UK: Build Up To The Budget 2009

Last Updated: 21 April 2009
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

Will this be a Budget for the Environment?

One of the politcial messages that we've heard in response to the global recession is that we need to build a low carbon economy. The G20 Leaders communique included a promise to build an inclusive, green, and sustainable recovery.

It's now clear that this year's Budget stunt revolves around electric cars. The Government plans to make £250 million available over 5 years to support electric motoring. Part of the money will be spent on installing electric recharging points in the street and there will also be a subsidy of up to £5,000 towards the purchase cost of an electric car. Building some infrastructure is needed - but it will be several years before electric cars are more readily available. Even then, it's expected that they will cost substantially more than petrol/diesel cars. The subsidy won't plug the gap.

Unfortunately, it's not thought that the Government will announce help for renewable energy generation. The Carbon Trust has put forward four suggestions that would make a big difference - including support for offshore wind generation.

How much tax did we pay last year?

The Chancellor predicted in Budget 2008 that we would pay £541 billion in tax in the 2008-09 tax year - whcih finished on 31 March. This was a healthy rise of 4.6% from the prior year's £517 billion. Unfortunately those predictions were made before the recession took hold.

The update at the November Pre Budget Report was much more gloomy. Tax was predicted to yield £517 billion, with the biggest drops being National insurance (down £7 billion),Corporation tax (down £6 billion) and Stamp Duty (down £5 billion).

Banks have historically made a big contribution towards corporation tax. In 2007-08, banks paid over £10 billion. However, in 2008-09 oil companies provided the largest contribution, aided of course by high oil prices in the first half of the year. It's thought that North Sea oil contributed over £13 billion in tax.

Since the Pre Budget Report, it's become clear that even those forecasts were optimistic. January is the peak month for tax receipts, as it's one of the main months for corporation tax and also the main month when individuals pay their tax bills (apart from PAYE, of course). January 2009 was down by about £5 billion compared to the previous year.

It's now thought that the tax yield will prove to be something like £500-505 billion, leading of course to greater Government borrowing. The first draft of the figures will be available to the Chancellor in time for his Budget speech.

Do we need to raise tax?

Ireland has just announced an emergency budget, with significant tax increases for individuals. Roger Bootle, Deloitte's economic adviser, makes it clear that the UK will need net fiscal tightening in the years ahead - but that taxes should not be raised now.

The Chancellor did of course announce a significant package of tax increases and spending cuts in the November 2008 Pre Budget Report. The main elements are reduced personal allowances for people earning over £100,000; a new 45% tax rate for those earning over £150,000; spending cuts of £5 billion pa from 2010 and an extra ½% national insurance levy for employers and people.

Where could the Chancellor look for further tax rises? Perhaps he might consider an increase in the VAT rate, to 18.5%, which of course he considered and rejected last autumn. This would raise over £5 billion and would cost someone on average earnings of £25,000 about £1 per week. Of course it would be necessary to compensate those on very low incomes by increasing credits and benefits.

Another option - once it is clear that credit is flowing freely - could be to ask businesses to pay tax a little earlier. The main months for corporation tax payments are July, October, January and April. Simply moving the April payment into March would bring forward tax revenue on a one-off basis, without a major cost for companies.

Yet another option could be to increase the basic rate of income tax by 1%, to 21%. This would raise over £3 billion and would cost someone earning £25,000 a further £3.50 per week - more than the VAT increase.

Putting up the top rate of tax doesn't seem to raise as much money. The new 45% rate at £150,000 is estimated by the Treasury to raise only £670 million in the first year - although the second year will raise more (the Treasury hasn't given us their figures). Could an increase to 50% be considered?

Choosing what options to select involves political choices rather than obviously economic decisions. The economic decisions concern the amount of the fiscal tightening.

Time to extend Stamp Duty relief?

Last September, the Chancellor announced a one-year hike in the stamp duty land tax threshold (to 2 September 2009), so that flats and houses up to £175,000 would be exempt from the usual 1% charge. The normal threshold is £125,000. Since then, sales volumes have plummeted; the Land Registry reported that the average monthly sales in September-December 2008 were 38,830 - down from over 95,000 in the previous year.

It is clear that the timing of the tax incentive wasn't right. We hope that the Chancellor will announce in the Budget that the £175,000 threshold will remain in place for at least another year - and preferably longer.

