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The Chancellor’s PBR is next Wednesday 9 December. There have been some leaks and pre-announcements about what might be included and also a lot of pure speculation!

 

The following are our thoughts on what might be included:

 

Income Tax rates 

 

There is speculation that the level of income at which 50% tax becomes payable from 5 April 2010 will be reduced to something like £110,000 but that, as a quid pro quo, the personal allowance will not be abolished for those with income over £100,000.  This would get rid of the effective 60% rate of tax for those with income of just over £100,000.  Depending on exactly how this was done it might mean that there was little impact on those with incomes in the £120,000 to £150,000 bracket.

 

Corporation tax

 

At the moment tax losses can be carried forward indefinitely. This has caused controversy because it means that the banks will not pay tax on their profits for years because of their tax losses carried forward, even though the banks have been very significantly restructured.  Many other countries do have a time limit on loss carry forward and it may be that the Government will adopt the same approach here. 

 

It is unlikely that any change would apply only to the banks because this would be anti-competitive so any changes would be across the board.

 

As a quid pro quo there might be a further extension of loss carry back rules – at the moment the extended carry back only applies to £50,000 of losses. 

 

The difference between the small company rate of tax and the full rate of corporate tax has gradually been eroding and a move towards a single rate over a period of time might well be an option.  This would make the UK competitive for large companies and at the same time could reduce the incentive for people to take money out of private companies as dividends rather than as salary

 

VAT

 

There are no signs at the moment that the VAT rise back to 17.5% will be postponed.  We suspect that the Government would love to raise VAT to 20% but to do so would surely be a sign that they had given up all hope of winning the election.

 

Capital taxes

 

With a 50% income tax rate the pressure to increase the capital gains tax (CGT) rate will be intense.  The current 18% rate is something of an arbitrary figure and putting it up to 20% would have no impact on behaviour.  Long term there is a compelling argument for bringing together the CGT and income tax rates as Nigel Lawson did some time ago, but we doubt that this could be done all at once.

 

The Conservatives have committed themselves to the £1m inheritance tax (IHT) threshold per person.  The Government has said that it would not do this.  Hence it might find political capital in increasing the IHT cost for the very rich.  We anticipate that this would not be done by rate increases but by limiting business and agricultural property reliefs and perhaps also tightening up the avoidance regime.  This could be spun as ensuring that the rich pay their fair share of taxes!

 

Avoidance

 

There is a lot of talk about further anti-avoidance measures to prevent people taking income in a form which avoids the 50% rate.  There is still evidence in the market place that there are schemes which are being sold to high earners. Presumably the Government will be looking at a tougher income into capital anti-avoidance regime.  Recent ministerial statements have shown an increased emphasis on tackling avoidance and in many ways this is now higher up the political agenda than tackling evasion.

 

Certainly we anticipate that there will be plenty to think about and to plan for before 6 April 2010.  We live in an ever changing tax environment but one in which higher taxes are here to stay.

 

We’ll provide a further update once matters become clear after the Chancellor’s statement.