Treasury Committee Publishes Report On 2008 Budget

by Amanda Banks, Tax-News.com, London

08 April 2008

The UK Treasury Committee cautioned in its Report on the 2008 Budget that the Treasury may have given insufficient weight to the risks of continued financial market turbulence in making its forecasts for economic growth.

The Treasury Committee observed this week that the Treasury’s growth forecasts, used for the latest fiscal projections, are more optimistic than the average of independent forecasts.

The Committee went on to suggest that the margin by which the Treasury forecasts that it will meet the sustainable investment rule is extremely tight, especially considering the uncertainty surrounding the overall economic situation.

John McFall, Chairman of the Committee, commented that:

"The Treasury’s forecast of economic growth in the next two years is more optimistic than the consensus view. Critical to this forecast is the resilience of the UK economy to shocks. Some of the very things that have kept our economy growing over the last decade may start to cause us problems, and the 2008 Budget may not have recognised this fully."

"The Government’s own forecasts show that it will be extremely tight as to whether, in future, it will meet the sustainable investment rule. There are significant downside risks to the economy, and therefore potentially to tax receipts."

"As such, the Government is going to have to be extremely vigilant in how it manages the public finances if it wishes to maintain its so far clean record in meeting its own fiscal rules.”

On the topic of tax, the Committee concluded that the group of main losers from the abolition of the 10 pence rate of income tax - those below the age of 65 with an income under GBP18,500 who are in childless households - seem an unreasonable target for raising additional tax revenues to fund the benefits of tax simplification and meeting the needs of children in poverty.

The Committee also expressed concern over the poor take-up rate of working tax credit among eligible families without children, especially given that working tax credits are intended to mitigate for low-income households the effect of this removal of the 10 pence starting rate of income tax.

Mr McFall explained that:

“While tax simplification is a laudable aim, it seems strange that the abolition of the 10 pence starting rate of income tax, disadvantages mainly low income households. As such, the Government must ensure that these people are identified, and appropriate help given to them to ensure they receive the benefits to which they are entitled.”

Commenting, meanwhile, on the tax treatment of non-domiciles, the Committee cautioned that, as a result of the focus on wealthy individual non-domiciles, there has been insufficient consideration of the possible impact of tax changes announced in the Budget on the middle and lower income groups of non-domiciled taxpayers.

Due to the complex nature of the policies on domicile and residence, and the distinction between how liability is incurred for the annual GBP30,000 charge and the loss of personal tax allowances, the Committee is concerned that the new policies will create a group of non-domiciled taxpayers who would be unwittingly in breach of the new law.

McFall concluded:

"There has been too much focus on the very wealthy non-doms, and almost no notice taken of the low and middle income groups who will be affected by the changes."

"We have highlighted a serious risk that HMRC will be faced with the problems of potentially millions of foreign workers, either seeking advice or unwittingly in breach of the new law.”

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