‘Like a good Irish stout – a creamy head but dark’

The chancellor gave his expected upbeat picture of the UK’s economy, pointing out that we are enjoying the longest period of economic growth for 200 years. Growth is 3-3.5% this year; inflation is under control at an expected current 1.75%; and borrowing (at £37.5bn this year), is manageable. He reiterated that borrowing for investment is part of policy and said his Golden Rule will be met with £11bn to spare.

As most of us expected, we didn’t get any big tax rises. However, the huge volume of detail that accompanies any Budget shows that taxes are going to drift up a little. Inevitably, thresholds haven’t been raised in line with house price inflation (so more will pay 3% or 4% stamp duty or fall into the Inheritance Tax net) or earnings growth (so more people and more income will fall into the 40% tax rate). Small increases in the traditional sin taxes will chip in a few extra pounds, but many will still wonder whether there will have to be rises in the future to balance the Budget.

Some measures do catch the eye – good and bad. The freezing of many tax rates is naturally welcome. It’s good to see the chancellor doing something to cut back on the administrative burdens that the tax systems impose, by proposing to move the burden of paying working tax credits away from employers. The announcement that the major reforms to pension tax are to go ahead is also good news, though there remains the sting in the tail with the need for a number of people to keep an eye on the £1.5m ‘pot limit’ (an increase from the expected £1.4m) and many more in the future to watch out for it. We also have until April 2006 to get to grips with these new rules.

The less good side includes very definitely the unwelcome additional tax levy on small business – a 19% tax on dividends. It seems the chancellor is convinced that incorporating a small business is a tax avoidance move, so many proprietors will have to cope with the tax bill and the cost of sorting it out. All businesses are going to have to get to grips with transfer pricing and thin capitalisation. And we are going to have to cope with US-style tax shelter regulations, with the potential problems of defining what is a shelter and coping with the administration it all involves. What it should not do is curtail normal, sensible tax planning – provided the rules work sensibly.

It will be interesting to see the impact of the merger of the Inland Revenue and Customs & Excise. It should in due course deliver efficiency gains for businesses and tax advisers who will only have to deal with a single authority, with the potential for harmonised definitions and procedures. However, there will be disruption to come and one has sympathy for the extra pressures on the departments who have had to cope with huge volumes of change in recent years.

On St Patrick’s Day, there was no overt nod to an Irish theme – except that one can perhaps liken the Budget statement to a pint of good Irish stout…stimulating, rather dark, takes a while to get to the bottom of but has (with his extra help at the end of the speech for the elderly) a good creamy head to make it look so good.

  • John Whiting is tax partner at PricewaterhouseCoopers

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