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22 December 2003

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Pre-budget comment

As with recent Budgets, it is unlikely that there will be any major surprises come April 17th. We will once again be subject to a regurgitation of previously announced measures, coming into effect for the 2002/03 Tax Year, and the announcement of measures to be implemented over the following Tax Years.

This Chancellor has a liking for announcing measures one, two or even three years in advance. The more cynical amongst us may say that this tactic gives him dual benefits.
Firstly, he can repeat all the popular measures at every given opportunity for maximum effect. Secondly, unpopular measures can be announced so far in advance that we do not worry about them at the time of the announcement and have forgotten about them by the time they come into effect.

In his Pre-Budget Report last November Gordon Brown announced the income tax allowances and National Insurance bands and rates for 2002/2003. He also confirmed the accelerated capital gains tax taper relief for business assets that he had already announced in June. Recently, he announced the income tax bands for next year together with the capital gains tax annual exemption and the nil rate threshold for Inheritance tax.

For businesses, the Chancellor has said in recent speeches that there will be no short-term lurches in policy that may risk the long-term stability he is aiming for.

Among the measures already announced are:

  • A new research and development tax credit for large firms;

  • 20 million to fund best practice initiatives in industry;

  • The forming in every region of the country locally based venture capital funds - in Yorkshire, for example, this fund will be 25 million;

  • In high unemployment areas, the abolition of stamp duty on all home and business property transactions up to 150,000;

  • Helping with premises and business support through the 75 million business incubation fund.

The Budget in April will be a Budget for enterprise as well as for our public services.

It is accepted that the National Health Service is in need of a massive injection of funding and the government has been preparing us for the fact that we will have to pay for it, as if we did not know! The question is how will this and other initiatives be funded?

We can only speculate but there are some likely targets:

Income tax: it seems unlikely that the Chancellor will raise income tax rates in direct contradiction of the government's election manifesto. However, he could increase income tax revenue without increasing the tax rates, either by restricting the value of allowances or by increasing the amount of earnings taxable at the higher rate.

National Insurance: although it is difficult to draw a distinction between National Insurance contributions and income tax, Gordon Brown may be more inclined to increase employee National Insurance contributions. His likely method would be to increase or even remove the upper earnings limit for employees.

Value Added Tax: with the UK's VAT rate lower than the European average and the last increase more than 10 years ago, there is the possibility of a hike in the rate of tax or the removal of certain exemptions.

Inheritance Tax: every year there is speculation about changes in this area but there have been no major changes for 15 years. The Chancellor could make it more difficult to make lifetime gifts but it is unlikely that we will see any changes in a tax which collects an insignificant amount of revenue for the government.

Stamp Duty: with no sustained signs of a slow-down in house price increases, the Chancellor may consider a further increase to rates of duty, especially on the more expensive properties.

Petrol, tobacco and alcohol: the public outcry over fuel prices seems to have died down so do not be surprised to see the Chancellor taking the opportunity to add a few pence to the price of a litre of fuel. Tobacco, as always, seems a likely target, driving even more people over the Channel for their cheap cigarettes. Alcohol seems likely to avoid any major increases again.

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April 2002




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