Budget 2013: 10 key tax calls

After the UK lost its AAA-rating last month this week’s Budget becomes even more critical. However, the chancellor has limited wriggle room, especially in the tax department.

George Bull, a senior tax partner at Baker Tilley, underlines the predicament: ‘I think there will be some very obvious themes in the years Budget – stamping out tax avoidance will feature strongly. But, more importantly, there are no big “tax levers” for the chancellor to pull to start economic recovery. Indeed, the chancellor will have to tread very carefully to ensure that the economy doesn’t lose more momentum as a result of any announcements made on the day.

‘Mr Osborne can’t risk losing the confidence of UK business or the public, and so he’s going to have to juggle looking at ways to stimulate the economy, along with pleasing the crowd. If he continues to claim that there’s no alternative to austerity, he’s going to have to tread very carefully.

Grant Thornton head of tax Francesca Lagerberg adds: ‘Tax is the new political battle ground as we claw our way out of recession and the Budget announcements on Wednesday 20 March will see plenty of effort to promote growth with little room for manoeuvre.’

Pensions relief

Despite pressure not tinker with pension rules, there is a strong chance the chancellor will make furthers cuts to the tax relief on lifetime level, which has already been reduced from £1.5 million to £1.25 million. This could be dovetailed with a further reduction in the annual relief level from £40,000 to £30,000.

Withers’ Sophie Dworetzsky says: “Tax relief for pension contributions has been repeatedly restricted in recent years as successive governments have sought to emphasise that a pension is a vehicle to prevent pensioners being dependent on the estate, not a tax planning mechanism.

‘Further restrictions are possible, either through a reduction in the maximum permitted annual contribution or perhaps the abolition of relief for higher-rate taxpayers.’

In other changes there is a possibility that the amount of tax free cash withdrawal could be changed from the current 25% limit to a set amount, which would be something of a radical move. There is also some concern that an employers’ pension contributions could be subject to national insurance.

Income tax

The income tax basic allowance could be increased from £9,440 to £10,000, a target the Coalition initially set for the end of this parliament.

‘In terms of giveaways, the government will presumably follow its well-trodden path of rewarding hard-working families. A further rise in the personal tax allowance is an obvious candidate for the obligatory “rabbit out of the hat” at the end of his speech,’ say Capital Economics duo Roger Bootle and Jonathan Loynes.

Meanwhile the government has already announced that the top rate of tax for those earning in excess of £150,000 will reduce this year from 50% to 45% and it hard to see any more action on this side.

National Insurance

National insurance contributions could be raised for the self-employed to fund the rise in the basic income tax allowance.

‘There could be an NI increase for the self-employed, who currently pay less than the employed, that might be justified by the government on the basis of the introduction of a flat rate state pension,’ says Coutts head of tax, trust & estate planning Dominic O’Connell. ‘However, as the pension change is not scheduled until 2017, introducing such an NI ‘alignment’ before then could be controversial.’

Meanwhile chief secretary Douglas Alexander has indicated a loophole which enables firms to dodge and estimated £100 million in NI contributions will be shut. This allows firms to use offshore payroll services in the likes of Jersey and Guernsey, which is said to leave around 100,000 people not entitled to benefits.

Property tax

Property taxation is likely to be a key area too and it appears a mansion tax has been virtually ruled out. Dominic O’Connell, head of tax, trust & estate planning at Coutts, says: ‘Many believe that it would be exceptionally difficult to efficiently administer such a policy and it is also often argued that any such tax could have an unfair impact on some living in certain property “hot spots”.

However, Withers’ Chris Groves believes Osborne may look at alternatives ways tax people with high value properties. ‘Extending the council tax bands at the top end would allow the government to show that it is seeking to ensure that the burden of the deficit falls on the asset-rich as well as the income-rich and to show that non-residents with UK property are contributing to the Exchequer,’ he says.

Corporation tax

If the UK is to get out of this recession businesses desperately need help, which could see another cut in corporation tax. The rate is due to fall from its current rate of 24% to 21% in April 2014. Bootle and Loynes see a possibility that the rate could fall to 20%.

‘A further cut in corporation tax is possible, given that this is one of the chancellor’s pet measures,’ the pair said. ‘20% has a nice ring to it, although it would quite expensive. An extra 1p off the headline rate would cost about £0.4 billion in 2013/14 and £0.8 billion by 2014/15. Or he could heed calls to cut the rate for small companies further below the current 20% rate. This could be funded by a more aggressive clampdown on tax avoidance, or a tax on the banks.

VAT

While a mere 1% increase in VAT could raise in the region of £5.6 billion, experts are not expecting a rise in the rate, which currently stands at 20%. ‘The standard VAT rate in the UK is currently quite a bit lower than the average EU VAT rate (approx. 23%), so it’s not beyond the balance of probabilities but in view of the political impact and the problems with pasty tax in 2012, it seems unlikely,’ explains Colin Laidlaw of Baker Tilley.

However, he does not think it is beyond the realms of possibility that there could be an increase in the number of items which are subject to the reduce rate of VAT of 5%. ‘VAT is an EU wide tax and there are a number of goods and services which are permitted by the EU to be subject to the reduced rate,’ Laidlaw says.

‘The UK does already apply either the reduced or zero rate to a number of the qualifying items but there has been a lot of lobbying on this point in recent times which may see a change. The most likely candidates would be repairs and maintenance to housing (as part of a social policy), hotels, catering and entertainment/ cultural events.’

Inheritance Tax

With the IHT nil rate band frozen at £325,000 until 2019, experts are expecting little news on this front. However, there might be some details on a review of IHT.

Francesca Lagerberg of Grant Thornton points out that the decision to freeze the nil rate band goes against the announcement in Osborne’s 2012 Autumn statement that the nil rate band would increase by 1% for the 2015/16 tax. ‘This means there are no guarantees Osborne will not change his mind on other measures as well,’ she says.

Capital Gains Tax

Some people believe the government should be radical and scrap CGT altogether to get the economy going, while others think a more measured cut would be more appropriate. However, the government has tinkered with CGT over several years, reducing the rate to 18%, before increasing it again to for high earners.

It’s unlikely that we will see significant change in this area until considerable research has been undertaken to see what impact it would make. It is more likely we’ll see corporate tax changes, says Lagerberg.

Tax avoidance

The clampdown on tax avoidance is likely to be another feature, although the introduction of the General Anti-Abuse Rule in April may limit new measures. ‘Instead we can expect some highly targeted measures aimed at a few abusive schemes,’ Withers Sophie Dworetzsky says.

Also following the public outrage at the tiny amount of tax the likes of Starbucks was paying, Osborne will be under pressure to act. ‘It’s doubtful that the chancellor will ignore this issue and will be keen to show that he is doing something positive to ensure that large corporates are paying their ‘fair’ share of tax in the UK,’ says Baker Tilly. ‘It’s likely that he’ll talk about progress being made on international co-operation to reduce the scope for profit shifting.’

Enterprise Investment Schemes

The chancellor could extend the relief available on EIS, alongside the seed enterprise investment scheme (SEIS), which came into force earlier this year.