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"Little for businesses in the long term..."

31 Dec 08

The Pre-Budget Report has traditionally been a curtain-raiser for the Budget announcement the following spring, writes Richard Goslan. Circumstances have changed that, so what is the verdict of Scottish business, and tax experts, on Alistair Darling’s emergency measures?

by Richard Goslan

With the unprecedented financial crisis engulfing the UK and the international economy, this year’s Pre-Budget Report (PBR) was always going to include direct and immediate measures aimed at keeping the worst of the recession at bay.

To that end, Chancellor Alistair Darling announced a raft of changes on 24 November designed to stimulate the economy and support individuals and businesses through the downturn. Among the headline-

grabbing moves was a cut in VAT from 17.5 per cent to 15 per cent and the introduction of a scheme to allow businesses to carry back up to £50,000 in losses for three years.

National Insurance contributions will go up by 0.5 per cent by 2011, and people earning more than £150,000 a year will pay a 45 per cent income tax rate from 2011.

The fiscal stimulus package unveiled by the Chancellor is worth around £20 billion, but the national debt is now due to reach £118 billion by next year – with no one in any doubt about the pain ahead when it comes to payback time.

Bob Crawford, convener of the ICAS tax committee, said: “Even in a crisis, short-term measures to assist businesses and individuals should be consistent with a considered policy which will strengthen the UK economy in the longer term.

“The proposed increases in National Insurance contributions will discourage employment at a time when there is a need to preserve jobs. Temporary reductions in VAT will help financial institutions by reducing costs and could bolster the profitability of other businesses, but will impose extra administrative burdens on many small businesses and may not give the economy the boost it needs.

While a new higher rate tax band would be a political measure, restricting personal allowances for those with high incomes adds unjustified complexity to the tax system.”

Derek Allen, director of taxation at ICAS, (pictured) said: “It was disappointing. There was a lot of complexity, some short-term measures to stimulate the economy but very little that in the long term will help business. The Chancellor has chosen quite wisely in reducing VAT by 2.5 per cent, but the trouble is that what he needs to do is to establish confidence, and the reality is that short-term measures achieve very little when it comes to establishing confidence.

“He was between a rock and a hard place and although people have ideas about which specific area of the economy they wanted to see stimulated, you have to look at it and say it’s very difficult to pinpoint what could have been done to improve things. What he shouldn’t have done was complicate things, and yet he has.

“He seems to have introduced quite a lot of complications, and in many of the things he’s done, the question has to be asked whether it was a worthwhile thing to do. I question whether this was anything other than gesture politics.”

Russell Hills, head of tax for KPMG in Scotland, said: “Alistair Darling is like the little boy who put his finger in the dyke. He may stop the flood in the short term, but the hole will need repairing.

“He announced a package of measures to help SMEs survive the crisis, including a decision that will enable them to spread payment of their taxes. This is effectively a government loan that hopes that by giving them more time to pay their bills, they will be able to continue trading and pay in the longer term. Whether this helps, or simply prolongs the agony of a failing business, remains to be seen.”

Richard Garrod, head of the property and construction tax team at Mazars, said: “The deferral of the 1p corporate tax rise for small companies, the interim extension of loss relief to be carried back three years and the ability to pay tax on an ‘affordable’ basis are no doubt a relief to strained cashflows, even if all too temporary.”

Andrew Jupp, Tenon’s head of tax, said: “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 employers’ National Insurance contributions, and maybe a rise in VAT to 20 per cent. We just hope that the good news for entrepreneurial businesses is not reversed in the future.”

Dr John Philpott, chief economist at the Chartered Institute of Personnel and Development, said: “There is certainly a good spread of jam in this Budget. But with the bill so clearly in the post, including a hike in National Insurance contributions for employers and employees just as the economy is expected to be recovering, there is a real danger that this Budget may do as much to slow medium-term jobs growth as it does to slow short-term job cuts.”

John Cairns, head of tax at BDO Stoy Hayward in Scotland, was one of several to wonder whether the cut in VAT would stimulate the economy.

“The Chancellor should have used a good part of the £20 billion available for direct cuts in income tax which tax payers – and consumers – would have noticed every month in their pay packets,” he said. “Will they really link the price paid for goods and services to the VAT reduction?”

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Pre-Budget Report | ICAS | Bob Crawford

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