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Budget 2008 - Straitened Circumstances


Budget 2008

Budget Day: Wednesday, 12 March 2008

Alistair Darling's first Budget speech

Summary of Tax Changes 2008 / 09

"A responsible budget"

Alistair Darling was always going to be on a sticky wicket for his maiden Budget speech. He aimed for dull and achieved his aim! Headlines are using the words 'boring' and 'lacklustre' to describe the Chancellor's speech. We appear to have exchanged a dour Scot at No 11 Downing Street for a dull Scot.

But Budget 2008 had to be boring - the Chancellor, in straitened circumstances, had no room for manoeuvre to make it anything other than boring. Most of the 'new' measures he announced (as opposed to those we already knew about - see Budget 2008 - Tax measures in the pipeline ) were small beer in real terms - what you might call just tinkering at the edges.

The Budget is broadly revenue neutral in 2008 / 09 but raises £1.9 billion by 2010 / 11, mostly via increases in alcohol, fuel and vehicle excise duties. Government receipts are estimated at £550 billion for the current financial year. Deferring petrol tax hikes costs £0.6 billion, higher winter pensioner payments costs around about the same, while the increase in alcohol taxes are expected to raise just £0.4 billion. However, there were also a number of small measures aimed at 'protecting tax revenue'. Overall, it is unlikely that this Budget will make much difference to the direction of the economy over the next two to three years.

The Budget may not have been full of surprises but there was one small one - the announcement that the Chancellor is increasing petrol duty in 2010 above the increase for "environmental reasons". In addition he confirmed that the 2p duty rise this year will be postponed for six months. While the delay this year is welcome, the extra increase in years to come will not be well received.

A substantial portion of Mr Darling's speech was given over to point-scoring over the opposition with regular references back to how his financial position and his policies (and those of his immediate predecessor) were so much better than what had gone before, pre-1997.

There were no jokes but one notable moment of levity from the opposition benches when the Chancellor, making reference to his troubled 'non dom' £30,000 tax imposition on rich foreigners, said, "This new charge will be implemented from April. There will be no further changes to this regime for the rest of this Parliament or the next."

This is something of a hostage to fortune given the current state of the political opinion polls - polls unlikely to be swayed very much in the Government's favour by anything that the Chancellor unveiled in his Budget speech.

'Stability' was Alistair Darling's watchword. He was, as had been widely expected, forced to cut his economic growth forecasts and appears to have put his faith in the falling pound. There was little fiscal stimulus in this Budget, and Mr Darling clearly expects a significant fall in the exchange rate, as he expects exporters to be specifically responsible for recovering growth in 2009 and 2010, saying, "I expect growth to shift towards companies and exports... " The Chancellor also signalled that interest rates were unlikely to come down soon.

Mr Darling claimed that Government borrowing would be below his Pre Budget Report forecast for the current year although it would rise again to £43 billion for 2008 / 09. What's a few billion here or there between friends?

Rather a lot actually, bearing in mind the fact that Gordon Brown's original forecast for Government net borrowing for the coming fiscal year (made in Budget 2004) was £23 billion. The discrepancy between these two numbers perhaps underlines just how much faith we should be putting in the Government's ability to forecast. In fact, general government net borrowing is forecast at 3.2% of GDP in 2008 / 09, exceeding the 3% Maastricht treaty limit for the first time

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Mom and Pop reprieve - for now

Among what detail there was, was good news for husband and wife firms - the dog didn't bark in the night - or to put it another way, Mr Darling made another U-turn (he must be used to them by now). The Chancellor delayed the implementation of legislation against "income shifting", designed to prevent individuals transferring part of their income to spouses who are subject to a lower rate of tax.

The complex piece of legislation would have hit husband and wife enterprises that make use of their dual tax allowances, by requiring each spouse to prove their contribution to the company and their entitlement to a dividend, based on difficult yearly calculations.

Mr Darling announced that this measure will not come into effect until 2009, following further consultation. The Chancellor's decision to delay this unworkable piece of legislation is welcome. It was designed to stamp out income shifting by examining the commercial contributions each individual brought to the table. But the legislation was couched in such obtuse terms, it was almost impossible to ascertain exactly what dividend was permissible for any given commercial contribution.

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Mixed news for savers

There was disappointment that the Chancellor did not take the opportunity to increase the cash ISA limit but various tax changes may benefit savers in some ways while adversely affecting them in others. For example, Alternatively Secured Pensions (ASPs) could become a more viable retirement income option following Budget changes that reduce inheritance tax (IHT) liability on the schemes. Changes to IHT provisions to allow the transfer of unused IHT allowance to the surviving spouse or civil partner on death, to be included in the Finance Bill 2008, will also apply to ASP.

The new rules will mean any proportion of unused nil-rate band when the original ASP owner died will be applied to increase the nil-rate band in force when the dependant dies. This new boosted nil-rate band will be available to offset against the remaining ASP fund. Under current rules, the nil-rate band available for application against the remaining ASP fund would be £110,000 (£350,000 - £240,000). Under the changed rules, the nil-rate band available for application against the remaining ASP fund would be £180,000 ((£350,000 x 120%) - £240,000).

Venture Capital Trusts (VCTs) will be exempt from VAT on management fees from 1 October 2008. The Government also confirmed that investment trusts will be exempt from VAT on management fees. Provided this cost-saving is past on to investors in the form of lower charges, this could be very good news.

On the other hand Mr Darling made no concessions to the insurance industry on the taxation of investment bonds. The Chancellor ignored calls from the Association of British Insurers (ABI) to make concessions - the ABI had been lobbying for the government to change the taxation of investment bonds, which are taxed at up to 40%. This makes them look rather less attractive against, for example, unit trusts.

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13 March 2008 © Moneyextra.com

 

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