Budget 2013: A look at what might be in Osborne's red case
1. Budget 2013 - it's time to get personal
The Budget is likely to one of continued austerity while attempting to provide incentives for business growth.
For wealthy individuals there will be continued freezing of reliefs and allowances - for example, we already know that the inheritance tax (IHT) nil rate band will be frozen at £325,000 until at least 2019, and that tax relief for pension contributions continued to be limited with a new £40,000 annual maximum and a £1.25 million lifetime allowance from April 2014.
While it's hoped that after continuous tinkering with tax relief for pensions we will see another change, there is a possibility that the amount of tax free cash withdrawal could be changed from the current 25% limit to a set amount.
For IHT, it would be good to hear of a much needed review – the current system is actually a tax on some lifetime gifts and the death estate and is not a tax on inheritance.
The chancellor may also be considering extending ISA limits, incentivising people to use them as an alternative to pensions. However, he needs to be putting money back into the economy and so would need to extend ISA investments to unlisted securities and business investment, or extend some of the other business investment incentives, such as the Seed Enterprise Investment Scheme.
Perhaps even a new incentive is needed as the current options are fairly limited and difficult to access.
The squeeze is likely to continue with the self-employed possibly seeing a hike in NIC contributions, as this would support the new flat-rate state pension proposals. But bringing the self-employed in line with the employed could potentially create a backlash at a time when these people are contributing to keeping unemployment figures down.
The Annual Residential Property Tax (ARPT) starts in April, charging an annual tax on properties worth more than £2 million owned by companies. There are some exemptions designed to ensure the tax falls purely on homes for personal use, held by tax avoidance structures.
While no changes to these rules are expected, it could be an easy step for the future to extend this charge to all homes worth £2 million or more, whether held by companies or personally – in other words a Mansion Tax. We don't expect to see this in this parliament, but maybe in the next, depending who is in Government.
2. A Budget for business?
The surprise announcement on corporation tax in the Autumn Statement should logically be followed by a final reduction in the headline rate to 20%. This would not only provide some positive headlines in the press, but it would also be a welcome simplification – particularly on the difficult issue of whether companies are associated so as to share the benefit of any lower rate of corporation tax.
The 1% differential between the lower rate and the standard rate is of negligible commercial benefit. Any further reduction below 20% is unlikely as it would potentially encourage retention of profits to be extracted in due course at little or no further cost.
Further cuts in the effective rate through the use of targeted reliefs, as with R&D, Patent Box etc., would make much more sense in incentivising investment and expenditure - especially if accompanied by a repayable tax credit. There are many niche industries that would be benefit from such arrangements.
The cash basis of accounting for smallest businesses has been strongly criticised by many and it is to be hoped that the previously announced arrangements will be modified so as to make it more attractive to the millions of taxpayers that will be eligible to use the scheme.
As regards the multinationals, there will no doubt be some mention on progress being made on international cooperation to reduce the scope for profit shifting.
The difficulty is that whilst there is some degree of tax competition between the G20 members, the main target is the use of 'tax havens'. In this respect the stumbling block is the difficulty in determining what is a 'tax haven'.
The focus on anti-avoidance will undoubtedly continue both due to the imminent introduction of a GAAR (General Ant-Abuse Rule) and the additional resources provided to HMRC. An area that may be considered is further strengthening HMRC's ability to pursue taxpayers who used schemes that only now are being considered by the Courts.
We are not expecting the chancellor to seek to raise the current standard VAT rate of 20%. A 1% rise in VAT rate would generate additional income in the region of £5.6 billion but the impact on fiscal growth could be significant.
The standard VAT rate in the UK is currently quite a bit lower than the average EU VAT rate (approx. 23%) so it's not beyond the balance of probabilities but in view of the political impact and the problems with pasty tax in 2012, it seems unlikely.
We could see an increase in the number of items which are subject to the reduced rate of VAT of 5%. VAT is an EU wide tax and there are a number of goods and services which are permitted by the EU to be subject to the reduced rate.
The UK does already apply either the reduced or zero rate to a number of the qualifying items but there has been a lot of lobbying on this point in recent times which may see a change.
The most likely candidates would be repairs and maintenance to housing (as part of a social policy), hotels, catering and entertainment/ cultural events.
We have also seen a rise in Insurance Premium Tax (IPT) especially around perceived VAT avoidance on the sale of VAT exempt insurance with VAT-able products or services. As a result we might expect to see additional items being included in the IPT arena.
4. Green machines?
It's possible that there could be some further tightening of thresholds for capital allowances on company cars, and for benefit-in-kind charges on company cars, although probably aimed at 2015 onwards to aid planning (all this year's HMRC guidance booklets have already been re-written and published).
This would put further pressure on manufacturers to keep up the efficiency drive. But there are engineering limits to what can be achieved by this, and the likely outcome is that manufacturers will start 'gaming' the system – there are already reports of manufacturers using tricks to manipulate their CO2 ratings. But the chancellor will almost certainly be wanting to make a 'green' announcement with one eye on the Kyoto/EU targets.
Super-green drivers have done well - currently a vehicle gets a 5% benefit in kind if it's rated at less than 75g/km. But you need a tiny car or very expensive plug-in hybrid electric vehicles to go low enough.
Those with ordinary 'green' company cars might not fare so well next year. What usually happens is that employees choose a company car that qualifies for a low rate benefit for being green, then see the charge raised above inflation or the qualifying threshold raised, despite the car remaining equally green.
Zero-emission cars (plug-in electric or fuel cell-powered) attract a nil benefit in kind, but a new rate of 9% of list price will come in from 2015 and the 5% rate will go too, so an average 'green' car will double (or worse) in tax cost as a company car. Plus there's a double whammy for plug-ins as there still aren't many places to plug them in to recharge the batteries.
A smarter move might be around enhanced capital allowances for manufacturing equipment used to make low-emission cars, which might attract manufacturers to set up or re-tool plants in the UK. This would mean the tax incentive would ultimately flow through to reduced costs and greater sales, with more jobs.
Amazingly, if you erect a wind turbine to generate clean electricity for your plug-in car, you don't get enhanced capital allowances for being green as the turbine isn't on enhanced allowances list (but the newly-increased annual investment allowance of £250,000 pa will help where businesses do that). Sadly, the turbine in the garden might make you slightly unpopular with your neighbours.
As the chancellor gets on his feet to deliver Wednesday's Budget, the real work begins for the tax advisers as we begin to determine what impact his decisions will have on taxpayers.
George Bull heads the Baker Tilly professional practices group
This article was written for our sister website Money Observer
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
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.
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).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Enterprise Investment Scheme
A scheme set up to encourage investment into small, unquoted trading companies and give investors tax breaks to compensate for taking risk. Because the companies in the scheme are not listed on a stock exchange they often carry a high risk, so the tax relief is intended to offer some compensation. An EIS company cannot be a subsidiary, must trade wholly in the UK, can’t employ more than 50 people and certain activities (including forestry, farming and hotels) preclude companies from offering EIS relief.