Budget checklist: What to expect
Wednesday, 21 March 2007
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ECONOMY
Current position:
The economy bowled along at its fastest pace for two and a half years in the final quarter, taking GDP for 2006 to a healthy 2.7 per cent. The economy remains chronically unbalanced, however, with the services sector flourishing while manufacturing struggles.
What to expect:
The Chancellor has an impressive track record in forecasting economic growth and has little reason to change his predictions from December. These show the economy expanding 2.75 - 3.25 per cent this year before slowing slightly to 2.5 - 3 per cent in 2008.
STAMP DUTY
Current position:
The threshold at which Stamp Duty becomes payable on property transactions rose from £120,000 to £125,000 last year. The bands it is payable in have mostly been left untouched since 1997, despite rampant house price inflation.
What to expect:
Mr Brown has again come under pressure to cut the cost of Stamp Duty - and once again, he is likely to resist. The revenue is simply too precious to the Treasury. The Treasury is more likely to concentrate on shared ownership schemes and key worker initiatives.
ENVIRONMENT
Current position:
It is stated Government policy to move the burden of taxation from "good" things, like employment, to bad things, such as pollution. The Conservatives have also put pressure on Gordon Brown to raise the green tax take from its current level of 8 per cent.
What to expect:
A rise in fuel duty was announced in December and air passenger duty has just been increased. There could be new incentives for companies to go "carbon neutral". It is expected that Mr Brown will make owners of "gas guzzling" cars such as big 4x4s pay more duty.
R&D/SCIENCE
Current position:
Tax relief for small and mid-sized firms was introduced in 2000, allowing them to claim tax deductions on up to 150% of their R&D expenditure or claim 24% cash back if loss making. Relief was extended to include larger firms at a slightly lower rate in 2002.
What to expect:
The maximum number of employees for a company to qualify as a small or medium business is expected to rise from 250 to 500, which would allow many more firms to benefit. The tax break could also be expanded to cover capital expenditure.
VAT
Current position:
A rise in VAT has long been touted as a revenue-raising option. Having stood at 17.5 per cent since 1991, an increase to the European average of 19 per cent would net a tidy £5.5bn. VAT is levied on all goods and services transactions other than certain exempt items.
What to expect:
VAT is a regressive tax, disproportionately affecting the less well-off, and so an increase is unlikely from a Labour chancellor with a mission to redistribute wealth from rich to poor. Further measures aimed at clamping down on VAT fraud are possible.
BUSINESS TAXES
Current position:
Corporation tax for larger companies comes in at 30 per cent, which, critics argue, is significantly higher than key competitors. Mr Brown has promised a "Budget for business" so expectations are high in the business community, which claims lower taxes create jobs.
What to expect:
The key question is how a corporation tax cut could be paid for - one way could be by abolishing R&D tax credits but these, as a flagship policy, would be hard for the Government to lose. The general complicity of the system is another complaint that could be tackled.
BUSINESS MEASURES
Current position:
Venture capital trusts are struggling to raise money for investments in very small companies this year, following a reduction in the perks. Ironically, private equity funds, meanwhile, are under attack for the tax breaks they enjoy as large institutional investors.
What to expect:
Further changes to VCTs are still possible, particularly as a new type of fund, that promises to repay investors at the end of a limited time period, is worrying the Chancellor. Meanwhile, the Treasury has already indicated that it will review the tax status of private equity.
PUBLIC FINANCES
Current position:
Better-than-expected public finances figures for February yesterday left the Chancellor on track to hit his £36.8bn borrowing forecast for 2006/07. But independent economists warn that tax rises are still needed to get the Treasury's coffers back in good shape.
What to expect:
Mr Brown's existing forecasts envisage a modest improvement over coming years, based on an optimistic outlook for the economy and a public spending squeeze. Having moved the goalposts several times, he will undoubtedly claim his fiscal rules are being met.
INHERITANCE TAX
Current position:
Inheritance tax is payable at 40 per cent on all estates worth more than £285,000, which will rise to £300,000 in 2007-08. But as a result of rampant house price inflation, more than 2.3 million families will theoretically be within the IHT net next year.
What to expect:
Mr Brown has already announced an above-inflation rise in the IHT threshold, to try to appease the growing campaign for reform of the tax, and could announce similar increases for futureyears. Clarification of the rules on tax-planning trusts is also likely.
AVOIDANCE
Current position:
The Chancellor has promised to end "unacceptable tax avoidance" by 2008. His chief weapon is the disclosure regime announced in 2004, which requires accountants to declare tax planning schemes in advance so they can be vetted or vetoed by HMRC.
What to expect:
Accountants are expecting a raft of technical legislation. One potential area for new rules is on personal capital losses that can reduce liability on gains elsewhere. There may also be measures aimed at offshore accounts and new penalties for incorrect tax returns.
INCOME TAX/THRESHOLDS
Current position:
The Government has pledged not to raise the main rates of income tax - currently 10, 20 and 40 per cent - this Parliament. The thresholds have been raised in line with inflation rather than earnings, pulling thousands more people into the higher tax bracket.
What to expect:
More of the same is expected, leaving the Chancellor open to accusations of delivering tax increases via the back door. Cutting income tax is not an option, as he does not have the money to spare. A penny off the basic rate would cost the Exchequer £3.5bn.
EDUCATION
Current position:
Fatherhood has raised education to the top of Gordon Brown's agenda. No surprise then that it will be the centrepiece of his final Budget. A year ago he announced a £34bn cash boost for education to raise state school spending to the same level as private schools.
What to expect:
An above-inflation increase in the education budget worth an extra £4.5bn a year, lifting spending to £90bn by 2010-11. This will be financed partly by selling off some of the Government's £16bn student loan book. Brown raised £4bn this way in 1997-2000.
EXCISE DUTY
Current position:
For health and environmental reasons governments have been raising duties on cigarettes, alcohol and petrol. Greener fuels, such as biofuels get a 20p reduction which is set to stay until 2009.
What to expect:
The Chancellor is expected to raise taxes on cigarettes and beer in line with inflation and continue a freeze on spirits. Experts believe he could raise taxes on cider for the first time in a number of years. He is also expected to flag a rise in petrol duty in September.
LANDOWNERS
Current position:
The Barker Review recommended developers should be taxed on gains they enjoy when their land gets planning consent - a so-called "planning-gain supplement" (PGS). The tax raised is then supposed to be used for house-building in areas with the greatest need.
What to expect:
The industry is strongly against the current PGS proposal, arguing that it is a blunt instrument and that its valuation methodology is wrong. Critics also argue that it will become just another Treasury revenue stream.Mr Brown could press ahead regardless.
