2008 Pre Budget Report

18th February 2009

If you follow the news closely you will know that Alistair Darling recently proposed £ 20 billion of tax cuts and funding measures to incite economic activity, to support small firms and to ease the pressures on household budgets. For those of you that haven’t had the opportunity to review his comments, here are some key highlights to the report that may be of interest:

• VAT is to be cut as from 1 December to 15 percent until the end of 2009, but duties on petrol, alcohol and tobacco to rise to offset the reduction
• The recent increase in personal allowance of £600 to be made permanent. Personal allowance for next year to be£6,475. Restrictions apply for high earner (Over £100,000) from 2010/11
• National insurance to rise by 0.5% for employers and 0.5% for employees on all rates of national insurance as from 2011
• Top rate of income tax to increase to 45 percent on earnings above £150,000 as from 2011
• Air passenger duty to involve higher charges for longer flights
• New car tax fuel efficiency bands still to be introduced but at a more gradual pace, with a top increase next year of £5

Business:

• In order to support small companies during this economic climate, the rate of corporation tax will only increase from 21% to 22 % from 1 April 2010, thus delaying this by a futher year. Companies with profits liable to corporation below £1.5 million will be affected
• Businesses to be allowed to spread tax payments over longer periods of time
• No legislation to be introduced on income shifting in the 2009 Finance Bill, but the issue is to be kept under review
• £1 billion to be set aside to help small business borrowing by means of a temporary small business lending scheme
• £1 billion to help exporters through the export credit guarantee department
• Rise in the threshold on duty payable on empty business premises
• Watchdog to monitor bank business lending
• Introduction of a three year carry back for trading losses for one year, capped at £50,000
• The proposed legislation on Income Splitting, due to be introduced in April 09, has been put aside for the time being. It may be reviewed at a later date.

Mortgages:

• Lenders to wait three months in the case of defaulted payments before pursuing repossession
• Ceiling at which homeowners who lose their jobs can apply for help with mortgage payments to rise to mortgages worth £200,000

Families:

• Increase in child benefit to come into effect in January instead of April 2009
• Pensioners to get above-inflation increases, up from £124 to £130 a week for couples and up from £89 to £98 a week for individuals

Government spending

• £3 billion of capital expenditure scheduled for 2010/11 to be brought forward to this year; funds are to be spent on roads, schools, social housing and new energy measures

Government borrowing

• Public borrowing set to climb to £78 billion this year and £118 billion next year, and to fall back to £54 billion by 2014
• Debt as a proportion of GDP to reach 57 percent by 2013/14
• Policy of borrowing only to invest over the economic cycle will not be re-introduced until 2015/16

Growth

• Forecast for 2009 puts UK economic contraction at between -0.75 percent and -1.25 percent
• Forecast for 2010 puts UK economic growth at between 1.5 percent and 2 percent

Changes to the standard rate of VAT

The standard rate of VAT will reduce from 17.5% to 15% with effect from 1 December 2008. The standard rate of VAT will revert to 17.5% with effect from 1 January 2010.

The 2.5% reduction has not been fully passed on to business on the Flat rate scheme. Some examples are:

In short, tax cuts and increased government spending is no doubt going to lead to an inevitable increase in national debt. Discouragingly, the government's own forecasts do not expect to see any significant reversal in national debt for several years. Only time will tell the effect of these changes and we, along with yourselves I’m sure, will continue to monitor the progress with great interest and hope for a swift improvement in the current economic climate.

It should also be noted that recent initiatives to reduce red tape and simplify taxation have, it seems, been shelved judging by the complexity of this PBR.

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