Hopes and fears for the 2011 Budget
With Wednesday's Budget in sight, industry experts are speaking up on what they would like to see the Chancellor change - and what they hope he doesn't.
A report from the Adam Smith Institute (ASI) calculates the negative effects of the top tax rate and the organisation has called on the coalition government to scrap the 50p tax rate in this year's Budget.
The ASI says that if the government keeps the 50p rate it will have highly negative effects, leading to lost revenue of £350 billion or more, as well as flat economic growth.
The report points out that the UK has become one of the most highly-taxed countries in the world and evidence from overseas shows that high top tax rates fail to produce public revenues and injure economies.
"The government says the forthcoming Budget will be all about growth, but no amount of tinkering around the edges will make up for the fact that we have an extremely uncompetitive tax regime, which is increasingly making hard-working entrepreneurs wonder why they bother," warned Tom Clougherty, the ASI's executive director.
"Yes, we need to balance the budget - but high taxes are not the way to do it. What we need to do is couple a smaller, more efficient public sector with a dynamic, enterprise economy. Scrapping the uneconomic, politically-motivated 50p tax rate would great start."
Adrian Coles, director-general of the Building Societies Association notes that the government's commitment to ISAs is welcome, but adds: "We believe that the regime could be further improved by permitting transfers from stocks and shares ISAs to the cash product. This would provide more product flexibility for savers and represent a consistency of approach."
VCTs and EIS
Mike Currie, Partner at the Foresight Group says: “Given the belief by the coalition government that private sector businesses will lead the UK out of recession and absorb many of the public sector job losses, it would be incongruous that they introduce uncertainty or downgrade one of the few investment products that are genuinely backing British business at a time that banks are not."
"VCTs are more accessible to ordinary investors as opposed to EISs which are typically for more ‘sophisticated' investors. The Government's 'we are all in this together' mantra would sound hollow if they favoured a tax break that only the rich can comfortably invest in."
Currie says private equity needs to be protected in order to stimulate investment and enterprise."It is naive to think banks will play any meaningful part in lending over the next year which means private investment is more important than ever. We believe the answer is for British tax payers to back British Business."
The Federation of Small Businesses (FSB) is calling on the government to reverse the planned 1p rise in fuel duty the Budget next week and is urging it to introduce a fuel duty stabiliser - a mechanism to adjust fuel prices in order to alleviate the impact of oil price rise shocks on pump prices - as promised.
It says rises in fuel duty are stifling eight in 10 small firms, but is concerned that it severely affecting key sectors needed for economic growth. Interim results from more than 1,000 respondents to the FSB 'Voice of Small Business' survey panel show that rises in fuel duty will negatively impact 79% of small businesses.
The FSB is particularly concerned that the manufacturing industry, the construction sector, and the transport industry are being severely affected.
The FSB believes that while a cut in VAT would lower the price at the pump, it will not stem the volatility in fuel prices in these uncertain times - something a fuel duty stabiliser would.
"Reversing the planned 1p rise - which when indexed to inflation will actually mean a 5p increase on pump price - and cutting the VAT on fuel duty in the Budget next week will be welcome steps," said FSB national chairman John Walker.
Meanwhile, almost 60% of country people in a survey by insurer NFU Mutual said tackling the cost of fuel was top of their wish list for the Budget. "Many people struggling with the cost of fuel are in rural areas where heating oil has risen in value and is an all too common target for thieves," said the company.
"We're glad the government is making moves to help those who struggle to heat their homes, but any moves to tackle fuel poverty should also include those who find it difficult to make ends meet because of rising petrol prices.
"We would welcome any way of reducing the tax burden on people and businesses in remote rural areas and we anticipate measures that will help small and medium size businesses."
Support for struggling homeowners and Stamp Duty
The Building Society Association is calling for Support for Mortgage Interest (SMI) to be paid at the same rate as the borrower's mortgage to ensure that vulnerable borrowers continue to receive adequate support.
"Obtaining a mortgage remains very challenging for first-time buyers, who must raise a large deposit," said the BSA's Adrian Coles. "Transaction costs act as a further barrier to house purchase, so we call on the government to make permanent the exemption from stamp duty for first-time buyers on properties under £250,000.
"The government should also go a step further and look at reforming the current 'slab' structure of the tax - it's time stamp duty for all buyers was reviewed."
This article was written for Interactive Investor
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.