Pre-Budget report – Eliminating the element of surprise

These days much of the content of the speeches is leaked beforehand or pre-announced in press releases. Occasionally doom and gloom is suggested early so that when we hear the real news we are pleasantly surprised that the reality isn’t quite as bad. If there is good news to impart we will hear it at the PBR.

The main question for this year’s PBR is how is the chancellor going to bridge the deficit in his budgets? We already know that the economy hasn’t performed as the chancellor had hoped, giving rise to a possible shortfall. Therefore we are unlikely to see any major ‘give-aways’, but will probably hear about a few revenue-raising measures.

On past performance, these will not be increases in the headline rate of tax but will be ‘death by a thousand cuts’-type measures – a freeze in an allowance here, a small rise in an apparently obscure tax there.

We already know that stamp duty is to be radically overhauled. The changes to the tax of leases alone will see some people faced with a 7,000% increase in their lease duty bill! Last year’s increase in national insurance contribution and the removal of the employee ceiling on contributions provide another useful avenue for revenue collection.

Expect to see a number of anti-avoidance provisions slipping into the copious background notes. Closing down perceived unacceptable forms of tax schemes and reversing tax cases lost in the courts is a common feature.

We already know that the Revenue is seeking to cap claims for back tax after the decision in Deutsche Morgan Grenfell and has had two stabs already at draft legislation. It has also announced that it will shut down certain capital allowance and capital gains tax schemes. It would not be surprising if the revenue authorities put their regular attendance at tax conferences to good use to close off other well-marketed and well-known tax schemes such as those used in inheritance planning for family homes.

Some of the blockbuster announcements that are expected on or around the PBR could include the following:

Pensions reform should loom large. A consultation paper will probably point to the simplified regime expected to take effect from April 2005.

The main talking point is likely to be where the tax-advantaged cap will be for individuals. The original limit was to be £1.4m, and much has been made by various commentators on how many people this would adversely affect.

Leaked reports suggest the chancellor is sticking to his guns on this issue, but if he needs to generate some good news, a slight increase in this limit may be an easy answer.

The proposed merger of Customs & Excise and the Revenue is expected to be announced. This may prove to be a wistful intention for the future, but plenty of background discussion has taken place on how it could work.

The joining of the two revenue ‘super tankers’ would prove to be a challenge for both hard-pressed departments.

An issue that has been fermenting since April is that of residence and domicile. While many agree that the rules need overhauling, the economic advantages to the UK of our advantageous structure for non-domiciliaries is more of a sticking point. For many years there has been discussion of reform and a background paper issued with the Budget in the spring suggested further consultation may arise.

One possibility is that the PBR may tackle domicile head-on with an anti-avoidance stance suggesting that rule changes are necessary to safeguard UK revenues, and those who have made the UK their long-term home should pay an ‘appropriate’ sum to the UK coffers based on their worldwide income.

An overnight change would ruffle the feathers of several strong lobbying groups, but it appears the time may be ripe for some change.

Look out also for more news on corporation tax reform. The positive simplification of reviewing the schedular system may be put on the back burner while revenue-saving measures such as introducing transfer pricing within the UK may be fast tracked.

We may also see the tax-breaks end for company vans and some announcement on employer-pro-vided childcare.

All in all, it appears unlikely that the chancellor is looking to give us any early Christmas presents.

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