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UK TAX

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Emergency Budget 2010 - Countdown

The countdown to the emergency budget on 22 June 2010 truly got underway yesterday with the first report from the newly formed Office for Budget Responsibility (OBR). A brainchild of the Tories, the OBR is the recently formed independent body which has taken over economic forecasting from the Treasury.

So is this just another report I can ignore?

Ignore it at your peril is probably too strong a sentiment but this report is worth taking note of. While economic forecasts are ten a penny and are produced by everyone from the International Monetary Fund (IMF) to City Banks, the OBR's report is a different type of beast. This forecast will inform the measures taken in next week's budget and have an impact on future Government spending reviews. In a nutshell, the OBR report will form the backdrop to any increases in taxation and any cuts in the public purse which will directly impact you.

So was the OBR forecast good or bad?

Well, reading the papers you'd be hard pushed to figure out if it's good news or bad news. While the OBR predicted a lower economic growth rate than Labour's last budget announcement, the OBR also forecast lower borrowing as a result of stronger tax revenues and conservative Labour estimates. Probably the best indicator as to whether it was good or bad was the reaction of the currency markets which saw a strengthening of the pound against both the $ and the € as the OBR forecasted that the UK would not have to borrow as much as anticipated.

So what does this mean for next week's budget?

Unfortunately, the mixed news from the OBR forecast is unlikely to put off the upcoming pain. David Cameron spent last week warning the British public about the dire state of the country's finances and preparing the way for swingeing cuts. George Osbourne, the Chancellor, and Nick Clegg, The Deputy Prime Minister, continued to reinforce that message yesterday with Nick Clegg criticising "unreformed gold plated public sector pension pots" as "not affordable". It seems that for the private sector and the public sector alike the rain is still coming. Aides to the Chancellor continue to indicate that a turnaround in the public finances will be funded 80% through spending cuts and 20% through tax rises so it seems hard to avoid the conclusion that there will be increasing pressure on public sector pay.

So what are the likely tax changes?

At this stage, only the Chancellor and a handful of his advisors know what to expect but the best bets for changes are as follows:

Income Tax:

  • The Lib Dem proposal to raise the personal allowance threshold to £10,000 looks likely to go ahead.
  • Gordon Brown's 1p NIC looks set to stay for employees but not for employers.
  • A rise in the headline basic or higher rate of tax seems unlikely at this stage but the Chancellor is also unlikely to make any change to the tax bands which determine the rate of tax paid. These were frozen by Alistair Darling in what many criticised as a stealth tax by allowing inflation to bump up the amount of income taxed at the higher rate.

Capital Gains Tax

Everyone anticipated an alignment of the CGT rates with income tax at the last budget but the then Chancellor, Alistair Darling, decided against such a move. Given the furore in the press over the last few weeks, this seems to have been a shrewd move.

It's worth taking a few seconds to consider the history of CGT over the course of the last 15 years as so far we have had 3 different "systems" for taxing capital gains in a very short time. When Labour came to power in 1997, we moved from a system of indexation to taper relief. Two years ago we moved from taper relief to a flat rate of 18%. Now we seem destined to move to a fourth, as yet undefined, system. As it’s likely that we will see a rate increase, the Chancellor has a fine line to tread between pitching the new system so that, on the one hand, gains arising from inflation are not taxed and long term investment is not deterred and, on the other hand, the rules granting relief are not overly cumbersome as to be intractable to the public. Many commentators are anticipating the re-emergence of indexation in one form or another.

Other speculation doing the rounds is a drop in the annual tax free allowance from its current level of £10,100 to c.£2,000. Given the Lib Dems desire however, to increase the Income Tax personal allowance to ease the tax burden on the lower paid, lowering the CGT allowance at this stage would be an odd move indeed so we don't really expect to see it happen.

VAT

Last year we had a 15% rate. But given the UK's position as having one of the lowest EU VAT rates, it's likely that we are going to see a hike in the rate of VAT to 20%, possibly phased in over time. This would still leave the UK around the EU average. For example the Irish headline VAT rate is 21%, but that's still cold comfort when it comes to paying at the tills.

IHT

The one tax where no real change is anticipated. It's well known that the Tories were keen to move the threshold to £1m but in the current climate, don't expect to see this happen. The Emergency Budget is on next week, 22 June. We'll have analysis, FAQs on the changes announced and we'll do some case studies on average families so please join us next Wednesday to see how the measures affect you.