James Fernley and Partners are Independent Financial Advisers based in Hertfordshire

Pre-Budget Report 2007

The following is our summary of the Chancellor's announcement on 9 Octoebr 2007.

Corporation Tax.
One of the headlines of this report was the 2% reduction in the Main Rate of Corporation Tax. However, this is not a new announcement at all. It was originally announced six months ago in the 2007 Budget. Just the usual dishonesty we have had from this Government since they came Office.

At the same time as big business is celebrating this 2% tax benefit, small businesses all over the country will be suffering a 2% additional tax penalty – the Small Business Corporation Tax Rate will rise from 20% to 22%.

Small Businesses.
Overall, next year’s budget will be very much an attack on small business. An increase in the Corporation Tax Rate. A proposal to achieve with yet more legislation the Revenue & Customs attack on husband and wife companies which the House of Lords thwarted in the infamous Arctic Systems case. A near doubling of the Capital Gains Tax hard working business people will pay when they try to sell their business at the end of their working life.

Also the reduction of business support schemes from 3,000 to 100 part of this attack. Cynics might say that maybe this is a genuine attempt to reduce bureaucracy? Or is it more likely an attempt to reduce spending in this area?

Capital Taxation
The two big changes highlighted by most commentators are the modifications to the Inheritance Tax system and the revamping of the Capital Gains Tax system.

In at least one respectable newspaper report it was suggested the Inheritance Tax Nil Rate Band had been doubled to £600,000. This is at best a half truth. The Nil Rate Band has not actually changed at all. Even the announced increases over the next three years had already been announced in the budget earlier this year. But what has changed is something much more fundamental and something which to me is eminently sensible.

Previously a married couple (or partners in a civil partnership) each had a Nil Rate Band of £300,000. Any assets passed from one to the other were free of Inheritance Tax but could result in the combined estate paying more tax through wasted relief.

Any of the Nil Rate Band not utilised by one partner will simply be passed to the surviving partner. Mr Darling in his preamble announced there would be measures to “make the tax system fairer”. This really does seem that the Chancellor has come up with a vast improvement, which is a lot fairer than either the present system, or anything I have heard proposed elsewhere (other, perhaps, than scrapping Inheritance Tax altogether).

Again a cynic might say that they have stolen some or the Conservative Party clothes, i.e. this is change does not benefit unmarried couples, so maybe it strengthens the reasons for getting married?

The promise to consider house price inflation when setting the Nil Rate Band is welcome too, if we can believe this promise will make much difference. The problem is, how can we really measure whether or not they do live up to their promise? Note that the promise is not that the Band will increase with house price inflation, but only that the government will “consider” house price inflation when setting the band – a very different matter entirely.

Some might take a different view on the Capital Gains Tax change. If implemented as Mr Darling has suggested, the change to Capital Gains Tax would certainly be an enormous simplification. The current system is so complex that even many qualified accountants seem to give inaccurate tax advice. Having a “one rate fits all” approach is most certainly a lot simpler. But it would also remove the tax incentive to concentrate investment in long term rather than short term projects and to focus on the smaller businesses that are the backbone of our economy. Simplification is good in theory, but not if, as seems it actually results in increasing the tax burden” which is what seems to be happening here.

Pensions
A rather pompous statement that “successive governments” have introduced generous tax relief’s to encourage pension saving. Nothing new here, and not even something introduced by Labour. It is fact this government reduced tax relief through Mr Brown’s infamous tinkering with dividend tax credits, there was no mention of this in the report!

More ominous was the statement that the budget would “tackle deferral of Corporation Tax through structural management of employer contributions to pension schemes." We have only just settled into an understanding with the Revenue that when it comes to pension contributions on behalf of controlling directors all but the most blatant “abuses” would be regarded as deductible expenses. Hopefully this is not a backward step from that position.

The other blow that was, anticipated was the announcement that measures will be introduced to prevent scheme pensions & lifetime annuities being used to divert tax relieved savings into inheritance.

Anti Avoidance Various anti-avoidance proposals were mentioned.

There will be further attacks on the Stamp Duty Land Tax avoidance schemes that are still out there and that still work.

The distinction between “higher paid” and “lower paid” employees, when determining whether or not an employment benefit is taxable, is likely to disappear. Given that the threshold for this is only £8,500, and given we now have a minimum wage regime, there are probably not many genuine employees who benefit from “lower paid” tax treatment. But there may well be a number of spouses and other family members of tax planners’ clients who will suddenly find they have a rather higher tax bill as a result.

Borrowing directly from the Conservative proposals, Mr Darling announced non-domiciles will have to pay £30,000 a year and lose their personal tax allowances if they wish to keep their “remittance basis” tax advantage. As commentators stated when the Conservatives made a very similar proposal, it remains to be seen whether the country will lose more from the likely exodus of wealthy expatriates than it could gain from the additional fees or tax revenue.

The rather odd tax rule that says you are not actually in the country on the day you arrive or the day you leave will disappear. With the disappearance of the rule altogether we will perhaps see fewer weekend commuters from the Channel Islands.

Sundry Matters
The budget deficit is expected to worsen and not recover until the 2009/10 financial year. Perhaps, therefore, the election will be delayed rather beyond the November 2007 some suggested?

Holiday and Business Travel
Air Passenger Duty is to be levied per plane rather than per passenger. Get ready for the airlines to try squeezing in even more seats and giving us even less leg room.

Armed Forces
Finally, some people will feel they have done more for the Armed Forces, after all the adverse press reports about support for our young men and women in Iraq and Afghanistan, by increased spending on the Armed Forces. Problem is when will they get the proper equipment and enough of it to do the job and save lives?