Pre-Budget Report 2004

Stephen Herring: A speech promising much for the deserving few but precious little for the majority of voters

Gordon Brown continued his history of delivering carefully crafted speeches emphasising his generosity to clearly deserving causes, including new parents, the retired and those requiring additional skills to obtain employment. However, I am surprised that the Pre-Budget Report has so little good news for the large majority of taxpayers in the run-up to the anticipated general election next spring.

While the promised £1bn assistance to rein in threatened increases in council taxes is obviously welcome, there is little to excite the voters. Assuming that a February election can be ruled out, he may be keeping some glad tidings for the Budget in March.

Focusing first on the viability of the Chancellor's assumptions for taxation receipts, there are certainly some areas for concern. The Chancellor is rightly confident about the projected receipts from income tax, national insurance and VAT, which have all been shown to be sound sources for the public purse in recent years. The increases of 8 per cent, 6 per cent and 5 per cent respectively in these three taxes, between the estimate for 2004/05 and the projection for 2005/06, all appear to be achievable assuming the economy stays on course, unemployment does not increase and consumer spending remains reasonably buoyant.

However, I am frankly amazed that the Chancellor is happy to forecast an increase in corporation tax revenues from the 2004/05 estimate of £32.9bn to the 2005/06 projection of £41.3bn; an increase of 26 per cent. The Pre-Budget Report accepts that corporation tax receipts in 2004/05 are now estimated to be £3bn below the Budget 2004 projection. There is an attempt to explain the substantially increased take on receipts collected from North Sea Oil companies but it is clear that onshore companies are also expected to generate increased corporation tax.

We do not consider the Chancellor is taking sufficient account of the factors reducing the total corporation tax take. These include the impact of recent - and forthcoming - decisions in the European Court of Justice, which overwhelmingly favour taxpayers at the expense of the taxing authorities, and the impact of higher interest rates and higher pound/dollar exchange rate on corporate profitability. We foresee downward revisions and wonder how the shortfall will be met.

For businesses, I am very disappointed that the Chancellor has deferred an announcement on the introduction of tax transparent property investment funds (better known as real estate investment trusts or Reits). The consultation period ended in July. Undue delay will hurt the property industry and property occupiers, and will prevent the emergence of a liquid investment market in which pension funds, investment funds and individual investors can participate. Why is it that not only the US and the Australians, who have also had Reit legislation for many years, but also the Frenchhave successful, tax transparent and liquid property vehicles? The delay until Budget 2005 for the Government's discussion paper is unacceptable.

Secondly, we understand the Chancellor's continuing campaign against perceived tax avoidance in the area of remuneration rewarding executives and employees through shares, share options and securities rather than cash bonuses, but we do not consider that good tax legislation derives from tinkering with the existing tax code. What is really called for is a fundamental reform and simplification of our tax legislation that achieves the Inland Revenue's objectives without causing excessive collateral damage to legitimate remuneration incentives.

Thirdly, I am encouraged by the promise made in the Pre-Budget Report's interim findings by Philip Hampton, for simpler inspection and enforcement regimes for businesses. It appears that a risk-based approach could lead to less burdens, particularly for smaller businesses. Taken together with a pledge of a more joined-up approach for small businesses from the newly merged Inland Revenue and Customs & Excise, many entrepreneurs will be hoping, although, perhaps, not expecting, that they will start to find they have more time available to develop their businesses rather than completing information for the various tentacles of HM Government.

For similar reasons, I am encouraged by some of the detailed proposals for corporation tax reform contained in the correctly described "Technical Note". For instance, at long last, it would no longer be necessary for businesses to keep detailed analyses of expenditure on industrial buildings on a year by year basis back to 1962 as the so-called pooling arrangements available for expenditure on plant and machinery may be applied to industrial buildings.

Similarly, the special rules applied to "expensive cars" (more than £12,000, a limit which presumably is exceeded by all ministerial cars) could be changed to allow pooling to apply but with a lower rate of writing down allowance than the 25 per cent allowed for plant and machinery and cars generally. These two proposals would simplify corporation tax computations and therefore reduce compliance costs for both large and small businesses.

I have a feeling that the Chancellor has held back some favourable tax changes for the Budget, which could well be within 12 weeks of the election, but he may have also held back some less popular tax changes until after the vote, by when there will be a clearer picture of the impact of higher interest rates and the downturn in the residential property market upon the economy generally and tax receipts in particular.

The author is a tax partner at BDO Stoy Hayward

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