What might be in the Pre-Budget Report?
7 Nov 08
Alistair Darling will present his second pre-budget report amid a financial landscape vastly different from last October. Andrew Smith, chief economist at KPMG in the UK and Sue Bonney, head of tax at KPMG Europe, look at what it might include
Andrew Smith, chief economist at KPMG in the UK
“At the macro level, the focus in this year’s PBR will be the economic forecast and projections for government finances.
“After confirmation that total output fell in the third quarter, the UK is only one quarter away from recession – how long does the Treasury think it will last and how deep will it be?
“And with the slowdown already pushing up public borrowing, as tax revenues decline and rising unemployment boosts spending, the Chancellor is being forced to re-write the fiscal rules to accommodate higher annual deficits and raise the ceiling on total public debt. He will be treading a fine line between building-in enough leeway to ameliorate the worst effects of the downturn, while reassuring the markets that the public finances will be brought back onto an even keel once the economy stabilises.
“In the meantime, there is little option but to allow these “automatic stabilisers” to work – attempting to either cut spending or raise taxes at this stage would prove counter-productive.”
Sue Bonney, head of tax at KPMG Europe
“On the tax front, the Chancellor has limited room for manoeuvre. Public finances are clearly stretched but so are household budgets and there is an election in the next couple of years to consider.
Corporate tax
Foreign Profits
“The corporate tax world is waiting for the next development on the changes to the way that foreign profits are taxed and we’d expect to see something on this in the pre-budget report. Exactly what might emerge is not very clear – a full consultation document with detailed proposals on all the areas of foreign profits taxation under review is very unlikely but updated proposals on changes to the controlled foreign companies regime and a new restriction on interest expense are likely before the end of the year and could be unveiled in the pre-budget report.
Property
“The Chancellor may take the opportunity to help the property investment sector at the pre-budget report with an easing of the stamp duty rules for property investment funds. Currently portfolio purchases by property funds are subject to stamp duty at 4 per cent where the aggregate value is over £500,000, even if the values of the individual properties are below this £500,000 threshold. This is a result of a specific anti-avoidance rule that applies equally and arguably unfairly to such bona fide transactions. A relaxation of this rule could especially benefit housebuilders and residential property funds as it could pave the way for a possibly transfer of unsold housing stock into investment funds.
HMRC Powers
“We could well see draft legislation on new HMRC powers covering penalties for late payment and interest charges on outstanding tax in the pre-budget report. It will be interesting to see if any draft rules contain provision for HMRC to make allowances for businesses struggling in the current climate or if they will point to a more draconian approach to help the authorities raise more revenues from errant taxpayers.
Personal Tax
Allowances and thresholds
“The Chancellor usually announces the personal allowances for the next tax year at the pre-budget report. We would ordinarily expect these to be increased in line with the retail price index (RPI) for the year to September 2008. Under normal circumstances, increases in the personal allowances aligned to RPI may still lead to increased tax revenues as earnings usually rise more than prices. This may not be the case this year, and so the decision on personal allowances is more difficult. If the Chancellor decides to increase by less than RPI because he expects future inflation to be lower he runs the risk of further reducing voters’ living standards.
“If he follows a formula of raising personal allowances in line with RPI (up 5 percent for the year to September 2008), the new personal allowance is estimated to be £6,340 (2008 / 09: £6,035), the personal allowance for people aged 65 – 74 would be £9,485 (2008 / 09: £9,030) and the personal allowance for people aged 75 and over comes out at £9,640 (2008 / 09: £9,180).
“An additional complication this year is the fact that the Chancellor may use the pre-budget report to announce longer-term measures designed to compensate those who lost out as a result of the abolition of the 10 percent starting rate of tax in April 2008. Currently those with a taxable income of up to around £11,000 are not fully compensated.
“We expect the Chancellor to say he intends in future years to reduce the exceptional borrowing required to alleviate the current recession. One way to do this would be to announce in the pre-budget report a delay in further moves towards the alignment of National Insurance Contributions and income tax thresholds. Such alignment is scheduled for April 2009 but was complicated by the changes to personal allowances this year as a reaction to the abolition of the 10p tax rate. To delay it and not increase the higher rate threshold will mean more taxpayers paying tax at 40%. Given the need to boost the public purse and the possibility that the Treasury may have compensated taxpayers for the loss of the 10p tax band, it’s possible that Alistair Darling might follow the example of Gordon Brown in 2003 and increase National Insurance contributions for higher rate taxpayers in future years.
“As to the capital gains tax threshold, an increase in line with RPI would see this rise from £9,600 to £10,100. It is possible that the ‘Entrepreneurs’ Relief’ limit of £1million of gains might be increased. Whether many entrepreneurs will be in a position to take advantage of this relief in the current climate is, unfortunately, somewhat doubtful.
“Inheritance tax thresholds for future years have already been announced but at levels which are below where an RPI level increase would take them. For 2009 / 10, the inheritance tax threshold is currently set at £325,000. An increase in line with RPI would take it from the present £312,000 to £328,000.
VAT
“Under EU rules, the UK is prevented from zero-rating any additional goods and services for VAT purposes but the Chancellor has some room for manoeuvre on extending the scope for the reduced (5 percent) rate to many labour intensive supplies. Such supplies include items as diverse as shoe and bicycle repairs, renovation of dwellings and window cleaning.
“Additionally, to extend the scope of the reduced rate for energy efficient materials could be a timely and ‘green’ move were it to cover items such as low energy bulbs and energy monitors.”