Harris & Co accountancy services reports the President of the ICAEW"s assessment of the Budget:
The economic news continues to be bad and the Financial Times headline on Budget morning suggested that it would be a “bleak budget”. In the end the Chancellor made the best of a very difficult situation and he may finally be able to bring about some of the growth that has so far proved elusive for this Government.
We are less optimistic about the public finances which we think may turn out to be in worse shape in the future than the Chancellor is currently projecting.
The Centre for Business and Economic Research (CeBR) with which ICAEW produces its Economic Forecasts thinks that the medium-term economic growth forecasts announced by the Office for Budget Responsibility (OBR) look unreasonable and are unlikely to be achieved, and the borrowing figures are going to be, potentially, much higher than the Chancellor is currently anticipating. This could start to cause serious problems if the interest rates that the Government has to pay to service the public debt also rise in the future.
There was much to applaud in the Chancellor’s announcements including a further reduction in the headline rate of corporation tax to 20% from 2015 onwards, which means the same rate applies to all companies and the existing complexity caused by the small companies rate of tax and marginal relief will no longer exist.
One innovative measure is the “employment allowance” which will provide up to £2,000 per year for all businesses and charities to offset against their employers’ NIC bills from April 2014. It is intended that it will be easy to administer and the Government will be consulting with ICAEW and other organisations on the detailed design. If this succeeds in overcoming the difficult of growing businesses taking on employees then it will be a very beneficial change. The estimated cost of this measure starts at £1.25bn in 2014/15 so it is anticipated that it will have a significant impact.
The increase in the personal allowance to £10,000 is being introduced a year earlier than anticipated and will come in from April next year. When there is a rise in the personal allowance this usually means the Chancellor lowers the threshold for the higher rate of tax, so that it only benefits people on lower incomes. The increase in the personal allowance is taking people out of income tax but not out of National Insurance, and it would be nice to feel that at some stage in the future a Chancellor will take up the challenge of aligning the two.
On the income tax front there is also going to be a new benefit of £1,200 towards childcare vouchers. This new scheme was announced the day before the Budget and our more detailed posting explains what is being proposed and sets out some of our concerns about the somewhat piecemeal approach of the Government in this area.
There is also going to be a new “Help to Buy scheme” which, in its title, is clearly designed to remind the electorate of Mrs Thatcher’s “Right to Buy” which allowed council tenants to buy their own homes in the 1980s. The scheme will offer mortgage guarantees to prospective house-buyers. We have a number of concerns about this, from both an economic and accounting perspective. On the economy: will this simply inflate the housing market further? From an accounting perspective, will this be off balance sheet lending? After all, giving an interest free loan for five years does cost the taxpayer something, and we would have to make a provision for expected losses. There are other costs that the Government doesn’t accrue for, such as student debt that will eventually need to be written off, and also pension liabilities.
Avoidance remains a key concern for the Government and the various measures announced by the Chancellor are anticipated to bring in more than £1bn per year once they are fully operational from next year. The major money spinners are the deals with the UK offshore islands concerning undeclared income in accounts in those countries. There are also going to be moves to stop the exploitation of corporation tax losses and “misuse” of partnerships. The legislation to stop the former will be in Finance Bill 2013, while there will be consultation on the latter with a view to legislation next year.
The introduction of a General Anti-Abuse Rule (GAAR) is now in the finishing straight having been started by the Graham Aaronson study which began in late 2010. The amount of tax that the GAAR will bring in is expected to be about £50m, as it was always intended that it would only target the most egregious of schemes and not mainstream tax planning.
Finally the Government is going ahead with proposals to prevent businesses getting government contracts if they have been involved in “non compliance”. There was a Parliamentary announcement about this last September by the Chief Secretary to the Treasury but a formal consultation only took place over a two-week period last month. We were critical of a number of the proposals and we are delighted that the Government has listened to our concerns and modified the proposals in a number of important respects. “Non compliance” has been more narrowly defined, only procurement contracts in excess of £5m will be affected, there will be no retrospection and the policy will be reviewed after 12 months.
The Chancellor said that he wanted to help to create an aspirational nation and he has made a bold attempt to do so. With a 1p drop in the cost of a pint of beer there will be many raising their glasses to his potential success.