Pre-Budget Report Response:
How to raise taxes and woo voters at the same time

10 Dec 2009

Well that was the aim of Alistair Darling when he delivered maybe his last Pre Budget report earlier today. Did he succeed? No. Could he have succeeded? To be honest - No.

Politics is basically a popularity contest and in the current economic climate I cannot imagine many business leaders, who have had to take a long hard look at their businesses recently, winning any such contest.

So, in brief, what did he say and how will it affect us.

The lead must be the details relating to offshore evasion.

HMRC have announced that they will be consulting on a package of deterrents and new tools to help HMRC tackle offshore tax evasion. This includes a notification requirement for certain new offshore bank accounts and a new tough approach to penalties for offshore non-compliance, penalties could be up to 200%.

Comments will also be invited on whether the Government should consider reforms to the information HMRC receives on non-resident trusts, so watch this space.

The rhetoric about the bonuses paid to bankers, the specific reference to offshore bank accounts, tax avoidance and tax evasion is likely to re-ignite the debate about offshore financial centres. We have to ensure that we continue to demonstrate that we have the highest regulation and do not tolerate any form of evasion. We must continue to tell everyone that this has been recognised by virtually every authority and report that carries any weight. It should not be forgotten that a strong CI finance industry is good news for the City of London.

The changes in the tax laws relating to bankers bonuses is a vote winning move but will make very little impact when you look at the size of the predicted deficit but should restrict some bonuses being paid. A 50% super tax to be paid by the bank and another 40%/50% payable by the recipient on bonuses of over £25,000, does mean however, that it will be difficult to obtain any real value from a bonus. Targeted anti avoidance to ensure that the new rules are not circumvented will also be introduced.

The public spending cuts should provide future savings as will the cap on public sector pay of 1% on basic pay uplifts for 11/12 and 12/13 - and all of our States members should take note - tough times need brave measures.

The ring fencing of spending cuts in relation to health, education and policing is again aimed at the electorate but expect savings behind the scenes.

Increases in National Insurance for the well paid, restriction of pension relief for the very well off, the freezing of inheritance tax thresholds and the freezing of the point at which individuals start to pay tax at the higher rates does mean that the wealthy will pay more.

So could the island benefit from the higher taxes being imposed on the rich?

Probably, however the majority of people who do re-locate to the island, taxes are not the main motivation but the tax rises announced both today and previously, together with probable service cuts, will just add to the overall dissatisfaction that is spreading throughout the UK.

HMRC confirmed that the Code of Practice on taxation for banks will be introduced. The Government's aim in bringing in the Code is to encourage banks to follow the spirit as well as the letter of the law.

The Code sets out a constructive framework with several components:

• it describes what the Government believes to be good practice for governance and decision-making in banks, including tax planning. The Code asks banks to have governance around tax, integrated into business decision-making;
• following the spirit of the law will mean banks should undertake tax planning to support their business operations, but this should not be used to achieve tax results that are contrary to the intentions of Parliament; and
• the Code encourages banks to work with HMRC to build mutually open and transparent relationships, following the principles set out in the Review of Links with Large Business.

 

Expect this to evolve over time and could affect how business is undertaken in the island.

Also in the Report are details concerning a review of the Controlled Foreign Company regime with a report due in the New Year. This is awaited with interest.

In order to strengthen the incentives to invest in innovative industries and ensure the UK remains an attractive location for innovation, the UK will introduce a Patent Box, a reduced rate of Corporation Tax applying to income from patents, from April 2013. There will be consultation with business in time for Finance Bill 2011 on the detailed design of the patent box, which will apply to patents granted after the legislation is passed. This could take future business away from the island.

VAT is on the rise from January so administrators take care with their administration of rents etc and also note the new cross border rules. Surprisingly he did not add anything further in relation to future rate increases, but given that borrowing may rise into trillions of pounds, do not rule out future VAT changes either to the rates or scope (VAT on food anybody?).

So did Alistair manage to have his cake and eat it? Certainly not, and definitely not in the works canteen as he has restricted tax relief there as well.

With the next election looming it has to be seen whether all these measures are introduced in full or whether Alistair will be out of power and driving off, in his now 100% allowable, electric van into the political wilderness.

If you would like to discuss any points further please do not hesitate to contact either:

John Shenton | Tax Director
T (direct): +44 (0)1534 885866
john.shenton@gt-ci.com

Mark Colver | Tax Director
T (direct): +44 (0)1481 753448
mark.colver@gt-ci.com