Darling will dig deep to appease taxpayers through a
package of tax cuts in this year's Pre Budget Report
(PBR)
The current economic climate leaves the Chancellor with limited
options but to rely on substantial borrowing to fund a tax cutting
policy to bail out struggling taxpayers in the downturn, says
leading business and financial advisers Grant Thornton.
Francesca Lagerberg, Head of Grant Thornton's National Tax
Office comments, "To stimulate the economy and support those
experiencing difficulty as a result of the downturn, treasury
officials are likely to put in place substantial cuts in tax
revenue. The significant package is reported to be in the region of
£15 billion a year, equivalent to around 1% of UK GDP to benefit
the most vulnerable sections of society including pensioners, low
income families and the unemployed who are already feeling the
harsh effects of the economic downturn."
"One area that the PBR traditionally reviews is the Personal
Allowance and NIC bands. However in May, the Treasury responded to
the backlash over the abolition of the 10 percent starting rate,
which adversely affected low income taxpayers, by increasing the
personal allowance from £5,435 to £6,035. But, this move was only
to deal with the issue for the current tax year and the Government
will now need to explain what it is going to do to ensure that the
problem does not resurface in April 2009 for the start of the next
tax year."
"The Chancellor, in his annual Mais Lecture, has already made it
clear that there are no plans to reduce public spending so tax cuts
will have to be funded by borrowing and consequently breaking the
golden fiscal rules. The Treasury has experienced a significant
fall in tax receipts as expenditure on unemployment benefits
increases and stamp duty land tax receipts have declined owing to a
stagnant housing market - a large increase in borrowing is likely
to be one of few viable options this Government has at its
disposal," Lagerberg says.
Will the current savings guarantee be
doubled?
The official guarantee for UK depositors is currently set at
£50,000, or £100,000 for joint accountholders. There is speculation
that this figure may double to £100,000 after similar proposals
were unveiled recently by the European Commission.
However, Mike Warburton, senior tax partner at Grant Thornton
says an increase in the current savings guarantee is unlikely as
the Government could not justify the extended expenditure. "The
Government is unlikely to put in place measures to encourage saving
at a time when tax receipts from property and consumer markets are
low and the Government wants to encourage spending to get liquidity
back in the market."
"The collapse of several US financial institutions and the
mergers of several others has undoubtedly left savers feeling
uncertain about where to deposit their hard earned cash. Anecdotal
evidence suggests that savers have flooded Government backed banks
that are perceived to be 'safe'. Consequently, nationalised banks
have recently had to lower their savers' rates in an attempt to
avoid breaching anti-competitive laws. It is currently unclear
whether this PBR will see the Government implementing measures to
raise the current £50,000 limit or stick strictly to it in the
event of another banking collapse."
Inheritance Tax (IHT) - Will a bidding war
ensue?
In the March 2008 Budget the Chancellor restated his commitment
to increasing the IHT nil-rate band until 2010. With limited funds,
significant changes are unlikely to be made beyond the
pre-announced tax free limits of £325,000 for 2009/10 and £350,000
for 2010/11.
Maurice Fitzpatrick, a senior tax manager at Grant Thornton
says, "The condition of the housing market, may leave many who have
inherited a property facing a huge tax bill. Traditionally, a
property would be sold in order to pay the IHT bill but the average
home is taking approximately 24 weeks to sell and many are
languishing on the market for much longer and owners are
consequently losing value in their property."
"The current law takes the value of the property on the day
someone dies and expects the IHT to be paid within six months. With
an increasingly difficult property market and falling prices, the
executors will find it harder to sell and may find the tax is due
before they've got the cash available. It is possible to make a
claim to pay tax on a lower value if the property is sold within
three years and the value has fallen by £1,000, (or 5% if lower
than £1,000) compared to the value at the date of death."
Could a Stamp Duty Land Tax (SDLT) holiday breathe life
into an ailing housing market?
Statistics show that 15,600 mortgages were approved for
first-time buyers in August 2008, down 45 per cent from the same
month last year, according to the Council of Mortgage Lenders
(CML). The withdrawal of favourable mortgage products and
spiralling mortgage rates has left only those who have access to a
significant deposit able to gain approval for a mortgage.
Karen Campbell, head of Stamp Taxes at Grant Thornton says, "The
Government's recent one year suspension of Stamp Duty Land Tax
(SDLT) for home buyers purchasing residential property below
£175,000 may have provided a glimmer of hope to those at the lower
end of the market but it is unlikely to be large enough to boost
the market overall especially in the South East region where the
average house price is £233,086*."
