It will not have escaped anybody’s notice that the Chancellor announced his Pre-Budget Report on 24 November. He confused everybody – but that hardly matters. What matters is whether his plans work. I would not dream of commenting on the economic theory, but if the idea is to encourage everybody to spend, thereby fuelling economic growth and creating jobs, it makes common sense for the extra money (by way of tax cuts) to go to those who would immediately spend this extra money. Sounds good – but who knows?
However, a temporary decrease in VAT by 2.5 percent will not put more money in anybody’s hands, and the creation of jobs will hardly be encouraged by increasing National Insurance contributions. And the idea that this immediate and extremely urgent problem can in any way be improved by increasing the top rate of tax to 45 percent on high earners – not this year, or next year, or even the year after that, but on 6 April 2011 – defies belief. It is just playing politics and does rather suggest that Alistair Darling is not taking the matter seriously.
I am sure that nobody reading this Bulletin will have failed to see the main headline changes, but there are one or two points hidden away in the mountain of paperwork that traditionally accompanies any kind of Budget that may be of interest:
a) VAT reduced to 15 percent from 1 December – subject to anti-avoidance rules, of course.
b) The small-companies corporation tax rate of 21 percent is to continue for another year – the proposed increase to 22 percent has been deferred until 1 April 2010.
c) Personal allowances are being increased to £6475 next year, which is rather more than one might have expected – but for those earning over £100,000, the personal allowance will be reduced in 2010, and for those with income over £140,000, it will be removed altogether. Those with incomes over £150,000 not only will lose their personal allowance, but will fall into a new, higher rate band of 45 percent – but only from 6 April 2011.
d) The dividend trust rate will also be increased from 6 April 2011 to 37.5 percent and the trust tax rate increased to 45 percent.
e) The income splitting proposals – you remember Arctic Systems – have been abandoned, although maybe just deferred. The words “the Government will keep this issue under review” sound like abandonment to me.
f) The loss relief provisions for both incorporated and unincorporated businesses have been extended. At the moment, losses can generally be carried back for only one year, but this is being extended to three years for trading losses for the tax year 2008/09 and for losses of companies for accounting periods ending after 24 November 2008. This is a special offer for one year only and is capped at £50,000. A helpful technical note on this subject has been published, and copies are available on request.
g) Foreign dividends received by large and medium-sized groups will be exempt from tax, regardless of the level of their shareholding. This is likely to come into force next year. It will, of course, be subject to a special targeted anti-avoidance rule. It will also be accompanied by a worldwide cap on the deductibility of interest and an extension to the loan relationship rules relating to unallowable purposes.
h) The Controlled Foreign Companies legislation will be reformed – but not yet. Consultations will continue throughout 2009. This is obviously necessary, having regard to Cadbury Schweppes and Vodafone 2, in which the courts held that the legislation was contrary to EC law. I wonder what is supposed to happen in the meantime.
Nearly everything else is either too narrow, too vague or too long deferred to be relevant here. Anyway, the plans are sure to be announced a number of times again before they come into force.
One area of vagueness I mention simply to avoid misunderstanding is the comment about the (unspecified) British Offshore Financial Centres. The government will shortly commission a review (it clearly has not started yet – nor do we know its terms of reference) of their role in the global economy and their long-term business strategy. It will work with the Crown Dependencies and overseas territories to identify current and future opportunities, risks and mitigation strategies. (I told you it was vague.) The review will not consider changes to the United Kingdom’s constitutional relationships.
The Chancellor could not resist the opportunity to issue a few hundred pages of Explanation, Review, Consultation, Commentary and Draft Legislation titled HMRC: Modernising Powers, Deterrents and Safeguards, which all has to do with the new Revenue powers that are about to be introduced. A great deal more on this particular issue will follow soon.