Stephen Herring: Economic stability perhaps, but no clear vision for tax policy

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The Chancellor managed to avoid the word election in his 49-minute speech but it was clearly at the forefront of his mind as he revealed measures to reduce the tax burden for pensioners and families; both groups he has identified as key in the forthcoming general election. No doubt the younger elector, not moving house, without children who received nothing of note from this Budget is expected to focus on the presumed advantages children and old age will bring.

There are two of the Chancellor's particular measures which require comment. One of these is to be welcomed and one to be regretted.

I am pleased Gordon Brown has accepted many of the responses to the consultation exercise started in the Pre-Budget Report and has introduced a reasonably flexible 100 per cent capital allowance for the renovation of business premises in disadvantaged areas. This could make a real contribution to business regeneration across the country. We are not sure why the renovated business premises need to have been empty for 12 months. Surely the sooner the relief becomes available, and the work commences, the better?

But I regret removal of the exemption from the 4 per cent stamp duty land tax on commercial properties in disadvantaged areas. This appears to contradict the renovation relief. Many real estate investors and commercial property occupiers will be in a state of shock because the SDLT exemption was introduced only in December 2003 and, being an immediate change, some transactions are no longer viable unless a binding contract is already in place.

Many businesses will have to reconsider their plans and will have incurred abortive legal and professional fees. Hopefully, the Chancellor will reflect during the course of the Finance Bill debates on whether such a U-turn within 16 months is really the way to promote business stability.

Mr Brown claimed the reason he was able to afford the new measures was due to the benefits of his determination to maintain Britain's economic stability and growth. Whilst the underlying statistics that were quoted by the Chancellor were indeed impressive, including 50 consecutive quarters of economic growth and the lowest average levels of inflation and interest rates for more than 30 years, people running businesses may believe the Chancellor continues to give them a hard time compared to many of their international competitors.

One example of this is his decision to "freeze" the standard rate of corporation tax at 30 per cent. I trust it had never really been in his mind to increase this rate. Most European Union countries and global competitors have been cutting their corporation tax. The United Kingdom had for many years one of the lowest rates, and countries such as France, Germany and Italy are rapidly reducing theirs and our advantage has largely dissipated. In Ireland and Hungary, which target low headline rates of corporate taxation to attract investment, the rates are just 12.5 per cent and 16 per cent respectively.

Unfortunately, this is the essence of the dilemma faced by the Chancellor. To meet his projections for balancing the public sector finances over the economic cycle and keeping public sector net debt below the published 40 per cent ceiling, he needs to keep tax high if he is to increase government spending.

We consider that the Chancellor will need a very favourable economic backdrop to achieve his target next year and a downturn in consumer spending or business profits would lead to him missing the target by a large margin.

Similarly, capital gains tax and inheritance tax, only about £3bn a year, cannot meet a shortfall in corporation tax receipts. He is probably correct in saying stamp duties will collect an additional £1bn in 2005-06 unless the housing market and commercial property market suffer a more severe downturn than predicted.

The most likely result of the forthcoming general election campaign - in tax terms - is that both the government and the opposition will commit themselves not to raise income tax from the 22 per cent and 40 per cent rates which appear set in stone.

The Chancellor is predicting national insurance receipts of £83bn in 2005-06, a £5bn increase over 2004-05 and VAT receipts of £76bn, a £4bn increase over 2004-05. Arguments could be made that both of these taxes are levied at rates below those of our EU competitors. Indeed, VAT could offer an incoming Chancellor a chance to align more closely with them closer to 20 per cent. One suspects no major parties will wish to discuss this during the election campaign.

Stephen Herring is a tax partner with BDO Stoy Hayward LLP

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