Since the suspension, the economic outlook has further declined
and this has created even greater pressure on the housing market.
"The current state of the UK property market renders the withdrawal
of SDLT below £175,000 a relatively small measure given the scale
of the property downturn. At present there is a real need for more
innovative measures to be put in place to breathe life back into
the market. The Government said the stamp duty holiday would last
12 months, but it would not be a major surprise if it were to
become permanent."
"SDLT provides much needed revenue for the Treasury at a time
when the market is in desperate need of assistance. Could this PBR
see the Government take a more radical approach in the short term?
It is however, unlikely that this PBR will address a total reform
to SDLT but we may see incentives put in place for certain sections
of society. After the Bank of England's recent interest rate cut,
we may see more stability and hopefully we will see more
transactions as a result of banks beginning to lend again," says
Campbell.
Income-shifting post Arctic Systems - Any respite for
small business owners?
The Government is still publicly committed to bringing in
legislation in April 2009 to tackle what it calls 'income
shifting'. The measure is mainly aimed at married couples, civil
partners, cohabitees, or family members who share business profits
that have been generated primarily by the efforts of one individual
in the business. This usually takes the form of a sharing of
dividends from a company so income passes from a higher to a lower
rate taxpayer thus saving tax overall. The prime difficulty for
Government so far has been effectively targeting this measure. The
controversy surrounding this issue led to the proposal being
deferred in April 2008 for one year.
Francesca Lagerberg says, "The main problem is that the
Government has not yet been able to devise a method of targeting
its proposal on income shifting. To date it has tried to use a
mechanism that relied on having to value the contribution of a
person to a business. This sort of valuation is almost impossible
in a family owned businesses. How can you put a price on who does
what to make that business run? How do you value the discussion
across the kitchen table on day-to-day business decisions? The
concern was that the original proposal would set up huge burdens on
small businesses to justify their structure. If this proposal is to
come back it needs to be a significant improvement and given the
great pressure on small businesses at the moment with an impending
recession, the Government would gain some plaudits if it simply
decided to let this proposal drop and instead commit to
re-energising its longer term review of small business
taxation."
Taxpayers' Charter
HM Revenue and Customs (HMRC) has been consulting on introducing
a new Charter for taxpayers and further details may be released at
the PBR. HMRC's proposals to develop clear guidelines for
taxpayers' on their rights and probably their responsibilities is
welcome news. Business advisers have argued since the demise of the
use of the last Taxpayers' Charter that a revised statement was
needed.
Lagerberg says "HMRC's powers have changed significantly in the
last two years. It is imperative that taxpayers are kept up-to-date
and informed of what is expected of them and what protection they
have when things do not go as they should. The Charter is an
opportunity to set out a clear statement of a taxpayer's rights and
obligations and would bring the UK in line with many other
countries. When it comes to taxpayers' rights, the best result
would be for the Charter to be encapsulated in legislation to give
it real 'teeth' so that it can be fully relied on by a taxpayer.
Such a move would potentially form part of a welcome package of tax
measures for SMEs."
Will the taxman take a second bite of the offshore
cherry?
There is increased speculation that HMRC plans to launch a new
tax 'amnesty' for an estimated 70,000 investors believed to be
using offshore bank accounts to avoid paying the correct amount of
tax. An update on this measure is expected in the PBR in an attempt
to recoup what the Government considers as lost revenue.
Last year, an estimated £400m was raised when suspected tax
evaders were given the opportunity to come clean and pay reduced
penalties of 10% during the Offshore Disclosure Facility (ODF).
Gary Ashford, a tax investigations director at Grant Thornton,
says, "It is perfectly legitimate for a UK taxpayer to hold a bank
account outside of the UK and depending on their residence and
domicile status, any interest arising on that account may or may
not be subject to UK tax. However some people have used offshore
bank accounts to divert money away from HMRC and it is those people
that HMRC are targeting. Given the current economic outlook, the
Treasury is in need of extra revenue and encouraging people to come
clean to pay tax on their offshore accounts is looking like a very
real option."
"HMRC is facing growing pressure to show a breakthrough in its
investigations. Whether it be information sharing, pressuring
private banks to hand over details of account holders or teaming up
with other tax authorities, HMRC is determined to gain access to
suspicious accounts. It is looking increasingly likely that HMRC
will consider introducing another facility for those holding
untaxed offshore assets, particularly, in offshore bank accounts to
disclose these to HMRC and pay any tax owed."