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The Gathering Storm
The pre-Budget Report is in a sense both the most important and the most irrelevant for many years. Important because of the need to address not only the enormous level of government debt but also the “structural” public sector deficit; irrelevant because everyone knows that the pre-budget report does not tell the full story of tax rises and public expenditure cuts: for that we shall have to wait for the first budget of whoever wins the forthcoming general election. Thus today’s requirement is on the one hand to persuade international markets that the government recognises the seriousness of the UK’s economic position and has the stomach to take prompt and effective action; and on the other to persuade the voting public that the UK’s economic position is not as catastrophic as commentators would have you believe and that it will all come out right in the end without too much pain.
The new tax on “Bankers Bonuses” is in our view wrong-headed. Electorally attractive no doubt: but wrong-headed. There is of course plenty of historical precedent for singling out a particular section of society and pinning on it the blame for the entire country’s economic woes – but that does not make it respectable. Furthermore the burden of the tax is borne much more widely than simply by the big banks which have been rescued by public money – it risks causing much collateral damage (in both senses of the word) to profitable private businesses and at a purely practical level we are sure that the extra cash raised by the measure (allegedly around £500m) will be hugely outweighed by the damage that will be caused to London’s position as the world’s leading international financial centre.
Elsewhere in the PBR, we’re relieved to see that the much-trailed increases in CGT and VAT are conspicuously absent (for the time being at least), but less pleased to see that the rates of NIC – already set to increase by 0.5% across the board from April 2011 – are to increase by a further 0.5% from the same date. There are further tinkerings with the rules on pension relief – essentially the “anti-forestalling” rules are now extended to people with income of more than £130,000 (in place of the £150,000 limit previously applying) which is bizarre given that in general such people will not be caught by the new rules themselves when they come in from April 2011!
HMRC seem to recognise that the appetite for tax avoidance schemes rises and falls with tax rates and they seem determined to nail down the more inventive ways of sidestepping the seemingly inexorable rise in tax rates. So as well as proposing new powers to counter offshore evasion (200% penalty, anyone?) there are five specific proposals to enhance the effectiveness of the existing “Disclosure of Tax Avoidance Schemes” rules; and HMRC’s internet publication “Spotlights” which highlights tax avoidance schemes known to HMRC will be expanded “to include more general “buyer beware” messages to enhance its consumer protection role” and to “provide customers with an indication of the type of arrangements to avoid” and to “deter customers from buying into high risk avoidance”. Not much doubt there, then, as to HMRC’s approach to off-the-shelf planning: caveat emptor. On the other hand there is nothing in the pre-budget report which targets more measured responses to the 50% rate proposed to apply from April 2010 and generally speaking the focus in tax planning terms remains on structures which may mitigate the worst effects of it.
But to return to our starting-point: this is an election budget, not a recession budget: one which simply defers the evil day. We suspect that the budget we shall see within the next six months or so will be the one that really matters.
