Pre-Budget: KPMG offers insights |
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| Economy | |
| Written by KPMG | |
| Thursday, 20 November 2008 | |
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What tax measures will be put in place on Monday to rescue the UK economy from the effects of a severe recession? Gary Harley, Head of Indirect Tax at KPMG in the UK “In terms of reducing VAT even further for certain items: under EU rules, the UK is prevented from zero-rating any additional goods and services for VAT purposes but the Chancellor has some room for manoeuvre on extending the scope for the reduced (5 percent) rate to many labour intensive supplies. Such supplies include items as diverse as shoe and bicycle repairs, renovation of dwellings and window cleaning. “Additionally, to extend the scope of the reduced rate for energy efficient materials could be a timely and ‘green’ move were it to cover items such as low energy bulbs and energy monitors.” David Kilshaw - Head of Private Client Advisory at KPMG in the UK Personal tax "There has been speculation that the Chancellor may announce tax reductions to try and minimise the effect of the current recession. One way to do this would be a reduction in the basic rate of income tax for the current tax year. This could put the extra cash into the pockets of PAYE taxpayers by perhaps the end of February 2009. A one penny reduction would reduce tax receipts by around £4 billion in 2008/09. The maximum benefit would be £348 for those with earnings over around £41,100. Allowances and thresholds "Another option to try to boost the economy would be to increase the personal allowances significantly. Again, this could be done to take effect in the current tax year. If the basic personal allowance was increased from £6,035 to say £7,035 with similar increases for age related allowances, the cost would be around £7 billion. The benefits for taxpayers would be from £200 to £400. "The Chancellor usually announces the personal allowances for the next tax year at the pre-budget report. We would ordinarily expect these to be increased in line with the retail price index (RPI) for the year to September 2008. If he follows a formula of raising personal allowances in line with RPI (up 5 percent for the year to September 2008), the new personal allowance is estimated to be £6,340 (2008 / 09: £6,035), the personal allowance for people aged 65 – 74 would be £9,485 (2008 / 09: £9,030) and the personal allowance for people aged 75 and over comes out at £9,640 (2008 / 09: £9,180). "An additional complication this year is the fact that the Chancellor may use the pre-budget report to announce longer-term measures designed to compensate those who lost out as a result of the abolition of the 10 percent starting rate of tax in April 2008. Currently those with a taxable income of up to around £11,000 are not fully compensated. "We expect the Chancellor to say he intends in future years to reduce the exceptional borrowing required to alleviate the current recession. One way to do this would be to announce in the pre-budget report a delay in further moves towards the alignment of National Insurance Contributions and income tax thresholds. Such alignment is scheduled for April 2009 but was complicated by the changes to personal allowances this year as a reaction to the abolition of the 10p tax rate. To delay it and not increase the higher rate threshold will mean more taxpayers paying tax at 40%. Given the need to boost the public purse and the possibility that the Treasury may have compensated taxpayers for the loss of the 10p tax band, it’s possible that Alistair Darling might follow the example of Gordon Brown in 2003 and increase National Insurance contributions for higher rate taxpayers in future years. "As to the capital gains tax threshold, an increase in line with RPI would see this rise from £9,600 to £10,100. It is possible that the ‘Entrepreneurs’ Relief’ limit of £1million of gains might be increased. Whether many entrepreneurs will be in a position to take advantage of this relief in the current climate is, unfortunately, somewhat doubtful. "Inheritance tax thresholds for future years have already been announced but at levels which are below where an RPI level increase would take them. For 2009 / 10, the inheritance tax threshold is currently set at £325,000. An increase in line with RPI would take it from the present £312,000 to £328,000. Sue Bonney, Head of Tax, KPMG Europe LLP General taxation “Without the tax cuts and substantial public borrowing that the Prime Minister says are needed to help the UK economy, the Chancellor would have very limited room for manoeuvre. Public finances are clearly stretched but so are household budgets - and there is an election in the next couple of years to consider.” Foreign Profits “Business and the corporate tax world has had a very long wait to find out the next development on the changes to the way that foreign profits are taxed. So, we’d expect to see something on this in the pre-budget report. A full consultation document with detailed proposals on all the areas of foreign profits taxation under review is very unlikely - but updated proposals on changes to the controlled foreign companies regime and a new restriction on interest expense are likely before the end of the year and could be unveiled in the pre-budget report. We would like to see this accompanied by a clear statement on the UK’s tax competitiveness. Property “The Chancellor may take the opportunity to help the property investment sector at the pre-budget report with an easing of the stamp duty rules for property investment funds. Currently portfolio purchases by property funds are subject to stamp duty at 4 percent where the aggregate value is over £500,000, even if the values of the individual properties are below this £500,000 threshold. This is a result of a specific anti-avoidance rule that applies equally and arguably unfairly to such bona fide transactions. A relaxation of this rule could especially benefit housebuilders and residential property funds as it could pave the way for a possibly transfer of unsold housing stock into investment funds. HMRC Powers “We could well see draft legislation on new HMRC powers covering penalties for late payment and interest charges on outstanding tax in the pre-budget report. It will be interesting to see if any draft rules contain provision for HMRC to make allowances for businesses struggling in the current climate or if they will point to a more draconian approach to help the authorities raise more revenues from errant taxpayers.
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