Pre-Budget Report 2008

“In these extraordinary circumstances allowing borrowing to rise is the right choice for the country”

The Chancellor, Alistair Darling, delivered his second Pre-Budget Report on 24 November 2008, affirming as his key objective the maintenance of stability in the economic slowdown.

His speech was made, in the Chancellor’s own words, “against a background of economic uncertainty not seen for generations” and he went on to underline the “impact on businesses and families right across the world”.

In his address to the House of Commons, Mr Darling blamed international uncertainty and global financial turbulence as he cut his forecast for growth in the UK next year.

The Chancellor also announced that the economy will continue in recession for part of next year, before recovering in the second half of 2009. Inflation, which recently peaked at close to 5%, is forecast to reduce substantially during the next year.

In the light of the state of the economy, the Chancellor announced a number of measures designed to stimulate the economy through sustained government spending and short term tax reductions for the next 18 months, with a stated intention to restrict the growth of public spending and increase taxation thereafter.

Our clients will want to familiarise themselves with the main points of the Chancellor’s Pre-Budget Report and Comprehensive Spending Review statement. These include :

The UK growth forecast has been cut to 0.75% for 2008 between -0.75% and -1.5% for 2009 and between 1.5% and 2.0 in 2010.
Inflation is forecast to reduce to 0.5% in 2009.
Public sector net borrowing is forecast to be £78bn in 2008 and £118bn in 2009 before reducing thereafter.

Implications for your business :

For clients paying full rates of VAT there will be a temporary improvement via the reduction of VAT from 17.5% to 15%. For those on flat rate schemes, the flat rate percentages will be adjusted accordingly so that users will not be disadvantaged. Clients currently on 13% will change to 11.5%, and those on 12.5% will change to 11%.

Small businesses (including Personal Service Companies) will benefit from the postponement of the increase in small companies Corporation tax rate due to take effect in 2009. However, in real terms, what does this mean for our clients?

As an example, a business with pre-tax profits of £75,000 can expect to benefit by £750 in 2009.

Small businesses may be able to benefit from the announcements of additional credit and guarantees made in the PBR.

Small Businesses and Personal Service Companies with cash-flow difficulties will be able take advantage of the flexible tax payment arrangements and ability to negotiate a timetable for payment of all their business taxes to the HMRC.

However, in line with all employers and employees, small businesses will also be required to pay higher National Insurance charges on salaries from 2011.

For small business employers and employees seeking to provide for retirement there will be interest in the decision to fix the levels of lifetime and annual allowance pension contributions for 5 years from 2011.

Of interest to many of our clients will be the decision, contained in the PBR notes, to defer action on income shifting. This means that, if you are currently sharing dividend income with a spouse, you will be able to continue doing so, as no date has been set for the anticipated legislation.

VAT

CORPORATE HIGHLIGHTS :

VAT: Temporary 2.5% cut until end of 2010
Corporation tax: Preannounced rise in small business rate postponed for 2009
National Insurance: 0.5% increase in 2011 for employers
Finance: Government assistance with finance for small businesses
Tax liabilities: Ability to agree a timetable with HMRC for payment of business taxes
Tax planning: Postponement of planned legislation on income shifting

PERSONAL HIGHLIGHTS :

Income tax: 5p increase for top earners in 2011 over £150,000
National Insurance: 0.5% increase in 2011 for employees and self employed
Tax thresholds: Increase in allowance for 10p tax made permanent Personal allowance for income over £100,000 halved, removed over £140,000 from 2010
Pensions: Lifetime allowance fixed for 5 years at £1.8m, annual allowance at £255,000 from 2011
Travel: 2p rise in fuel duty, changes in air passenger duty scheme, changes to vehicle excise duties

FORECASTS:

• The UK growth forecast has been cut to 0.75% for 2008 between -0.75% and -1.5% for 2009 and between 1.5% and 2.0 in 2010.
• Inflation is forecast to reduce to 0.5% in 2009.
• £3 billion of planned public spending brought forward from future years to stimulate demand, £5 billion of efficiency savings identified.
• Growth in public spending to fall to 1.3% per annum in 2011.
• Public sector net borrowing is forecast to be £78bn in 2008 and £118bn in 2009 before reducing thereafter.

