PKF Predicts Brown's Pre-Budget Report

by Robert Lee, Tax-News.com, London

16 November 2006

In its predictions for the UK Chancellor's pre-budget report, accounting firm PKF says that although many companies are voting with their feet and either moving out of the UK or not setting up in business there in the first place because of the comparatively punitive corporate tax regime compared with many other EU states, it is unlikely that the Chancellor will cut tax rates.

The Chancellor’s forthcoming Pre-Budget Report (PBR), says PKF, is widely predicted to be the most political statement in recent years as he has both personal and party ambitions to realise. In what could be his last PBR, Gordon Brown needs to enhance his own reputation within the Labour Party and the country as well as neutralise the opposition.

Peter Penneycard, PKF National Director of Tax, takes a look at the four main areas where the Chancellor is likely to set out proposals to preserve his legacy as a prudent chancellor and demonstrate his crusading credentials in the war against global warming.

Although Gordon Brown has stated that he would like to bring down the basic rate of income tax, perhaps even reducing it from 22 to 20% over the next couple of years, this can only be afforded if the tax lost can be made up by new taxes, the most politically acceptable being green taxes.

The Government remains concerned about abuse of the new pensions regime, fearing that those opting to take an Alternatively Secured Pension at age 75, rather than purchase an annuity, will often be doing so with the intention of avoiding inheritance tax. Anti-avoidance rules may be tightened further to prevent this.

According to the Environment Secretary, David Miliband, “The Chancellor will set out the options” for green taxes in the Pre-Budget Report and PKF expects those options to include the following:

• The VAT fuel scale charge paid by companies in respect of fuel provided for private mileage of employees is to be linked to the CO2 emissions of each car from May 2007. Formal proposals and rates are likely to be announced following recent consultations.
• Increasing the Vehicle Excise Duty in future years for the most polluting cars (probably linked to the CO2 emissions of each car) is likely to be suggested as part of a wider consultation on green taxes on travel. Widely criticised for the very cautious increases announced in the Budget, the Chancellor may seek to catch up with the public appetite to tax 4 x 4s and suggest some quite radical increases.
• Proposed increases in air passenger duty are likely to be included in the same consultation.

PKF also expects to see some discussion of ways to boost the distribution of bio-fuels and other less polluting fuels – perhaps a special capital allowance for forecourt conversions.

There may also be some simplifications aimed at the City as Gordon Brown and the new City Minister, Ed Balls, seek to reassure the City that it can trust the Labour Party more than David Cameron. One example is likely to be the UK Investment Manager Exemption where, following formal consultation, PKF expects comment on the rules for non-residents trading in certain investments in the UK through an investment manager acting as an independent agent.

REITs (real estate investment trusts) are likely to get a mention again but, given the recent relaxation on the 10% holding rule, few major changes are expected at this late stage. However, a populist move could be to cut the rate of income tax that basic rate taxpayers will pay on distributions from a REIT in line with bank interest and other “passive” investments.

With recent Parliamentary support for the idea of a tax on land development gains, there may well be further proposals and the launch of another consultation on how this new tax, the Planning Gain Supplement, is to be implemented. However, it is most unlikely that the rate of charge will be suggested at this stage, so land owners and property developers will still be in the dark on how to plan for this.

Says Peter Penneycard, “Although Gordon Brown will undoubtedly do his best in the PBR to create the illusion that the tax regime is being simplified and focused on saving the planet, the reality for the taxpayer is that the fiscal noose is being tightened in every direction – new taxes, tighter deadlines, higher penalties for late payments and more powers for HMRC to poke their nose into your business”.

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