With the economy casting a gloomy shadow and the loss of the coveted AAA rating it’s unlikely we’ll see any big changes in the 2013 budget. The Chancellor has found himself on the points of a two pronged dilemma: trying to cut spending but encourage growth. As there’s little wiggle room within the budget due to constrained economic conditions, we shouldn’t expect to see any real cuts without corresponding increases to balance the books.
I predict the main focus of this budget will be anti-avoidance measures for those who the government see as aggressive tax avoiders. It’ll be a delicate balancing act though as we trade in a global economy and the Chancellor will not want to discourage foreign investment.
Company-wise, the focus of the budget will probably be at the larger end of the scale. I predict a further reduction in Corporation Tax by 1%, bringing the large company tax rate in line with small company at 20%. The aim being to discourage avoiders transferring “management fees” to other companies within the group based in lower tax countries. Although the tax rate would be lower as a percentage, the tax paid should be higher as an amount.
The disappointing results of the 4G auction, (which fell £1.2 billion short of the sum estimated in the Chancellor’s Autumn Statement), will have left a hole that needs to be filled. With no impending sell-offs due, anti-avoidance measures are likely to be the salve for this wound.
There is likely to be a further move towards the target of a £10k personal allowance starting in the 2014/15 tax year, although this may be held off until the 2013 autumn statement as a political ace to keep up his sleeve.
Fuel duty may feature, although as each 3p cut in duty costs £1.6 billion, it may be that any increase is postponed for 6 months or reduced to a lower-than-inflation rate. Reductions in this area are important to small business as fuel costs can account for a disproportionately high amount of their spending.
The Conservatives have historically criticised increases in employers’ National Insurance Contributions as a tax on jobs, but have done little to tackle this. The cost to a business of employing staff is one of the most significant, so any reduction here will have a direct benefit on all companies, and could encourage jobs growth.
Growth could be achieved with a reduction of the current rate of VAT rate. If prices on the shelves were lowered by 2.5% to 5% a larger volume of goods would be sold, generating increased revenue which would mitigate against the reduced rate. This would also help towards lowering costs of those small businesses not VAT registered.
Annual Investment Allowance
With the Annual Investment Allowance already having been increased to £250k for two years in the Autumn Statement, it’s unlikely we’ll see movement on this. The Chancellor will probably wait to see if, over its two years, it has achieved its goals of increasing investment in plant and machinery to help support engineering and manufacturing. If it has worked, it will likely be announced in future budgets as there is no benefit to making changes now.
With the government continuing to champion green issues, albeit mostly in word rather than in deed, it may use further investment allowances for companies investing in the research and/or production of green technologies to encourage development in what is widely seen as an important future growth area.
Employee Share Schemes
With the EU vote on banker’s bonuses going against the Chancellor, we may see further amendments to the taxation arrangements of employee share schemes to create a workaround to EU legislation. This already allows companies to pay out bonuses as shares, but we may see a more incentivised way of delivery that reduces the tax burden on the employees. It would be useful to see these schemes improved to benefit smaller PLCs, as it has been shown that when employees become shareholders it increases productivity. Just look at John Lewis’s figures last year, and the 17% bonus being paid out to its staff.
Real Time Information
Real Time Information (RTI) comes into effect in April, which should achieve savings within the tax credit system as the aim is to make changes more quickly based upon employees’ actual situation. We may hear about further consultation on how this model can be utilised further, particularly for sole traders who currently have a large grace period between tax incurred and tax paid, although the payments on account system is meant to iron this out.
A monthly RTI style system for small companies and non-incorporated traders, based on cash based accounts, looks highly likely to be approved (maybe even in this budget), so payments on account may become more frequent and more accurate. This would smooth out the cashflow from taxes that the government receives; so that instead of a large inflow of corporation tax in December and personal tax in January the inflow would be spread across the year. This would mean more administration for small businesses, which is unwelcome and generally viewed as unhelpful, but may help reduce the month to month borrowing needs of the government which are in some part a result of inconsistent cashflow.
Capital Gains Tax
Capital Gains Tax rarely features in budgets, with it being limited to slight annual increases or freezes. It may be that with Lib Dem pressure the current 28% top rate may be increased to 30% to 35%. This type of tax affects more top earners than middle earners typically, particularly with the sale of valuable assets such as second homes or works of art. An increase here could be seen as a Conservative answer to the Mansion Tax, and is certainly fairer than retrospectively taxing an asset currently held, especially as those assets are, usually, paid for out of taxed income. Any increase wouldn’t attract too much criticism either as it would affect relatively few tax payers, but would be seen as asking the rich to pay a bit more, which seems to be a constant argument from the opposition.
Little room for maneuver
In conclusion, we can’t expect to see too much change as there’s little room for maneuver. There will be a couple of headliners for the next day’s newspapers, but even they won’t be earth-shattering. Anti-avoidance is likely to be the biggest focus, especially as it will be popular with the media. Realistically, it is unlikely that the VAT rate will change, even though some are calling for an increase, but it may be that more types of purchases are brought under the VAT umbrella. Fuel Duty has been a popular area in previous budgets, so we can expect to hear something, even if it’s just a freeze. And finally it’s likely that green technologies will feature, particularly as the UK is struggling to meet its legally-binding commitments to renewable energy and carbon emissions.
Mark Barrett, Cannon Moorcroft
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