UK: Deloitte Predictions For The Chancellor's 2009 Pre-Budget Report

Last Updated: 8 December 2009
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

Chancellor Alistair Darling delivers his Pre-Budget Report (PBR) at 12.30pm on 9 December – the latest PBR ever. This PBR will no doubt be dominated by two themes: the recession, with its impact on the economy, tax receipts and public borrowing, and the General Election in 2010.

Bill Dodwell, head of tax policy at Deloitte considers what tax measures we might expect in a time dominated by the economy.

Tax rises?

It is clear that the UK economy has done less well in 2009 than the Treasury predicted at the Budget, in April. The Chancellor has already hinted that he now expects a greater decline in GDP - possibly a drop of 4½-5% although it's expected that the forecast for 2010-11 will be held at growth of 1¼%. Tax receipts so far have declined by 12.9% - rather more than the Budget prediction of an 8% drop to £465 billion. The biggest culprit is corporation tax, which has dropped by 30%, compared with the predicted drop of 20%.

Budget 2009 announced significant tax increases in the future. Some take effect in 2010: the new 50% income tax rate; the removal of personal allowances for those with incomes over £100,000; and fuel duty increases. Others – the ½% increase in NIC rates for both employers and employees and the removal of pension tax relief for those earning over £150,000 – take effect in 2011. The planned policy stance for 2010-11 is effectively an unspecified cut in public spending of £5 billion (the revenue from tax rises funds extra spending measures to counter unemployment). The policy stance in 2011-12 is tax rises of about £7.5 billion, plus another unspecified cut in public spending of £5 billion.

It is generally agreed that these measures are insufficient to bring the massive growth in public debt under control. All three main parties have said that cuts in public spending are needed - but there could also be a role for tax increases.

The political, and economic, question is whether the Chancellor will announce changes now, or wait until a pre- or post-election Budget. Given the current state of the economy, our view is that changes should not be made immediately; if the Chancellor has the same view, he may well simply postpone decisions on significant tax rises.

The main options for tax increases are:

  • VAT - adding 1% to the main VAT rate raises about £5 billion annually and is estimated to cost someone on average earnings about £1 per week.
  • VAT – charging VAT on some of the currently zero-rated goods and services. The main items here are: food; public transport; new houses; water & sewerage; and books & newspapers. All items here are politically contentious; for example, whilst it is clear that the wealthy benefit in absolute amount more than the poor from the zero-rate on food, the proportionate benefit is greater for the less well off. We also know from the fiasco following the abolition of the 10% rate that it's impossible to reach all lower-paid people through the benefit/credit system. Imposing 17.5% tax raises about £12 billion; a 5% rate raises £3 billion. It would also take all the fun out of those 'is it a cake (zero) or a biscuit (17.5%)' cases!
  • Increasing income tax on the higher paid looks counter-productive. The Treasury believes that it will collect just 30% of the theoretical yield from the 50% rate. Encouraging tax planning and emigration isn't a great economic strategy. In any event, this area has surely been covered.
  • Increase the basic rate of income tax, thereby reversing the 2008 reduction. A 1% increase in basic rate yields about £4.5 billion. However, the impact on someone with average earnings of £25,000 is nearly four times as much as a 1% increase in VAT (ie £3.50 per week compared with £1 per week in VAT) - which brings in a similar amount to the Exchequer.
  • There has been some speculation that the capital gains tax rate could increase from 18%, bringing it closer to the income tax rates. This sort of change wouldn't raise a great deal (capital gains tax this year is forecast to bring in £2.2 billion) and would highlight one of the challenges of capital gains tax – it should surely offer lower rates for assets held for a long time. This is partly to recognise the effect of inflation and also to encourage investment, rather than trading. Factoring in these aspects may well mean that this area wouldn't yield much additional taxation. There is already significant legislation which prevents income to capital switches.
  • The Chancellor could of course go back to National Insurance and increase rates by another 0.5%. This yields over £4.5 billion, but the difficulty is that it surely would be unhelpful to increase the cost of employment as the economy comes out of recession.

Our conclusion is that, overall, an increase in the main rate of VAT is the least damaging tax rise. However, as with all tax changes, the impact will vary by individual.

Tax allowances, NIC thresholds and benefits
Tax allowances and benefits for 2010-11 will be announced at the PBR. Changes are based on the September Retail Price Index (RPI), unless overridden by the Chancellor. The September RPI figure was negative (-1.4%) and thus we expect that tax allowances and NIC thresholds will be left unchanged. This scenario was predicted by the Treasury and the Chancellor announced in Budget 2009 that allowances would not be cut.

The impact on benefits is less clear. Pensioners have the benefit of a minimum 2.5% increase in the state pension; we shall await the Chancellor's decision on other benefits. Of course the reason that the RPI is negative is due to the huge reduction in interest rates; the Consumer Price Index (CPI), which excludes housing costs and has different weightings, continues to increase and the September rise was 1.1%. The Rossi index (RPI excluding rent and mortgage interest) is usually used for benefit increases; it rose by 1.8%.

Other tax announcements

Perhaps one of the comforting things is that proposals for and consultations on tax changes continue at a rapid pace, unaffected by the recession. Measures we expect to hear about include:

  • An update on the reform of controlled foreign companies' legislation - this legislation seeks to tax UK parent companies on profits earned in low-taxed overseas subsidiaries. It is the main reason that companies have left the UK, as evidenced in their responses to a Treasury questionnaire on the issue. Consultation on a better regime has been continuing since the spring and we expect a discussion document, setting out proposals for reform, due to be delivered in 2011.
  • Review of Intellectual Property (IP) – Budget 2009 announced that the Treasury would review whether to introduce a low tax regime for actively exploiting intellectual property in the UK. We welcomed this review, as several European companies offer low-tax regimes and there is clear evidence that the UK is losing activities to neighbouring countries. Active management of IP brings highly skilled jobs to the UK, which benefits other support activities. The Chancellor is due to announce the outcome of the review at the PBR.
  • HMRC Powers – we expect further announcements on extending HMRC powers in two areas:
    • Working with Tax Agents, where the intention appears to be to levy additional penalties on agents who make deliberate errors, or are incompetent; and
    • Bulk information, which is the process by which HMRC is provided with information by, amongst others, banks and letting agents. Bulk powers are effective in ensuring that HMRC is aware of sources of income and thus levies tax. However, it remains important that they are enforced in the least burdensome way for information providers.
  • Transactions in securities – these are rules, originally introduced in 1960, which convert capital gains into income – usually when received by controlling, or significant individual shareholders. It is expected that the Government will announce simplified and better targeted rules.

The end to recessionary reliefs?
House prices in England have risen for five consecutive months and the volume of sales has climbed slightly (although still well below last year). These indications suggest that the Chancellor is unlikely to extend the temporary increase in the Stamp Duty Land Tax threshold from £125,000 to £175,000 which applies to 1 January 2010. The average house price in England is now about £160,000; in Wales, about £118,000 and in Scotland, about £154,000.

The Business Payment Support Service has proved to be valuable. More than £4 billion in tax has been deferred, although repayments of over £2.5 billion have been made. HMRC has said it will keep open the facility for as long as it's needed – although there is some evidence that the bar is being raised on approvals to access the facility.

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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