The Chancellor announced a cut in VAT from 17.5% to 15%, effective from 1 December 2008 to the end of 2009. The intention of this is to stimulate spending in the UK economy at a time when the UK is entering into recession.

For MyAccountant clients, this will mean that VAT on invoices raised after the 1st December 2008 will be applied at the new 15% rate.

Business assistance

Small businesses will also be allowed temporarily for one year from 24 November 2008 to carry back losses of up to £50,000 for three trading years instead of the current one year.

The Government introduced 2 schemes to complement the provision by UK banks of European Investment Bank funds to small businesses.

The Government is also proposing to offer up to £1bn to small businesses via a temporary Small Business Finance Scheme.

Additionally, the Export Credits Guarantee Department, with banks, will introduce a temporary guarantee scheme up to £1bn to aid small exporters.

Income tax rates, National Insurance and allowances

The Chancellor also announced a future introduction of a top rate of income tax to come into effect from 6 April 2011 at a rate of 45% for income over £150,000.

Employer, employee and self employed rates of national insurance will also increase from this date by 0.5%

The Chancellor announced that the increase in personal allowances to compensate for withdrawal of the 10% tax rate would become permanent. In addition the personal allowance for incomes over £100,000 would be halved from 6 April 2010 and withdrawn for incomes over £140,000.

The thresholds for national insurance and income tax will again be aligned.

From 2011 the lifetime and annual allowances for tax free pension savings will be maintained for 5 years at £1.8 million and £255,000 respectively.

Travel Taxes

The main fuel duties will rise as announced in the Budget 2008 by 2p per litre from 1 December 2008. and there is a change in the air passenger duty scheme from two bands to four bands from November 2009.

Changes to Vehicle Excise Duty already announced will take effect in April 2009 and emissions based bandings affect all cars registered after March 2001. Other cars will see rates increase in 2009 and 2010.

Other measures

The Chancellor brought forward payment of planned increases in Child Benefit and increased the elements of Working Tax Credit and Child Tax Credit, the latter in advance of inflation.

Additionally, the Chancellor announced an increase in Pension Tax Credit and Pensions, with increased payments to pensioners also being brought forward.

A Savings Gateway is being introduced nationally to encourage persons on lower income to save, with the Government contributing 50p to every pound saved.

Major assistance was also announced for persons in financial difficulty, with mortgage lenders committing not to repossess homes for the first 3 months of arrears and the Government pledging to provide mortgage interest assistance after 3 months for up to £200,000 of borrowing.

In addition the Government would help supply of housing with increased housing and regeneration investments and tax relieved savings options for first time buyers to save for their first home.

The Chancellor also announced further funds to assist households to insulate their homes.

In response, the shadow chancellor George Osborne said the Prime Minister's promise to end boom and bust had proved "one of the greatest deceits ever told to the British public".

He countered saying the government's package of measures would double national debt to £1 trillion and that this would leave "a huge unexploded tax bombshell timed to go off under a future economic recovery".

He said that Chancellor Alistair Darling was giving away £20bn but taking back £40bn through tax hikes.

Mr Osborne added: "The chancellor has just announced the largest amount of borrowing ever undertaken by a British government in the entire history of this country."

Please contact MyAccountant for tax advice, accountancy services or for more details on the Pre-Budget Report. You can contact us on 0800 917 9100 (7 days a week from 8am to 8pm), or email us at advice@myaccountant.co.uk. Please also check the regular updates on our website.

Additionally, MyAccountant will shortly be issuing a further communication, with tailored analysis, directly to our clients.