Commenting on today’s Pre-Budget Report, Tim Gregory, partner in the private wealth group at accountants Saffery Champness says: 

“In what may well be his last Pre-Budget Report, the Chancellor announced a surprisingly large package of measures.  Whilst there was some welcome news, there were sadly also some missed opportunities and one or two initiatives that could well back-fire.

”A new one-off tax on bankers’ bonuses over £25,000 of 50%, to be charged to the employer, on top of the individual’s tax liability.  Whilst some action in this area was only to be expected, this massive increase in tax seems very likely to lead to people who really are top banking talent to relocate abroad and continue working from a place where their income may not be taxed in the UK at all.  Further, the fact that the tax will be levied on the employer means that the banks can only be expected to encourage this activity.

”The Stamp Duty Land Tax holiday for properties with a value of up to £175,000 will end on 1 January 2010, as previously planned.  This is a missed opportunity for the revival of the UK property market.  An extension of this holiday, together with a substantial increase in the limit below which it takes effect, would have cost relatively little, but could have inspired enormous confidence.

”Small companies corporation tax rate, which was to increase in 2010/11 to 22%, will remain at this year’s 21%, and this is clearly helpful for a very small number of struggling companies.  However, it clearly does not help any businesses that are currently making short term losses, which are in real need of some help.  Deferring tax rate increases on profits that are currently dwindling will cost the economy little, and is principally a soundbite.

”The Inheritance Tax nil rate band, above which IHT is charged, is to be frozen at £325,000 for next year, instead of the planned increase to £350,000.  This will lead to yet more middle-income people being drawn into the net of this tax that was initially introduced with regard to the very wealthy only.

”Anti-avoidance measures to protect £5 billion of tax revenue.  This received arguably the biggest reaction from the House, and there is no doubt that people should not be illegally evading their tax responsibilities.  However, this amount of tax is around a half of 1% of each of both tax revenues and the UK’s total debt.  Solving this problem is clearly necessary, but it is not going to make very much difference.

”A reduced 10% corporation tax for profits derived from patents is intended to boost innovation, but not all innovators operate through limited companies, and this tax incentive will lead to more regulation for creative people as they find themselves forced to incorporate.

”VAT will return to a rate of 17.5%, and the Chancellor said that he had no further announcements to make on VAT.  This is welcome news in the light of recent concerns that there might have been an increase to 19% or even 22% or 23%.”

What will be included in the Pre-Budget Report when it is presented to Parliament? 

It has been announced today that the current Chancellor’s third Pre-Budget Report (PBR), will be unveiled on 9 December. PBR 2009 will be the last of its type before next year’s General Election, and will reveal the Government’s latest tax and economic forecasts, departmental spending plans and planned changes to the fiscal framework. 

With the country still deep in what is now officially the longest recession since records began, TIM GREGORY and CLARE CROMWELL, partners at Saffery Champness Chartered Accountants, set out eight measures that could help assist the economy and potentially encourage a return to growth: 

• Deferral of National Insurance increases.

To start with, Tim proposes suspending these planned increases: “With unemployment at alarming levels, another cost of creating and maintaining jobs is the last thing the workforce needs.” 

• Reverse the restrictions on tax relief for pension contributions.

“The Chancellor should not be afraid to think again on tax relief for pension contributions,” says Tim. “With a proposed increase in the top rate of tax to 50% (51.5% for earned income), top earners and entrepreneurs are going to shoulder a large burden of tax increases in the coming years, which will inevitably discourage some from putting 100% into helping to rebuild the economy.” 

“The new rules that effectively increase their taxes further just because they wish to save for their retirement are simply unfair. The termination of the ‘quid pro quo’ of full tax relief on money going into a pension in exchange for full taxation of an annuity coming out amounts to double taxation, and should be reversed before it takes full effect.” 

Clare Cromwell adds, “For years the government has been encouraging people to build up their pension pots but there is now a decreasing incentive for people to add to their pensions.” 

• Don’t tinker further with CGT!

Tim Gregory says: “The prospect of an increase in Capital Gains Tax is a real fear, given the very large difference between the 18% flat rate and the proposed 50% top rate of income tax. At the extreme, some have spoken of an equalising of the rate, although this seems extremely unlikely to happen, as part of the package in the introduction of a flat rate for CGT was the abolition of any allowance for price increases.” 

“For many years, personal taxpayers had the indexation allowance, and then in 1998, taper relief was introduced. The abolition of these was accompanied by a reduction in the top CGT rate from 40% to 18%, similarly recognising that you just cannot put a heavy tax burden on general price increases.” 

• Extend the Stamp Duty holiday

“A Stamp Duty “holiday” for properties less than £175,000 was extended in the 2009 Budget to the end of this year,” says Tim. “It was introduced to help stimulate a housing market that is still barely showing signs of any real recovery. 

“A further extension of this holiday, and perhaps including higher value homes, could get this market moving again without any significant loss to the Exchequer.” 

• Remove the restriction on personal allowances

Clare Cromwell says: One of the stranger announcements in the last PBR was the disclosure that the basic personal allowance would be subject to income limits. 

