Budget checklist: What's in store

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ECONOMY

Current position

After a poor year in 2005 - when the economy grew by 1.75 per cent, its slowest rate for a decade and way below the Treasury's forecast of 3.0 to 3.5 per cent - Gordon Brown was forced to revise his growth estimates.

In March the Chancellor pencilled in below-trend growth of between 2.0 and 2.5 per cent, but with a better balance between manufacturing, which was forecast to post decent growth, and consumer spending, that was expected to return to trend

What to expect

The economy has revived since the start of the year as an upturn in manufacturing and exports combined with continued consumer spending and a mini-boom in house prices.

Growth is running at an annual rate of 2.7 per cent, which will allow Gordon Brown to say he has beaten his forecast. He is unlikely to revise his forecasts of between 2.75 and 3.25 per cent growth in both 2007 and 2008.

It is above trend but he has little incentive to lower them at this stage.

TAX AVOIDANCE

Current position

This has been a hardy perennial for Budgets and PBRs since the turn of the millennium. A combination of globalisation and financial innovation has created opportunities for companies to cut their tax bill and fostered a whole industry to help them do it. Past Budgets have seen major programmes to tighten loopholes. However the tide of opinion is turning, especially after a World Bank report showed that the UK had the second-largest tax statute book after India.

What to expect

The Treasury has indicated that this will not be a major package.

The Confederation of British Industry has warned that a complex and high tax burden will discourage investment. If he wants to respond positively the Chancellor could abolish rules that levy tax on dividends from overseas subsidiaries and enact a European ruling that Cadbury Schweppes's Irish subsidiary should not be exempt from UK tax rules. The tax industry is looking for guidance on the Government's attitudes towards non-domiciled residents.

R&D

Current position

Investment in Research and Development has long been identified by the Government as a key driver of economic growth. It has set a target to raise the level of investment in R&D to 2.5% of GDP by 2014 from 1.78% in 2004.

The Treasury has introduced a number of R&D tax credits over the years, although the jury remains out on whether they have been effective - investment in R&D actually fell over 2003 and 2004.

What to expect

The Chancellor is caught on the horns of a dilemma in this area - do nothing and be accused of indifference; make new changes and be accused, not for the first time, of tinkering. One crowd-pleasing option would be to extend the available relief to a wider range of Research and Development-related costs, such as capital expenditure; another would be to extend the small and medium enterprise allowance to firms of up to 500 employees.

ROAD FUEL DUTY

Current position

The duty on a litre of petrol bought on the forecourt, has been frozen at 47.1p since 2003. Until 1999, when hauliers' protests brought the roads to a halt, the fuel duty escalator had hiked it by 6 per cent a year above inflation. After that it rose in line with inflation until the Chancellor responded to high oil prices by freezing it.

The impact however has been to cut the real cost of motoring - and that while rail fares have soared.

What to expect

Given the recent tumble of some 25 per cent in crude oil prices, it is seems likely that Mr Brown will raise fuel duty in line with inflation.

However, it is most unlikely that the Chancellor will bring back the "escalator" or do anything other than restore the inflation link. The Budget assumed that fuel duty would not be increased, so the decision to push it up now will add about £275m for the second half of the financial year.

PENSIONS

Current position

The pensions industry is on high alert that the Government will abolish Alternatively Secured Pensions, a new vehicle brought in on pensions "A day" in April to allow investors to avoid purchasing an annuity at retirement. ASPs were introduced to cater for the beliefs of the Plymouth Brethren, a small Christian sect which objects to insurance. But the Treasury is concerned that rich investors are exploiting the fact that part of any remaining fund can be passed on in their will to avoid inheritance tax

What to expect

The industry has put up a stout fight against abolition. They acknowledge that holders of ASPs can choose not to draw any income from them, thus reducing the income tax they pay. They have suggested introducing a minimum income withdrawal to generate income tax. It looks highly likely the Treasury will go down that route. It may also increase the tax on the funds after death to minimise inheritance tax losses. Restricting ASPs to members of the Brethren would fall foul of EU equality laws

PUBLIC FINANCES

Current position

The last Budget envisaged that public sector net borrowing (the PSNB) would fall to £36bn from £37bn in 2005/06. But over the first seven months of this fiscal year, net borrowing is running at a cumulative level £2.3bn above the same point last year, which, if extrapolated, implies an outcome of £41.5bn for the year as a whole. He forecast a £7bn deficit on the current budget leading to him meeting his golden rule on borrowing with £16bn to spare.

