Predictions and wish list for the Chancellor’s 2014 Budget

March 17, 2014

–John Angood is Tax Senior Manager at BDO LLP. The opinions expressed are his own.-

With the next general election just over a year away, it is likely Chancellor George Osborne will want to keep his powder dry and hold back any vote winning announcements for the Conservative Party manifesto or for the election campaign itself. That said, there are pressures from both the UK public (especially those experiencing the continued squeeze on household incomes) and businesses that are continuing to experience the effects of the recession. With this in mind, I have set out below what I think could happen on Wednesday, and some of the measures I’d like to see introduced.

Last year, the coalition’s target of raising the personal allowance to £10,000 was realised and this will come into effect from April this year. BDO has been predicting for some time that this will increase again this year, to £10,500, and given the coalition parties are already seeking to take credit for this in the media, this would appear to be a near certainty. The cost of living debate has increased the pressure on the chancellor and this move would take even more low earners out of tax altogether.

I expect further announcements from the chancellor on measures to fight against offshore tax evasion and non compliance and I expect to see this based around further resourcing rather than additional legislation. The issue of Base Erosion and Profit Shifting (‘BEPS’), which is essentially what the likes of Google, Amazon and Starbucks have been accused of undertaking, will take longer to crack. Whilst the subject will undoubtedly be raised by the chancellor, unilateral announcements by the UK are unlikely.

My third prediction is slightly more left field and not, I should stress, a measure I would advocate. The chancellor may consider removing higher rate income tax relief for pension contributions as an easy revenue raiser. This could then pay for a wide range of giveaways in the forthcoming election. Pension reliefs have been tinkered with constantly over the years and the timing of hitting the higher earners now may be right for the government to weather any political backlash.

We should also not lose sight of the fact that mid-market businesses, when properly nurtured, become the big businesses of the future. The UK’s tax system should, therefore, incentivise mid-market businesses to grow their investments in people, capital assets and encourage exports. Accordingly I have set out below some brave measures I would like to see the chancellor consider but, I feel, are unlikely to be announced in his speech.

From an employer’s perspective, Mr Osborne may wish to bring about a temporary reduction in Employer’s National Insurance (NI) for the manufacturing industry. Employer’s NI is a barrier to businesses taking on new workers and whilst the government has sought to tinker with National Insurance reliefs in the past, the impact of these measures has so far proven negligible. The government is keen to increase UK manufacturing and exports and this would be a targeted relief aimed at those businesses taking on new employees involved in the manufacturing production process. Whilst a move like this would be a cost to the Exchequer, it would be compensated by the increased income tax and employee’s NI on the earnings created for the newly employed. If, as a result, unemployment was to fall, there would also be additional cost savings in the form of reduced demand for benefits.

In the past couple of years the Annual Investment Allowance (AIA) has been taken for a bit of a rollercoaster ride. Currently the AIA provides a 100% first year deduction on new capital expenditure up to £250,000 and as generous as this is, it does not stimulate the significant capital investment that the economy needs and is only a temporary relief. The chancellor has the opportunity to permanently increase the AIA to £1m which would provide a significant incentive for mid-market businesses to invest in the capital assets that will drive future growth.

Finally, I would like to see the chancellor acknowledge how tough life on the high streets is and address the well overdue issue of business rates. This outdated tax often adds to UK retailers’ troubles during difficult times and can sometimes even unnecessarily push a business into liquidation. In light of the wholesale review of the business rates system proposed by the British Retail Consortium it would be good to see the chancellor make changes to the way business rates are calculated. Currently businesses pay a fixed amount regardless of their performance which, therefore, often represents an unfair cost. Basing an element of business rates on business performance would create a level playing field for all.

On Wednesday, I hope that the chancellor goes some way to addressing the fact that UK tax policy over the last decade has largely ignored the UK’s mid-market businesses, despite this section of the economy being a significant source of tax revenues. This group is widely regarded to be the engine room for future economic growth and as such should be given as much support as possible.

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