The value of the increase will depend on which part of the country buyers are looking. The Land Registry reports that the average house price is less than £175,000 in all parts of England & Wales - apart from the South East (£190,000) and London itself (£298,000).

In a new era where lenders want sizeable deposits from buyers, the stamp duty saving of up to £1,750 is important.

Silver lining for some Individuals?

There's no doubt that the recession is a very dark cloud indeed. Deloitte economic adviser Roger Bootle forecasts that the UK will not start to resume growth until 2011. House prices have dropped by 30% in many places and some other assets have also declined substantially in value. Whilst these major changes are negative for most of us, a decline in asset prices may offer an opportunity for some individuals and families to pass on assets to the next generation, whilst minimising current and future inheritance tax charges.

Some entrepreneurs are thinking carefully about passing on shares in family companies to benefit their children and grandchildren and there are a number of different ways in which this can be done.

Gifts can be made to adult children, but often gifts to family discretionary trusts may be preferred, especially where shares in investment companies are involved. In any event the gifts must be made without strings in order to avoid having to tax the property as part of the donor's estate on death. Where investment companies are involved a husband and wife could, between them, transfer assets worth up to £624,000 to a discretionary trust, free of inheritance tax provided their nil rate bands remained unused.

There can be complicated capital gains issues and proper tax and legal advice is always recommended.

Innovative approaches to Tax Losses

One of the challenges in a recession is for a business to get effective tax relief for any losses. The basic rule is that losses in a particular year may be carried back for offset against profits in the prior year and generate a tax repayment.

At the Pre Budget Report, the Chancellor announced that businesses could elect to carry-back losses of up to £50,000 against profits in the previous three years. However, this election only applies to the accounting period that ended in the year from 24 November 2008- 23 November 2009 and the two most common year-ends will be 31 December 2008 and 31 March 2009. For some businesses, it is thought that the subsequent years will be more difficult, with the result that the loss relief may not be particularly effective. As a result, we hope that the Chancellor will extend the three year carry-back rules and also lift the limit on the amount that can be carried back. A £50,000 carry-back is likely to result in a tax repayment of only £10,500.

A much more imaginative approach would be for the Treasury to buy tax losses from businesses. The Royal Bank of Scotland has paid in part for participation in the Asset Protection Scheme by giving up tax losses. A similar approach could be extended to other companies, perhaps allowing them to sell losses to the Treasury at a discount. This has the twin benefits of putting money into business when it is most needed and also making sure that companies start paying tax again, once profitability resumes.

Foreign Profits update

Worldwide Debt Cap - announcement 7 April 2009

HMRC released an update to the debt cap proposals, with a view to simplifying the original proposals. The key change is the adoption of a 'gross' test, in determining total third party debt - which sets the maximum amount of finance costs that can be offset against UK profits. The original test looked at net debt i.e. finance expense, net of finance income. However, a targeted anti-avoidance rule is planned. Our initial view is that, whilst it's clear that HMRC have worked hard to develop solutions to problems, there are still too many questions open - including of course how all this might turn into statute - for the debt cap to go forward acceptably in 2009.

Foreign Profits update - 10 March

The official date for submitting responses to the Consultation closed on 3 March. We think that there's a broad consensus that the Dividend exemption should be introduced in 2009. However, there is great concern on the debt cap proposals, where - despite the willingness of the HMRC team to listen to issues and seek to find answers - the structure of the rules may get in the way of effective solutions.

The big challenge is clearly making the rules fit into the straitjacket set by the EC treaties and the rules on freedom of establishment and free movement of capital. This means that the first, early, draft is actually disadvantageous for those with UK domestic activities and income. We know this is recognised by HMRC and work is being done to try to develop solutions.

There seems to be a variety of opinion on the introduction of the debt cap. Our view is that there is sufficient protection in the existing rules and the planned extension to the 'unallowable purpose' rules to protect the Exchequer. The Chartered Institute of Taxation has recommended that the provisions should not be introduced into Parliament when the Finance Bill is published, but delayed, to give more time to formulate new provisions and debate them with business and advisers.

The minutes of the Business-Government Forum - published on 10 March - confirm that the the provisions will not be introduced on 1 April but that they will only apply from a later date, as yet unknown. Our view is that the debt cap rules cannot be calculated effectively unless they apply only from the start of an accounting period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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