“Alistair Darling is treading a very fine tax tightrope," says Mannion. "He’s under pressure to announce tax measures which support British business and hard-pressed families, but cannot afford to further re-mortgage our children’s future. Ultimately, certain groups of taxpayers are going to have to dig very deep – and probably for a long time. “Higher rate taxpayers should brace themselves. They will be paying more in National Insurance contributions from 6 April 2009, as the upper earnings limit will be aligned with the higher rate threshold for income tax (taxable income over £37,400 pa). “But the Chancellor will need further funds. He may look to generate additional revenue by increasing the rate of income tax for higher rate taxpayers, as early as this year. We know that the higher rate of tax rises to 45% in April 2011 – but this date could easily be brought forward. Ireland, for example, has introduced a ‘temporary levy’ for higher rate taxpayers." What else will the Chancellor do in the forthcoming Budget? Mannion considers Alistair Darling’s next moves. Alignment of CGT with income tax:CGT rate could be increased from its current flat rate of 18 per cent to an individual’s marginal rate of tax. This would immediately stop any perceived tax avoidance strategies which attempt to classify income as capital gains. Collections to the Exchequer arising from CGT were around £5.3bn in 07/ 8. An increase in rate may be required to maintain this level. VAT:Much publicity has been given to the Chancellor’s intention to return the standard VAT rate to 17.5 per cent at 31 December 2009. However, it’s worth noting that if the rate were increased to say, 18 per cent, this would net an additional £2.5bin a year. Moreover, the UK VAT rate is one of the lowest in Europe. Freezing personal tax thresholds:Thresholds for personal allowances and income tax rates may be frozen, given the current low inflation environment. However, the large government economic stimulus packages for the banking and car industries and "quantitative easing" (injection of cash in the economy through government purchase of bonds), means the risk of higher inflation may not be far away. In an inflationary environment, frozen personal allowances will help increase the government cash collection as income increases. We already know that the personal allowance for those earning more than £100,000pa will be reduced in 2010, thereby increasing the government’s tax-take. It’s possible that that measure could be advanced. NICs:A further option for a cash-starved government might be to accelerate some of the NIC increases announced in the PBR2008. However, the downside of increasing NIC for employers is that it acts as a tax on jobs, which would be counterproductive in the current environment. NIC could therefore simply be increased for individuals where it is effectively an extra tax rather than a ring-fenced levy to fund health and pension spending. Saving jobs:To support employers who might increase the number of staff, employers’ NI might be waived or reduced in relation to the employment of additional people. (This waiver might be capped at say, the first £10,000 of employers’ NICs). Increased flexibility in treatment of business losses:In the event a business makes a loss in one year, this can currently be carried forward until the organisation becomes profitable when the earlier loss is offset against tax. However, the government could enable businesses to surrender this right to a future tax credit for a cash injection in the short-term. (This approach has been successfully used for research and development costs). Such a tax break could be a win-win policy: it would help struggling businesses now, inject cash into the economy and remove an uncertain future liability for the government. Support for entrepreneurs and smaller businesses:Ease rules on Venture Capital Trusts and Enterprise Investment Schemes – the size and value of companies which can qualify for investment under these schemes was virtually halved a few years ago. So, in light of the current difficult equity and debt markets, a return to the previous thresholds would be helpful to hundreds of small businesses The government has consulted on the simplification of accounts for smaller companies and this could usefully be extended to partnerships and sole traders. The approach could allow "cash accounting", which means expenses are offset against profits in the same financial year. This generally has the effect of reducing taxable profits in the short term, which is not only financially helpful but also simplifies related administration. Tax havens: These are currently under the spotlight and we could well see further tightening up in the Budget as they are a major reason for the uneven international playing field. Other stimulating policies for business: Options for stimulating future capital expenditure could include: increasing capital allowance rates; permitting short life asset elections for a wider range of qualifying assets; and providing for an option to take capital allowances based on accounting depreciation rather than fixed rates. Share schemes:With the emphasis on share based reward, especially in the financial services sector, it would make sense for the government to provide greater support for these employer share schemes. We may therefore see an increase in the taxable benefits of HMRC approved plans. The Chancellor, for example, might increase the £30,000 limit on shares that can be held in a Company Share Option Plan (CSOP).
Under a Share Incentive Plan (SIP) the maximum tax breaks are only achieved if the shares are held in trust for five years. To encourage greater participation, especially among lower-earners, this could be reduced to, say, three years. Green measures:There will doubtless be measures to boost our environmental credentials. These might include widening the range of "green" assets which qualify for enhanced capital allowances and extending cash repayment options to unincorporated businesses. This would target smaller and startup businesses – another boost to the entrepreneurial economy.
To help car manufacturers and to promote the use of greener cars, we could see greater tax breaks for employers to encourage green cars under company car schemes.
For further details, you can contact Richard Mannion, national tax director at Smith & Williamson, on 020 7131 4252 or mob 07799 761326.