The date of the 2008 Pre-Budget Report (PBR) is announced as 24 November

Monday 17 November 2008

With the date of the PBR announced as barely a month before Christmas, will there be nice surprises in our stockings this year, or will we have to make do with a lump of coal and a "Bah Humbug"?

What is the PBR?

The concept of a PBR was introduced by the Prime Minister when he was Chancellor of the Exchequer, back in 1997. As a March Budget (favoured by Gordon Brown) is very close to the start of the new tax year on 6 April, the announcement of income tax  and NIC allowances and rate changes in the PBR allows taxpayers and employers, and HM Revenue and Customs (HMRC), time to make any necessary adjustments to software etc. Also, when significant tax changes are announced at PBR, rather than in the Budget, such as the abolition of Taper Relief and indexation announced in PBR 2007, taxpayers may have a window of opportunity to undertake tax planning before the new tax year, and the Treasury may also have time to think up a new replacement relief, such as Entrepreneurs' relief.

What are we expecting to be in this year's PBR?

The current economic maelstrom suggests that the Prime Minister was not entirely correct when he suggested we had escaped the previous cycles of boom and bust. Many of us are tightening our belts, and that includes HMRC, whose tax revenues are expected to fall in line with falling profits and the decline in house sales.

However, in order to jumpstart the economy, the Chancellor needs to consider measures that will help the poorest and those most at risk, while also encouraging more business investment. Any such spending is going to cost more, and faced with a falling tax income stream without a corresponding reduction in spending on public services, already ruled out by the Chancellor in his annual Mais lecture, his only option is to increase Government borrowing.

What are Grant Thornton's predictions for the PBR?

It is, of course, impossible to know exactly what the Chancellor has in store until the details are unwrapped on 24 November. However, the following issues may provide a flavour of what's in store for a PBR Christmas dinner:

Increase in personal allowances - after the debacle of the 10% starting rate of tax last year, the Chancellor needs to explain what he is going to do to ensure that the problem does not resurface in April 2009 for the start of the next tax year.

Will the current savings guarantee be doubled? - The official guarantee for UK depositors is currently set at £50,000, or £100,000 for joint accountholders. There is speculation that this figure may double to £100,000 after similar proposals were unveiled recently by the European Commission.

An extended holiday for SDLT? - the Government's recent one year suspension of Stamp Duty Land Tax (SDLT) for home buyers purchasing residential property below £175,000 may have provided a glimmer of hope to those at the lower end of the market but there is a real need for more innovative measures to be put in place to breathe life back into the property market. The Government said the stamp duty holiday would last 12 months, but it would not be a major surprise if it were to become permanent.

Changes to Corporation Tax - the recent relocations of large UK based multinationals to countries such as Ireland has been big news this year. Ireland creates an accommodating environment for inward investment, as the headline corporate tax rate is low at 12.5%, compared to the UK's 28%, and has other attractions such as a reduced administrative burden and greater certainty since there are no controlled foreign company (CFC) or transfer pricing rules.

UK corporation tax currently stands at 28%, which is higher than the EU average of 25.8%. The Government has recently reduced the rate of corporation tax in the 2007 Budget when it stood at 30%. Given the current economic crisis it is unlikely that the Treasury can afford to go further, despite widespread calls for a reduction in, or at least a postponement of the planned increase to the small companies' rate of corporation tax, due to increase to 22% next April.

Sacrificing salary sacrifice arrangements - there has been increasing concern that many employers are looking to cut costs by providing tax free benefits through salary sacrifice arrangements, which has meant that the tax loss to the Treasury has increased significantly. There has been talk that the concept of salary sacrifice arrangements for income tax and NIC purposes is being looked at closely by the Treasury.

Help for small businesses? - the Government may introduce new measures to help small businesses. For example, the Chancellor may consider extending the VAT payment deadlines for SMEs and increasing accessibility to the VAT cash accounting scheme. This would mean that businesses would only account for VAT when they have been paid.

The Government may also look to change the VAT Bad Debt Relief rules and reduce the current six month limit and make the claims immediate if the customer has become insolvent.

The Government is still publicly committed to bringing in legislation in April 2009 to tackle what it calls 'income shifting'. The measure is mainly aimed at married couples, civil partners, cohabitees, or family members who share business profits that have been generated primarily by the efforts of one individual in the business. This usually takes the form of a sharing of dividends from a company so income passes from a higher to a lower rate taxpayer thus saving tax overall.

If this proposal is to come back it needs to be a significant improvement and given the great pressure on small businesses at the moment with an impending recession, the Government would gain some plaudits if it simply decided to let this proposal drop and instead commit to re-energising its longer term review of small business taxation.

Francesca Lagerberg, Tax Partner and Head of the National Tax Office at Grant Thornton says: "In order to stimulate the economy and support those experiencing difficulty as a result of the downturn, treasury officials are likely to put in place substantial cuts in tax revenue. The significant package is reported to be in the region of c£15 billion pa, equivalent to c1% of UK GDP to benefit the most vulnerable sections of society including pensioners, low income families and the unemployed, who are already feeling the harsh effects of the economic downturn."

She continues "Overall, the Chancellor has little room left for manoeuvre. Extravagant spending decisions of his predecessor are now catching up with us and the chickens are indeed coming home to roost. The difficulty now is how to raise much needed revenue in the midst of a recession. Public borrowing is expected to rise significantly, hitting as high as £100 billion over the next 12 months."

"With the Conservative party announcing its package of tax cuts to help small businesses and proposed measures such as a VAT holiday and National Insurance breaks, the Government will have to step up its actions to help UK businesses, setting out some serious policies and not be seen to mirror opposition measures," concludes Lagerberg.

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