Recruiters view of the budget

Budget Nov 02 Analysis By KPC''s In-house Finance Director


PBR Analysis: 28 November 2002
Nigel J Campling FCA
Finance Director, Keypower Consultants Limited;
Principal, Campling & Co, Chartered Accountants.

Gordon Brown yesterday had to change tack in his economic methodology when sluggish economic growth and falling tax revenues have caused him to revise many of his plans.
The new plan is to borrow his way out of trouble, but spending on credit will push up interest rates and leave businesses struggling to cope.

He hopes for increases in Revenues within 5 years, but there is no guarantee of this. Indeed, the FT today makes a good case as to why many of his Revenue streams have disappeared.

The cynical of you may feel that this serves him right for dumping IR35 into our community :-)

On top of the 1 per cent NIC increase from April 2003, Brown will take more NICs next year through freezing the starting point at which earnings become NICable. By not increasing the starting threshold in line with inflation,
more Pay and profits will, in real terms, fall into the NIC net. He''s also frozen 2003-04 personal tax allowances, which will disproportionately hit the low paid.

Key points

Having now caused problems with our pensions, and raised the tax take from the UK economy massively, he is now targeting married women paying the reduced rate of NIC of 3.85 per cent. From April 2003 these women will have
to pay 4.85 per cent on their earnings between 89.01 and 595 per week, with a further 1 per cent above 595 per week. That is a whopping 25 per cent increase in NIC for this group, which is outrageous.

It is also worthy of note that although Income Tax allowances for next year were announced, Income Tax rates were not. Does this mean that Income Tax rates will go up next year?
There was the usual mention of targeted measures for enterprise, which just snip away at the edges of the red tape enveloping the engine room of our economy.

It is very noticeable from the small print of the Pre-Budget documentation that there is as much coverage about enforcing tax compliance and closing loopholes as there is about relaxing minor irritants to business. Another
area to watch were the changes announced regarding the way that Employee Benefits Schemes (EBT''s) are to be taxed. This will almost certainly cause problems for a number of the IR35 avoidance schemes that exists.

The supposed tax benefits of incorporation have not been changed, thus allowing the tax system to continue to affect what should primarily be a commercial decision about the choice of business structure.

The savings culture in the UK is very poor and needs encouragement to get it going. We saw nothing in the PBR that will get people saving any more than they do now. Instead we continue to spend instead of save, using borrowing and the value of our properties to keep the spending bubble from bursting.

On a different scale it''s what Gordon is doing with the economy. He''s borrowing 20bn this year (not the 11bn forecast in April) and economic growth will be just 1.6 per cent this year and not the 2.5 per cent predicted six months ago. The promised review of the rules concerning residence and domicile of individuals has not yet taken place, and with wealthy overseas nationals banging on the door of the Treasury in protest, maybe it never will. The
Treasury is aware of the wider contribution to the UK economy these people make and is prepared to be unpopular with those that take a different view.

The corporation tax reform paper issued in July 2002 generated much response and Brown will hopefully be listening to those who are calling for gradual
reform over time, and not take a big bang approach. This year''s Finance Act contained enormous changes to the corporate tax regime and these should be given time to bed down before any new laws are introduced.

Pensions with Gordon Brown''s 1997 Budget changes coming home to roost, the stock market in the doldrums and many final salary schemes closing. he''s bottled out of telling us now what will happen to pension tax reform. We will have to wait a few more weeks to find out what nasty surprises lurk there.

Whilst it is good to hear that pension tax-free lump sums will remain tax free, and that 40% relief will continue for pension contributions, Brown has missed the chance to bring in new tax incentives to boost pension savings,
which are worryingly low. The Pensions Green Paper in December must address this issue.

Environmental taxes have predictably been hit by the Pre-Budget Report, as Gordon Brown looks at ways of raising more money via indirect means. The only trouble is that indirect taxes eventually work their way through to
direct pain for us all.

An oddity is that although Brown''s medium-term aim is to increase landfill tax to 35 per tonne, he''s being timid by not hiking the rise from its current 13 per tonne to this target figure much more quickly. Households and councils need to stop dumping and start recycling. A big tax rise now in the so-called Green Budget would have enhanced Brown''s green credentials.

The Chancellor has failed to increase the IHT threshold sufficiently to take the growing number of ordinary homes out of the IHT net. He must do something about this soon if he is not going to alienate Middle Englanders with relatively modest wealth in bricks and mortar. By doing nothing he is leaving himself open to the charge that this is another stealth tax.

Simplification of ISAs would have helped the savings culture, what there is of it. The ISA regime remains very complex and many schemes have performed badly relative to other savings plans. A promise to retain the favourable
tax treatment of ISAs would have dispelled concerns about their future.

VAT
A special mention should be made about VAT compliance, as open warfare between Customs and business is about to break out. The C&E papers released during the
PBR state : Supported by the deployment of 1,000 staff to key problem areas, Customs will expand the support they give to help businesses meet their VAT liabilities, while cracking down hard on those who choose not to comply, who engage in abusive tax avoidance schemes, or who try to defraud the revenue.

This new strategy is expected to boost VAT receipts by an extra 1.4bn to 2bn a year by 2005-06. You have been warned!

An odd one is the announcement that there will actually be fewer VAT compliance visits in future and that from April 2003 businesses will first be offered support and advice before incurring penalties. Presumably Customs
thinks we are going to rush to phone our friendly VATman the moment we sense trouble. I doubt it. Less compliance visits means in reality more penalties
not less for traders who have not been visited earlier in their business cycle.

For those businesses that stand to gain, the raising of the turnover limit to allow more traders to join the VAT flat-rate scheme, will be welcome. The devil is in the detail on this one as to whether it is worth a trader joining or not. Further raising of the threshold is not ruled out, but seems
unlikely as the scheme won''t appeal to larger businesses that have decent accounting systems in place.

Construction Industry Scheme
Announced reforms to CIS include an intriguing comment about employment status of construction workers, a controversial area where tax law and employment law differ. Watch this one with interest in the press over the
coming months, as this subject could directly overflow into the IR35 status debates.


Tax complexity
There was little mention and no action on dealing with tax complexity. It is amusing to see in the PBR notes that the UK has one of the most favourable capital gains tax regimes in the world. It also happens to have one of the
most complex. Anyone attempting to deal with taper relief, for example, will vouch for that. Capital gains tax should be scrapped. The tax take relative to the costs of collection is poor and its removal from our tax regime would
abolish a whole raft of turgid legislation.

Conclusion
With the need to revise his plans due to the shortfall in revenue, he made no big announcements, although I feel that some major proposals can be expected next Spring.
With borrowing forecasts now twice the amount forecast just six months ago, the Chancellor''s has suffered a major dent in his credibility. He is taking a gamble on the future by borrowing his way out of trouble.

Unfortunately, he forgot to ask the stake providers (us), whether we mind !


Paul Finch
Keypower Consultants Ltd
2002 Essex EBusiness Award Winner