Pre-budget report delicate balancing act for Darling

December 2, 2009

thomas-story – Thomas Story is tax director at BDO. He will participate in a Reuters pre-budget live blog on Dec. 9, at 12 p.m. British time. The opinions expressed are his own. -

Alistair Darling is facing the most difficult set of economic circumstances for any chancellor since the 1940s, with the projected substantial fiscal deficits for 2009 – 2010 and 2010 – 2011 likely to be revised upwards from 175 billion pounds to well in excess of 200 billion pounds. He must perform a delicate balancing act to secure the confidence of the global financial markets while protecting any fragile economic recovery and boosting public confidence.

The Chancellor is likely to increase the yield from income tax, national insurance, VAT and customs duties, which are the biggest revenue generators for the Government.

I think we’ll see the restriction or removal of corporation tax reliefs but, if the chancellor takes this course of action, he should recognise the continued impact of the credit crunch by exempting losses accumulated up to March 2010.

There could also be a boost for the hard-hit construction sector by cutting VAT on repair and refurbishment of residential property to five per cent (or even to the nil VAT rate). Elsewhere in the sector, the chancellor may crack down on certain Stamp Duty Land Tax planning arrangements for very large commercial real estate transactions. He should further clarify the anti-avoidance provisions as lobbied for by the real estate sector.

Individual taxpayers will probably escape any change to the basic and higher rates of income tax, but the chancellor may try to generate more revenue from national insurance by increasing the upper earnings limit or contribution rates or restrict personal tax reliefs for individuals paying income tax at the 40 per cent rate and the proposed 50 per cent rate.

Individual taxpayers could even be hit by an increase in VAT from 17.5 per cent to 20 per cent (or even more) but only to take effect from July 2010 0r January 2011.

The majority of the measures announced are likely to be deferred to take effect after the General Election. Whether or not Alistair Darling has an opportunity to implement them remains to be seen.

One comment

Comments are closed.