Economic Woes to Force Tax-Raising Budget?

Chancellor of the Exchequer Alistair Darling’s 286 page pre-budget report  presages a reduction in economic growth and increased taxation.

Although the Chancellor predicts that the Government’s net borrowing will fall from £38bn this year to £23bn in 2012, this is predicated on a saving of a further £30bn in the running costs of Government departments.

Key points from the Chancellor's announcement for clients are:

Taxes Affecting Companies

He has decided to raise additional taxation from promoters of private equity firms (where multi-millionaires have been famously described as ‘paying less tax then their cleaners’) by introducing a flat rate of CGT of 18 per cent. The details of how this is to be done were not precisely spelled out. This is counterbalanced by a reduction of 2p in the pound in the large company rate of corporation tax to 28 per cent. This was, of course, announced in the 2007 budget, as were increases in the rate of corporation tax paid by smaller companies. This was increased from 19 per cent to 20 per cent in the March 2007 budget and will rise again (to 21 per cent) in 2008. Unsurprisingly, the Chancellor was silent on those changes, although they do appear in the document.

Inheritance Tax

The announcement also showed the importance of political expediency in framing tax policy. The reality is that the UK has one of the most generous Inheritance Tax (IHT) regimes in the developed world and, with proper planning, IHT is virtually a voluntary tax. However, it is big news at present and it was therefore no surprise at all that the IHT threshold for couples will rise to £600,000 from today and to £700,000 by 2010. This is being brought in by allowing couples who do not use their individual IHT ‘nil-band’ on the first death (i.e. who pass their assets to their spouse or civil partner) to use both allowances on the second death.

Child Maintenance

At the other end of the economic scale, the amount of child maintenance a family can receive, without it affecting their benefits, will double from £20 a week to £40 a week by 2010. Substantial increases in child tax credits over and above those previously proposed have also been announced.

Income Tax

Loopholes which allow non-domicilaries not to pay income tax on their unremitted foreign income are to be ‘examined’. A certain Chancellor Brown made the same promise early in the life of this Government and with ‘non-doms’ known to be substantial benefactors of political parties, perhaps we can expect the ‘examination’ to continue for a long time before there is any action - if indeed, there ever is. However, ‘modernisation of residence and domicile taxation’ is shown in the financial estimates to be expected to produce £1.3bn in the two years commencing April 2009, so Darling may well have plans in mind.

This will be done by making 'non-doms' who have been resident in the UK for seven of the last ten years, and who wish to retain their status, pay £30,000 a year for the privilege, unless their unremitted foreign income or gains are less than £1,000. Various changes to the residence rules and 'removal of anomalies' are also promised.

Indirect Tax

A ‘per flight’ tax will replace the ‘per passenger’ tax from November 2009. This is expected to raise an additional £520m from 2009 onwards – so expect air fares to go up.


Bits and Pieces

Heathrow Expansion – The Government will consult shortly on whether the expansion of Heathrow, the UK’s only major hub airport, can take place while meeting stringent environmental conditions. 

Foreign Lorry Drivers – On the spot fines will be introduced for foreign lorry drivers for infringements of UK law.