Budget report: Predictions from the experts

Personal finance experts predict the measures likely to be announced in this year’s Budget report.

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• Predictions from RSM Tenon

• Predictions from Grant Thornton

• Predictions from Smith & Williamson

• Predictions from Withers

• Predictions from Kingston Smith

• Predictions from Deloitte

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Predictions from RSM Tenon

RSM Tenon, the seventh largest accountancy firm in the UK has examined some of the options available to the Chancellor to reduce the estimated £178 billion deficit by a fifth – all of which are likely to be deal breakers so close to a General Election.

Income Tax: Increasing the basic rate of income tax by 1% would raise an additional £3.4 billion but would mean a worker earning the UK’s average salary, would pay an extra £254 in tax each year.

VAT: Raising VAT to 20% could generate £10-12 billion and bring the UK in line with the rest of the EU. This would mean an item such as a television or piece of furniture costing £200 would rise to £204.

Duties: Adding 10% onto wine, beer and spirits would generate £9 billion but would see the duty for wine rise from £1.61 to £1.77, beer from 39p to 42.9p, and spirits from £6.14 to £6.75.

Personal Allowances: Reducing all personal allowances by 10% would raise £3.9 billion but this would leave basic tax rate payers £129 worse off and higher rate payers £324 short each year.

IHT: Abolishing the nil rate tax band so that all monies from any estate would be taxed at 40% would raise an estimated £10 billion, but would leave anyone with an inheritance of £300,000 with a £120,000 tax bill.

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Predictions from Grant Thornton

Francesca Lagerberg, says: ”This pre-election Budget will focus entirely on what the Chancellor did to maintain market stability during the recent economic crisis. It is unlikely that he will set out further bold tax rises as every vote will count in the run up to the formal election campaign.

”There may be targeted but small tax breaks for the most vulnerable sections of society including families on low incomes and the elderly. It is also likely that the Government will introduce further anti-avoidance measures including, more stringent requirements for tax advisers to inform HM Revenue & Customs (HMRC) of clients who adopt more aggressive planning measures.

”With most MPs having their eyes firmly on the election, the Finance Bill which will follow the Budget is likely to be subject to barely any detailed scrutiny from Parliament which leaves little scope for picking up any operational problems or errors.”

More measures to reduce unemployment

It is expected that further measures will be taken to help both 18-24 year olds and the long-term unemployed back into the work force to help rebuild the economy. It remains to be seen whether any jobs created under the current government schemes will be real, sustainable jobs, or if we are simply returning to the days of previous recessions where there were a multiplicity of ’schemes’ for young people, few of which led to lasting employment.

Any measures announced in the Budget to aid unemployment are welcome, but many employers are concerned about the 1% National Insurance Contributions scheduled for April 2011 which could impact hiring decisions.

VAT to remain at 17.5%

We expect VAT to be left alone in this Budget. However, there is no doubt that any new Government of whatever political persuasion will consider that our comparatively low standard rate may need to be increased in the near future to reduce the spending deficit.

Increased anti-avoidance measures

To help close down aggressive tax planning and raise revenue, we expect to see a number of targeted anti-avoidance measures. These may include stringent requirements for tax advisers to inform HMRC of the activities of their clients. In addition, HMRC has been looking at specific measures to target ’wrong doing’ tax advisers although it is now expected that specific legislation may not appear in the forthcoming Finance Bill as more consultation is being sought.

Tobin tax to win votes is unlikely

It is unlikely that the Government will commit to further tax measures in the banking industry along the lines of the so-called Tobin or ’Robin Hood’ tax. There is still much debate around this area which may preclude any official announcement at this stage.

Rise of Green Taxes

Green taxes may seem more palatable for voters than an increase on alcohol or tobacco duty, particularly if targeted at the more anonymous business taxpayer. The car scrappage scheme was well received and a good way of raising revenue without harming the automotive industry. Consequently we believe the Government will capitalise on public sympathy towards environmental programs by creating similar schemes.

Tax Credits

Tax credits have proved to be a popular vote-winner and this will be at the forefront of Labour’s mind as the election looms in May. We expect the Chancellor to enhance the tax credit system to aid less well-off voters. It is unlikely that we will see any more significant wholesale reform so close to an election.

Corporation tax rate to remain the same

It is unlikely that the corporation tax rate (mainstream or small company rate) will change in this Budget. The small companies’ corporation tax rate is expected to remain at 21% in this Budget with the planned increase to 22% delayed until 2011/12.

There has been reform of the controlled-foreign company regime and the Chancellor may announce further amendments here to boost the UK’s attractiveness as a location for business.

Statutory Residency Test for Non-Doms

The UK’s tax rules on UK residency for tax purposes have come under close scrutiny in the courts. For some wealthy individuals, the Robert Gaines-Cooper case has thrown further doubt on what the tax position is of non-domiciles. The current Government has expressed its support for a full statutory residence test in the longer term, subject to some conditions. We will not see any draft test make an appearance this time around but we might see some further commitment to keep this area under review in the Budget.

