . The reason for this change appears to be compliance with EU State Notified Aid Rules.

Most EIS investments are very small and are well below the £2m limit. However technology start ups usually need more cash and find it harder to attract more conventional sources of finance. They are far more likely to be affected by the new limits.

There is a window of opportunity because the changes don't have immediate effect. The EIS changes are effective from Royal Assent (expected to be end of July 2007). The VC changes apply to money invested in the VCs after 5 April 2007. In theory, a VCT could invest up to three years later but most try to be fully invested as quickly as possible after funds have been raised.

I specialise in the VC reliefs so it's sometimes hard for me to judge how interesting they are to normal human beings, but these changes are going to have a big knock on effect on UK business.

Naomi Saunders
dTax LLP

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