Pre-Budget Report 2009 - Predictions

Initial thoughts on the PBR from Richard Mannion, national tax director at Smith & Williamson, the  accountancy and investment management group

The backdrop to this year’s PBR is intriguing. It’s clear the government must raise more tax to start to repay the exceptional borrowings resulting from the economic crisis. We are already expecting a new 50% top rate of income tax on taxable incomes exceeding £150,000pa from 6 April 2010 while personal allowances will be withdrawn from individuals earning more than £100,000 pa. But those increases alone are clearly not going to bridge the gap.

So the question is, how can this discrepancy be tackled? More tax increases, spending cuts, or both? And how can the government make this bitter pill more palatable on the eve of a difficult election?

We wait to see, of course.  But front-runners must include a hike in the CGT rate to reduce the difference between CGT (at 18%) and income tax. We have been put on notice that the rate of corporation tax for smaller businesses is due to increase to 22% on 1 April 2010. This 1% increase has already been postponed for one year and is unlikely to be delayed again since these levels are far below the higher rates of income tax and such disparity can distort behaviour. Recent comments suggest that bankers’ bonuses could even be at risk of a new tax.

Although the Chancellor won’t increase VAT beyond 17.5% for now, he may signal further rises to take effect in a couple of years to bring us closer to typical EU rates.  Despite difficulties in the housing market, we could get an increase in SDLT for properties over £500,000, while a clarification on the tax on second homes (in the wake of MP’s expenses) is likely.

We can also expect a strengthening of the rules on tax avoidance and increased penalties. Given that the Government’s information gathering powers are so much improved, these are not empty threats. Tax advisers and corporates must already declare details of aggressive tax planning to the government who can then decide what action to take. So arguably any further tightening of the rules could target small-scale every-day tax planning rather than heavily contrived avoidance – which has already been outlawed. However, such a move could produce substantial ill-feeling with little or no boost to revenue.

Richard Mannion, national tax director,
tel: 020 7131 4252
richard.mannion@smith.williamson.co.uk

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.