Basic state pension changes

The Chancellor may increase the basic state pension via a pension credit scheme. This is not without its complications but would be an attempt to help those on lower incomes. There may also be further amendments made to the state second pension (SERP) .

HMRC powers

There is likely to be another range of powers provided to HMRC. We would expect to see further legislation around aligning interest rates applicable to all taxes and more draconian provisions aimed at bulk repayment claims, some of which have been used to defraud HMRC.

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Predictions from Smith & Williamson

VAT and CGT front-runners for increases in the short term, with rises to income tax for higher earners likely in the medium term

CGT – up, perhaps from 6/4/10

It is only right that gains on long-term capital investments are taxed at a lower rate than income. However the decision to move to a flat-rate of CGT at 18% in 2008 now looks at odds with a top rate of income tax of 50%. This differential is encouraging taxpayers to seek out ways of re-designating income as capital.

Consequently the CGT rate on short-term gains could be increased from its current flat rate of 18% to make it less attractive to reclassify income.

There have been rumours that the generous treatment of second homes could be restricted following the unfortunate attention regarding MP’s arrangements, but a recent debate in the House of Commons indicates that no action is planned at this stage.

VAT – up, later this year

Although the standard VAT rate returned to 17.5% on 1 January 2010, there are likely to be further increases in the pipeline. As the average rate of VAT in the EU is almost 20%, and each 1% increase brings in just under £5billion, the Chancellor must be sorely tempted. However, any VAT rise will have an immediate impact on inflation.

Income tax – increases to 40% rate, but not yet

We already know that a new 50% top rate of income tax will apply from 6 April 2010 on taxable income over £150,000. The 40% rate, which currently applies on earnings over £43,875 could be increased to 42% or even 45% but it would hit the mass affluent so would be unattractive politically just before an election.

Tax on transactions – possible introduction

Recent EU discussions have considered a levy on financial transactions or ‘tobin tax’. This could be a significant money-raiser for the government but success would require agreement across different jurisdictions to make sure that all countries apply the tax equally. Without a multi-lateral approach, markets could be severely distorted causing a loss of business to those financial centres that do apply the tax. Given that London accounts for around a third of all foreign exchange trading in the world, the UK economy could be suffer significantly.

Tax anti-avoidance, stricter application of existing rules

A harsher approach from HMRC is already evident, with rules and penalties strictly applied. Moreover, HMRC has improved powers of inspection and more information at its disposal, giving greater scope to pinpoint tax evasion.

We do not anticipate major rule changes in terms of tax avoidance, rather implementation of existing legislation. However, the Human Rights Act means that any penalties must be proportionate putting HMRC under pressure with regard to some of the current penalties which are charged irrespective of the gravity of the offence.

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Predictions from Withers

Christopher Groves and Sophie Dworetzsky, partners at international law firm Withers, consider what the likely announcements might be.

Increases in the basic and higher rate of income tax

Comments Christopher Groves: “An increase in the top rate of income tax to 50% in the coming months is inevitable. It has already been confirmed by the Pre-Budget Report and will come into effect on 6 April 2010. The only question is how long will it last? Both Labour and Conservatives have indicated that they do not see this rise as a permanent fixture but any reduction would be most likely to happen closer to the end of the next Parliament than the beginning.

“All parties remain wary of any suggestion of an increase in the headline rates of tax, but one alternative may be freezing thresholds at which tax currently applies or raise them at a lower rate than the rise in average earnings, pushing more earners into a higher tax bracket.”

Increase in the rate of VAT

Christopher Groves says: “The two taxes that raise significant revenue for the Exchequer are income tax and VAT. Given the need to address the scale of Britain’s public debt, it is likely that VAT will be increased to 19% or even 20% after the election.”

Increase in the rate of Capital Gains Tax

Comments Christopher Groves: “This has been widely mooted and is certainly possible. Increases in the capital gains tax rate can have a negative effect on revenue as taxpayers delay making disposals, so change may be unlikely. However, the differential between the top rate of income tax and capital gains tax will be 32% after 6 April 2010 and therefore we may see a higher marginal rate of capital gains tax for top rate taxpayers to reduce the incentive to convert income into capital gains”.

An extension to the Bank Payroll Tax

Says Christopher Groves: “The Bank Payroll Tax is due to expire on 5 April 2010. However, there have been suggestions that it will be extended through the summer to catch banks with later year-ends, who have not declared their bonuses and this is still likely.”

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Predictions from Kingston Smith

With the country expected to go to the polls in early May, Chancellor Alistair Darling will need time to get the Finance Bill – enacting pre-Budget and Budget measures – onto the statute book before Parliament is dissolved ahead of the General Election. With this in mind the Budget on 24th March is expected to be little more than a short series of announcements, with a more comprehensive Budget expected post-election – irrespective of which political party gains power.

