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What a difference a year makes. Last year’s Budget preceded a general election and so the chancellor avoided making unpopular announcements in March. Instead, he left the bad news until last December’s pre-Budget report. The chancellor faced criticism as he reduced his projections for economic growth, abandoned one of his ‘Golden Rules’, doubled the Supplementary Corporation Tax on North Sea oil companies and eliminated a generous tax relief on pension savings.

It may have paid off. Going into this Budget, a surge in tax revenues means that the largest public finance surplus since records began was recorded earlier this year, giving rise to that all-important question: will the chancellor’s last Budget raise or lower the level of taxes?

Property

There is a growing clamour for the chancellor to take a fresh look at inheritance tax (IHT). With house prices rising faster than the inheritance tax threshold (currently £275,000; £300,000 for 2006/07) increasing numbers of families are being caught in the inheritance tax net. Had the threshold increased in line with house price inflation, it would now stand at £390,000.

The rising house prices compounding the IHT issue stem in part from a shortage of new housing. One of the measures being considered by the chancellor is a ‘Planning Gain Supplement’ (PGS) which would be charged on the increase in value of a piece of land once it has been granted planning permission. Property developers are divided, with many fearing that PGS could actually reduce the amount of land available for new housing. If introduced, PGS is likely to apply from 2008, with a starting rate of around 20%.

Real Estate Investment Trusts (REITs) offer another means to encourage investment in property and provide more rented homes. We expect the chancellor to announce details of the conversion charge which will apply to companies intending to become REITs. The lower that charge, the more successful REITs will be.

The other big property issue is stamp duty. Last year the chancellor raised the threshold from £60,000 to £120,000 yet the total stamp duty collected in the last financial year was a record £5.5bn. Getting people on the property ladder is high on the political agenda so the chancellor may raise the threshold a little further, or develop a mechanism for first-time buyers to avoid stamp duty.

Entrepreneurialism

Fostering a spirit of entrepreneurialism is a very important economic objective, but Baker Tilly’s survey shows that businesses have not felt the anticipated benefit from the chancellor’s earlier measures. We expect a number of announcements in this area. First, there will be much-needed improvements to the R&D tax credit system including a specialist unit within HMRC to help small businesses get full value from the R&D tax credit. Secondly, there will be a 50% first year capital allowance to encourage small enterprises to invest in growing their businesses. Finally, the chancellor may (quietly) announce changes to the tax regime for husband and wife businesses.

Tax avoidance

The attack on tax avoidance through rules which require tax schemes to be disclosed in advance has been a great success for HM Revenue & Customs. Currently, the disclosure regime does not apply to all taxes. The Government intends to extend the current system to cover all income, corporate and capital gains tax. We also expect HMRC to introduce a series of “hallmarks” to identify the schemes that must be disclosed in advance. The Budget will contain details of these.

What to watch out for

There are, as at every Budget, a few buzz words or themes from the chancellor’s speech. We should expect to hear a lot about fairness in the tax system, the reduction of red tape for small businesses, anti-avoidance measures and promoting Britain as a place to do business. As ever, close observers of the Budget will be keen to see how the chancellor’s words match up with subsequent actions. With many businesses saying that they have not felt the benefit of targeted tax incentives or red tape reduction, the chancellor will no doubt be presenting his Budget Day proposals in a way which helps restore his reputation in these key areas.

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