Pause for refreshment: George Osborne’s pre-election budget

Although last Sunday was generally known as Mother’s Day or Mothering Sunday, in ancient church tradition it was known as Refreshment Sunday or Laetare (“Be joyful”) Sunday. The idea is that Lent is far too long an unbroken period to expect the faithful to adhere to the strictures of the season; so at the halfway point the rules are relaxed for a day before plunging, fully refreshed, into the home straight running up to Holy Week and Easter. Similarly, it will be 70 years ago next month that Churchill famously reminded his weary peoples that “We may allow ourselves a brief period of rejoicing; but let us not forget for a moment the toil and efforts that lie ahead…” (In the interests of Anglo-Japanese harmony we had best draw a veil over his next few words).

So it is, perhaps, with Mr Osborne’s Budget Statement. With the election just a few weeks away, the temptation to bribe voters with their own money must have been considerable. On the other hand, having built his economic policy on the need for austerity, belt-tightening, deficit reduction and so on, Mr Osborne could hardly risk his credibility by suddenly declaring that austerity was yesterday’s message and that all was well with the world. So, while specifically recognising that “no short-term giveaway can ever begin to help people as much as the benefits of a recovering national economy” Mr Osborne has managed to deliver a Budget “of an economy taking another big step from austerity to prosperity”. We are not out of the woods yet, is his message, but we are getting there.

So to today’s budget: stunning or cunning? There is much to be glad of in the Budget announcements. The biggest headlines, much leaked before the Budget, were about the abolition of tax returns. There is precious little further detail in the Budget documents. More information than at present could no doubt be supplied automatically and electronically to HMRC by employers, companies paying dividends, banks paying interest and so on: but inevitably much information, especially in the case of traders or property investors, will have to be provided direct by the taxpayer. Hardly “abolition of the tax return” in any meaningful sense, we think.

Hot on the heels of the unprecedented reform of pension rules coming in from April there is some nibbling away at tax relief: the lifetime limit (now £1.25m) is to reduce to £1m next year but will from 2018 be indexed with RPI.

CGT Entrepreneurs’ Relief comes in for two new targeted anti-avoidance changes. First, relief is to be restricted to companies which themselves directly carry on a trade. “Indirect” trading (that is, membership of a trading LLP or partnership or holding shares in a joint venture company) will no longer count as a trading activity. Second, “associated disposal” relief is to be restricted. This is the relief which applies where an asset used for the purposes of a company or partnership but held by an individual outside of the business is disposed of at the same time as a disposal of an interest in the company or partnership occurs. Henceforth relief will be due only if the “main disposal” in question is substantial – defined as at least 5% of the shares in the company or at least 5% of the partnership. As regards partnerships, the effect of the change is to deny “associated disposal” relief altogether to partners with an interest in a partnership amounting to less than 5%, even though ER would still be due on any gain on the partnership interest itself. These ER changes come on top of the changes in last year’s Autumn Statement whereby ER is denied on the sale of goodwill to a company in which the vendor has an interest. Hopefully, this tightening-up on the perceived abuse of ER will mean that the fundamentals of the relief itself are safe and that it does not risk outright abolition.

Also on the topic of avoidance, the rules on travel and subsistence are to be amended to prevent abuse by using “umbrella” contracts to cover a number of discrete engagements.

The temporary increase in annual investment allowance to £500,000 is due to expire on 31 December 2015 when it is scheduled to drop back to £25,000. Although giving no commitment as to its future level, Mr Osborne recognises that £25,000 “would not be remotely acceptable” and confirms that it will be set at “a much more generous rate”. Oh, what a tease you are Mr O!.

On Inheritance Tax, the use of Deeds of Variation as a planning tool (a perfectly legitimate strategy used, allegedly, by the Miliband family in the past) will be reviewed by HMRC later in the year. The existence of the scope for a post-death Deed of Variation sometimes makes people more relaxed than, perhaps, they should be about wills: so with a threat hanging over Deeds of Variation now might be a good time to consider revisiting will planning generally.

Buried in the Chancellor’s speech is a commitment to allow farmers to average their income over five years for tax purposes. Given the volatility of agricultural incomes, this is fair and reasonable: but what of other businesses (financial traders, for example) whose profits can be at least as volatile as those of farmers?

For fuller details of the ins and outs of the Budget, including a link to the full text of the Budget Statement, see here.

Good budget? Probably – at least, one which is likely to score some brownie points for Mr Osborne and which manages to steal some of the opposition’s policies to boot. But, before anyone gets carried away, remember that this was after all a pre-election budget. Next year (or even later this year if there is a change of government) will see the first budget of a new government. Do not expect to see such kindliness repeated then.

David Whiscombe


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