What to expect

Unless he is happy to bet on a turnaround in remaining five months of the year, Mr Brown will have to admit that he will miss PSNB and current deficit forecasts with spending growing above target and only one major tax receipt month (January) to go. He is likely to nudge his forecasts up a bit but positive revisions to GDP should keep the margin of success for the rule at £16bn (the golden rule is calculated as the net surplus as a percentage of GDP). Watch out for another change in the timing of the economic cycle.

HMRC

Current position

The merger of Inland Revenue and Customs & Excise into HM Revenue and Customs was followed by a rising number of complaints from business about the merged organisation's more aggressive stance. The Chancellor commissioned a report from Sir David Varney and broadly accepted its recommendations for a more business-friendly approach - particularly in the advice given ahead of corporate takeovers, under which HMRC would make a commitment as to how it would view the deals in tax terms

What to expect

The Varney review has given the Chancellor to opportunity to make the UK more tax competitive without pleading guilty to charges of excessive tax burdens.

The proposal on advance tax rulings for companies engaged in takeovers applies only to businesses considering major investments in the UK and would perhaps benefit 100 deals a year. Copying the Dutch model and extending the proposal to domestic deals would win praise

AIR PASSENGER DUTY

Current position

Air Passenger Duty was introduced by the last Conservative government but has been frozen for the last five Budgets, fuelling charges over Labour's claim to be developing a green agenda. The Stern Report has give the Chancellor carte blanche for pro-green tax moves, although British Airways has argued that Air Passenger Duty is a flawed way to address aviation pollution. Currently the tax raises £1bn a year.

What to expect

An increase in the duty has been well signalled in advance. Expect a doubling of the four rates of Air Passenger Duty to raise an extra £1bn. Within the European economic area the duty will rise to £10 for economy and £20 for business class.

For long haul flights the respective levies will rise to £40 and £80. The airlines will react with admittedly manufactured fury and urge the Chancellor eventually to replace the tax stick with a carrot of emissions trading.

ROAD TAX

Current position

This year's Budget unveiled a major review of the Vehicle Excise Duty system, leaving seven bands linked to CO2 emissions. Cars with the lowest rates of emissions would pay no vehicle excise duty at all but the 1 per cent of most polluting cars would pay £210. Environmental groups have criticised the move as a sop to green issues, pointing out that someone who is able to afford a £40,000 "Chelsea tractor" could probably cope easily with a £210 tax.

What to expect

Some action is likely, although Treasury sources indicated that the move would go down to the wire. Any increases are certain to be focused on the most polluting vehicles. Friends of the Earth is calling for a top rate of £2,000 - although that seems politically unlikely.

A leaked memo from David Miliband, the Environment Secretary, proposed a top band of £630 for those cars emitting 225g of carbon dioxide per kilometre

HOUSING TAX

Current position

According to research by Halifax, the combined revenue raised from inheritance tax (IHT) and higher rates of stamp duty on residential property reached a record £6.7bn in the last financial year. The amount of stamp duty revenue raised from sales of properties valued at more than £250,000 has risen by 175% from £1.2bn in 2000-01 to £3.4bn in 2005-06. IHT revenue was a record £2.1bn in the first seven months of financial year 2006/07, up £175m (9%) from the same period of 2005/06.

What to expect

Pre-Budget Reports are seldom used for tax changes (although the North Sea oil industry might argue with that). If he were to act, then he could increase the lowest stamp duty threshold from the current £120,000 without losing much revenue as house prices have risen so fast. Halifax wants the £250,000 threshold to be raised to £650,000 and the £500,000 to go up to £1.3m Of course, Mr Brown could use the recent surges in house prices to raise the tax at the top end to fund cuts lower down

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