Non-domiciliaries and residency: It is as yet unclear how much revenue the £30,000 remittance charge has brought in. Therefore, it is unlikely that non-doms will be targeted in the March Budget. “Following the most recent Gaines-Cooper ruling – when the Court of Appeal decided that entrepreneur Gaines-Cooper was liable to pay UK tax despite spending less than 91 days in the country each year – after the election the Government may announce the introduction of a statutory residence test to take effect from 6th April 2011,” says Andrew. They may even go a step further and tax on the basis of citizenship regardless of where an individual is based. “This would be taking a leaf out of the US’s book, taxing on worldwide income, subject to double taxation treaties,” says Andrew. “But such a radical measure would no doubt have to be introduced after the election.”

CGT: The disparity between CGT and income tax rates means the Chancellor may raise CGT from 18% to 25%, possibly with a corresponding extension to Entrepreneur’s Relief (from £1m to £2m). “CGT doesn’t tend to affect the traditional Labour voter so increasing the rate is unlikely to be too damaging,” says Chris Lane, partner and head of entrepreneurial businesses at Kingston Smith LLP. “Moreover, there is the school of thought that those fortunate enough to be making financial gains in these difficult times should be helping to put the economy back on the road to recovery.”

Income tax and National Insurance: The Government could be tempted to reduce the tax threshold for 50% taxpayers from £150,000 to £130,000. “The £130,000 threshold would align with the threshold announced in relation to the revised anti-forestalling pension measures in the pre-Budget report, so could be justified by the Chancellor as a simplification measure,” explains Tim Stovold, a partner at Kingston Smith LLP. “However, relatively few voters are affected by the 50p tax rate and with the recent Gaines-Cooper ruling potentially putting a halt to City executives leaving the country, the Government might opt to leave well enough alone.”

Anti-avoidance: A continuing assault on tax avoidance in all its forms is expected in the March Budget. “Promoters of tax-avoidance schemes are required to disclose them to HMRC, giving the tax authorities an early opportunity to identify and shut down those schemes that they think might work,” explains Graham Morgan, a partner at Kingston Smith LLP. “Businesses also need to be aware that tax laws with retrospective effect are no longer regarded as constitutionally unacceptable, as evidenced by the Treasury’s recent announcement on tax rules to be included in the Finance Bill concerning manufactured dividends, and affecting arrangements dating back to 2007. A clear statement on how and when retrospective legislation will be used is much needed, but unlikely to be announced anytime soon.”

Corporation tax: Plans to raise the small companies’ rate by 1% to 22% were shelved in the last two pre-Budget reports due to the economic situation. “The Government can’t afford to lower the headline rate of corporation tax, which has remained at 28% since 2008. However, with the Tories widely trailing plans to reduce it to enhance the attractiveness of the UK to international business, Alistair Darling may seize this opportunity to steal the Tories’ thunder and make a similar announcement, probably adjusting reliefs to pay for the change” says Graham. “Incentivising measures that win headlines but don’t cost the Treasury much, for example, ‘green’ capital allowances are also anticipated.”

VAT: The Government is expected to announce various VAT measures after the election. Adrian Houstoun, VAT partner at Kingston Smith LLP, says: “The Government will not wish to upset voters by raising VAT rates now. However, it is likely that the main rate of VAT will increase from 17.5% to 20% later in the year, with the possibility of a 5% rate on books and foods. VAT on books has always been unpopular, with some labelling it a ‘tax on education’. But with the public finances in a parlous state, tough measures may now be necessary.”

The European Court of Justice recently asked the Netherlands to define its interpretation of ‘employee entertainment’ in relation to recovering VAT on employee entertainment. “With this in mind the Government may announce plans to review the UK’s definition of the term later on in the year,” says Adrian.

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Predictions from Deloitte

Roger Bootle, economic adviser to Deloitte:

Likely Budget measures might include some additional expenditure on politically sensitive areas such as health, education and defence. Measures to tackle youth unemployment and cuts in corporation tax are also possible, perhaps partly financed by higher duties on alcohol and tobacco.

But all of this will simply be putting off the inevitable. The lack of detailed spending plans beyond the current year and Mr Darling’s optimistic predictions for economic growth cast major doubts on whether even the current plans to halve the budget deficit over the next four years can be achieved.

§ Meanwhile, with Greece and other countries announcing ever more aggressive measures to tackle their own fiscal crises, and sterling assets suffering from fiscal worries, the pressure for a correspondingly faster reduction in the UK budget deficit will continue to build.

As such, much more decisive action to put the public finances on a path back towards health will be needed after the election. While the prospect of a hung parliament has increased the uncertainty over the precise timing and size of such action, a very substantial fiscal squeeze lies ahead under any form of government.

In the markets, the Budget is unlikely to do much to ease the near-term pressure on sterling asset markets. But if I am right in expecting worries about the fiscal outlook finally to start to ease later in the year, alongside fading inflation concerns and still exceptionally loose monetary policy, both gilts and the sterling exchange rate should eventually begin to fare better.

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