Pre-Budget Report 2008: Tax cuts now, but we'll pay later warns accountancy body

Following today's Pre-Budget Report, leading accountancy body - the ACCA, has warned that the country will be subjected to large tax hikes in the future in order to pay for cuts today.

Chas Roy-Chowdhury, head of taxation at ACCA, has kindly provided his analysis on the key points contained within the PBR.

Value Added Tax
 

• Slicing the top rate of VAT from 17.5 to 15 per cent until the end of next year means that certain products and goods charged at the top rate will be cheaper. The hope is that this will kick start high street spending, but business needs to pass on the savings from Monday 1 December when this cut is effective. The question is whether this is enough of a stimulus.
• Big and effective measures are needed. Will a year be enough? If not, this temporary reduction may need to be extended.

• It is good news that the temporary £120 allowance introduced earlier this year will be made permanent and rise to £145 next year. However, the features of this scheme can be complex.

• The rise of National Insurance by 0.5p is a tax rise dressed up as something more palatable. This effectively means that the top rate will be 46.5 per cent in 2011.

• This higher rate of tax will only affect the top one per cent of high earners. However, it remains to be seen whether this is palatable to higher rate tax payers who feel they bring wealth and prosperity to the UK.

• There will also be drastic and complex changes to the Personal Allowance regime for higher earners.
• April 2010 will see the restriction of the Personal Allowance to 20 per cent for the £100,000 earner and those earning £150,000 will receive no Personal Allowance at all.

• We welcome the £50k carry-back of tax losses for three years. This will be a real relief and will aid much needed cash flow for small companies.
• We also welcome the fact that SMEs will be able to defer tax payments indefinitely. However we hope that any interest charged will be restricted to the equivalent of the Bank of England base rate.

“This is a PBR delivered at the tail end of a turbulent year. Tax wise, it’s cuts now followed by inevitable tax hikes later; UK taxpayers will pay in the future with tax rises and we wait to see how the proposed 45 per cent rate will go down with voters at the next General Election. The government has an extremely difficult task to do - encourage confidence, get people spending and yet show those outside the UK that the proposed increase in tax rate to 45 per cent is not a disincentive to working in the UK.”

“Business large and small received some help from this PBR. The various reliefs offered to business are sensible, but the economic picture remains turbulent. Will this year’s PBR be seen as a fair and responsible means of getting the UK back on track economically? Reducing VAT shrinks the cost of things people buy; and the Chancellor will also be reducing the level of inflation in the economy. This will then push the Bank of England bank rate even lower with the possibility of a one per cent cut in the near future. Borrowing does need to rise.”