“The effect of this restriction is to create a marginal income tax rate of 61.5% for those earning between £100,000 to £113,000. This anomaly should be looked at again.” 

• Reform of Inheritance Tax.

Tim says: “All of the main political parties are looking at changes for Inheritance Tax (IHT). It was originally introduced to tax only the particularly wealthy who chose to hold onto their wealth well into their old age. But even with the current state of the property market, there are many people who are pushed into the IHT net purely because of the value of their home.” 

Tim proposes that the level above which IHT is charged could be increased substantially, or a possible alternative could be to exempt the main home from IHT altogether. 

• ‘Stick with the programme’ on VAT.

“There has been some speculation that the anticipated increase in VAT from January may be revised so that it goes beyond a return to the previous 17.5%, with fears that it may be increased to 19% or even as much as 22%. I hope this does not occur,” Tim says. 

“Although there would be obvious extra revenue for the Exchequer, at least initially, it would do nothing to stimulate retail demand. It would very likely reduce retail sales (net of VAT), and would probably reduce demand. Whilst a reduction in demand might curb fears of inflation in the short term, it clearly could not assist in the general economic recovery.” 

• Give companies a break on Corporation Tax.

“It is often said that lower taxation promotes growth more effectively and there can be no doubt that now is a time to stimulate enterprise,” Tim concludes. 

“A reduction in the rate of Corporation Tax could well help companies to grow whilst not impacting on the total tax take, since more profits would be taxed.”

Extension of carry back of trading losses

A company may normally carry back trading losses arising in an accounting period for twelve months, and set that loss off sideways against its profits from any other source. In the pre budget statement last November, new rules were introduced in relation to losses of accounting periods ending in the window from 24 November 2008 to 23 November 2009 to allow trading losses to be carried back for more than one year in certain circumstances, effectively giving a three year carry back period. The government has announced further extensions to this support by extending the enhanced relief for two years rather than one.

Foreign profits

The tax exemption for most foreign dividends received by UK groups of companies has been confirmed and will be supported by a restriction on interest deductions combined with the replacement of the Treasury Consents rules with a new post transaction reporting requirement. This will herald the changes to the controlled foreign companies rules and is intended to improve the competitiveness of the UK as a location for multi national businesses.

VAT – change of standard rate

There is to be no extension to the period for the reduction in the standard rate of VAT which was reduced from 17.5% to 15% in the pre budget report. The rate will revert to 17.5% with effect from 1 January 2010 and legislation will be introduced to prevent any manipulation of the rules in relation to this.

Corporation tax small companies’ rate

The increase in the small companies’ corporation tax rate from 21% to 22% will be deferred until April 2010.

Extension of carry back of trading losses

A company may normally carry back any trading loss arising in an accounting period for 12 months, and set that loss against its profits from any source. New rules apply to losses of accounting periods ending in the period 24 November 2008 to 23 November 2009 to allow trading losses to be carried back for more than one year in some circumstances.

If a company’s trading losses for an accounting period ending in the year to 23 November 2009 cannot be fully relieved by carrying back one year, then up to £50,000 the unrelieved excess may be carried back against trading profits only for a further two years, on a LIFO basis. This means that, for example, where a company’s trading results are as follows:

Year ended 31 December 2008    (£150,000)
Year ended 31 December 2007    £40,000
Year ended 31 December 2006    £40,000
Year ended 31 December 2005    £40,000

the company can offset £40,000 of the 2008 loss against any income of 2007 as normal. A further £50,000 is carried back to the two earlier years, £40,000 of which is offset against the 2006 trading profits before £10,000 is carried back against the 2005 trading profits. The unrelieved loss of £60,000 is carried forward against future profits of the same trade as normal.

There are a number of computational rules to ensure that companies do not abuse the relief by altering their accounting year end dates. If the accounting period ending in the year to 23 November 2009 is less than 12 months long, the £50,000 limit will be reduced proportionally. In addition, if two accounting periods end in the year to 23 November 2009, the £50,000 limit applies to both periods.

Loan relationships

Two changes will be introduced in Finance Bill 2009 to amend the loan relationship rules affecting connected companies and it is proposed that the changes will have effect for company accounting periods beginning on or after 1 April 2009.

The first change means that a debtor company would no longer be taxable on the release of a trade debt from a connected creditor. Previously where a creditor formally released a connected debtor from a trade debt, the creditor would have been denied a deduction for the loss on the debt but the debtor may have been taxed on its ‘profit’.

The second proposed change is still under consultation however the change concerns the rule that allows a debtor company a deduction for interest payable to a connected creditor that is outside the loan relationships rules only on a paid basis, rather than on an accruals basis that normally applies. It is proposed that the rule should be amended to provide certainty about its operation.

Taxation of foreign profits

The Government will bring forward a package of reforms to the taxation of foreign profits in Finance Bill 2009 which will include:

• An exemption from tax for most foreign dividends received by medium and large companies regardless of level of shareholding.

• A Targeted Anti- Avoidance Rule to avoid the dividend exemption being exploited.

• Worldwide debt cap on interest.

• Changes to the Controlled Foreign Company (CFC) rules.

• Reform of the existing Treasury consent rules.