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A Chancellor on thin ice

28 Mar 08

On 12 March, the Chancellor presented Gordon Brown's twelfth annual Budget, but failed to deliver the stability he promised

by Donald Drysdale

With Government spending still exceeding income, Alistair Darling had his back to the wall – facing a slowing world economy, jittery financial markets, falling business confidence, and over-stretched consumers increasingly cautious as the housing boom ends.

Tax revenues have been falling short of expectations and the Chancellor’s economic growth projections are seen as optimistic. There are fears that public sector borrowing cannot be contained.

Also apparently out of control is the Government’s drive to reduce tax compliance burdens. Budget Day brought a record weight of announcements from HM Treasury and HM Revenue & Customs, swamping taxpayers with levels of detail incompatible with the concept of self assessment.

When a firm hand was needed, Darling has been accused of weakness and dithering. His ill- considered moves to simplify capital gains tax and rationalise the taxation of non-domiciled individuals had attracted widespread opposition, leading to months of uncertainty and partial U-turns.

There is hope that he has learned from this and may consult more widely in future.

What the Budget said

In spite of strong opposition, the new simplified capital gains tax regime kicks in on 6 April, with a flat rate of 18 per cent and no indexation or taper. Entrepreneurs’ relief offers some taxpayers a poor replacement for business asset taper relief.

The remittance basis has been extended and made more complex, while the new annual £30,000 charge for some who use it has been restricted to adults only; this widely criticised charge has been modified to qualify it for credit against US tax, but the efficacy of this has not yet been confirmed by the US. There are changes also to the complex capital gains tax regime for non-domiciled beneficiaries of UK trusts.

The inheritance tax nil-rate band is increased to £312,000, transferable between spouses or civil partners from 9 October 2007, and a related capital gains tax anomaly has been corrected.

New rules on UK residence will bring more individuals within the scope of UK tax, but more extreme proposals have been modified to relax day-counting rules and provisions for transit passengers.

For taxpayers seeking to invest in businesses, the limits on EIS relief have been raised to £500,000 (at 20 per cent) but the list of excluded activities extended.

The main rate of corporation tax is down from 30 to 28 per cent. The small companies rate is up from 20 to 21 per cent, and the associated companies rules will be somewhat less restrictive.

The small companies rate rise is one bad news item from Gordon Brown’s Budget last year. Others include the abolition of the 10 per cent general starting rate of income tax, and reductions in capital allowance rates with tiresomely complex transitional provisions.

To balance the books, Darling is raising other taxes – notably alcohol and tobacco duties – and relentlessly developing complex new provisions to combat tax avoidance.

What the Budget didn’t say

Some expected content did not materialise – notably, the absence of firm proposals on the taxation of foreign profits of companies creates continuing uncertainty.

Large companies mostly welcome the deferral until 2009 of a principles-based approach to financial products avoidance.

The way ahead

Darling has been criticised for a wishy-washy “pale green” Budget. His contradictory environment-related measures include modest early increases in road tax for most vehicles, postponement of a scheduled rise in fuel duty, removal of the subsidy for biofuels, and a sharp cut in capital allowances for insulation of industrial buildings.

Campaigners want a clearer strategy for environmental taxes and their hypothecation.

Given prevailing conditions, the Government may find it hard to offer tax sweeteners before the next general election, expected in 2009. Indeed, Darling is desperately holding back swingeing tax rises till after the election – notably substantial increases in vehicle excise and fuel duties and higher taxes on company car benefits.

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Page No: 69

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Donald Drysdale | Budget | Alistair Darling | HMRC

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