Budget Round-up: Brown’s double-edged sword.

Well it was national insurance after all – and how! No-one thought the chancellor would raise the levy on employers as well as employees.

With company treasurers having borne the brunt of the downturn – not to say recent Budgets – most of us thought they would be let off lightly this time.

And only the Treasury had the bright idea of another contribution rate.

The 1% increase is to be applied on all earnings over the lower earnings limit – is this effective increase in the basic rate of tax the beginning of the end for the earnings cap or indeed of a separate NIC system at all?

Work incentives at the lower end of the scale will be improved by the more generous family tax credit, but this benefit will be offset by the increase in employer contributions. This is a tax on jobs and no mistake.

The irony is that the chancellor imposed it after boasting that the UK had the lowest unemployment rate in the G7. That hard-won position will be hard to sustain now.

Brown’s announcements followed an unprecedented level of pre-Budget publicity. We had already seen draft legislation on major technical measures such as the substantial shareholdings exemption. It was also widely trailed that this would be a major revenue-raising Budget to fund the public sector; even the Prime Minister has been involved in the management of public expectation of the level of tax increases.

In the event, speculation on the major measures has been fairly accurate, with the headline forecast net tax rise at £6.1bn rising to £8.3bn in 2005/06 falling in the middle of the expected range.

The stamp duty reforms announced are wide ranging; the imminent exemption of goodwill will be welcome and complement corporate tax changes on intellectual property, but there is also anti-avoidance legislation. Other reforms – many welcome, some not – will require careful study!

For companies, in addition to measures which had already been announced, there is much below the surface: in particular, consultation on the reform of the very fabric of the corporate tax system, the distinction between gains and income, and the schedular system.

In theory, we welcome attention to a system that has become outdated; however, in practice this is not the right time to create yet more uncertainty for companies only now coming to terms with the reforms of the last two years. The life assurance industry in particular, will be uneasy about the complexity of bringing gains into charge as income.

The chancellor also did more harm than good to his treasured Share Incentive Plan. Despite the Inland Revenue’s recent national press advertising campaign promoting SIPs, the 1% NIC tax increase is another nail in the coffin of Brown’s good idea. The additional 1% saving from putting cash into a SIP isn’t enough to convince either employees or companies that the benefit is worth it. He should have reduced the holding period for shares from five to three years and paid for it by reducing the benefits of SAYE schemes.

Complexity is a major by-product of the new child and working tax credits; if these are really going to affect 90% of families, that means the completion of returns by many more taxpayers. Coupled with the increased administration of an uncapped 1% NIC charge, is the net effect really worth the complexity?

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