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Tenon Pre-Budget Report 2008

Tenon budget logo

26 November 2008

Elizabeth Robinson

After weeks of speculation, the Chancellor has finally presented his report. But of course, with all recent leaks over the past few days, many of the measures were already known.

The Chancellor announced a package of measures designed to provide a fiscal stimulus to the economy. The measures announced are likely to inject £20billion into the economy by April 2010. Mr Darling acknowledged that the underlying structural position of Britain’s economy is far weaker than he thought at the time of the Budget in March. Public borrowing is set to rise in 2008/09 from a Budget prediction of £43billion to closer to £100billion. In 2009/10 borrowing will be £118billion.

The headline grabbing measure is the reduction in the rate of VAT from 17.5% to 15%. This is the first reduction in 17 years and is the lowest rate permitted under European Union law. But it is only temporary and the rate will revert to 17.5% on 1 January 2010. The aim is to encourage spending to be brought forward to limit the recession. But with massive sales in the High Street already, this reduction in VAT is unlikely to have much impact. The main effect will be felt by the big spenders who spend more on goods that attract the full rate. For low earners most of their spending is on essentials that have a lower or zero rate of VAT.

A new 45% higher rate of income tax for earnings over £150,000 is to be introduced in 2010 if Labour wins the next General Election. But this will be a small drop in the ocean of the tax rises that will be needed in the years ahead. Personal income tax allowances which were increased for 2008/09 to head-off the 10p tax rate shambles will be made permanent, and indeed, increased. But personal allowances will be restricted for earnings between £100K and £140K, and abolished completely for earnings over £140K.

From April 2011 both employers’ and employees’ national insurance contributions will rise by 0.5%, and the starting threshold for NICs will be aligned with those for income tax.

The planned increase in the rate of the small companies corporation tax to 22% is to be deferred for a year. Small businesses will be able to agree with HMRC a payment schedule for all taxes. And losses of up to £50K will be able to be carried back for up to three years in order to generate a repayment of taxes previously paid.

Another very welcome announcement which Mr Darling did not mention in his speech, was the indefinite postponement of the so-called “income splitting” rules that would have affected many entrepreneurial family businesses. Andrew says: "We have been saying that the rules would be unworkable ever since they were first announced. This is a welcome relief for these businesses which can now concentrate on creating wealth rather than worrying about how they are going to be taxed".

Large and medium-sized companies will welcome the announcement that dividends from overseas subsidiaries will be exempt from tax. This will make the UK a far more competitive regime and this should prevent further large companies relocating offshore.

A number of anti-avoidance measures were announced, but again the potential tax saving here will be small in comparison to what will be needed to be raised to pay back the massive borrowing in the future.

In summary, three things strike us about this Pre-Budget Report. First it is, in fact, an emergency Budget. Secondly, there will need to be massive tax rises in the future to pay back the borrowing that is necessary to pay for these tax cuts. And thirdly, if the fiscal stimulus doesn’t work, there is very little else that the Chancellor has up his sleeves.


 

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