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What will we see in Budget 2015?

February 27, 2015

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Type: The Budget

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With the final budget before the General Election just a few weeks away, Chiks tax partner Tony Medcalf becomes our Budget 2015 ‘bookmaker’ and looks at the probability of changes to the major tax rates.

 

Pre-election budgets are always politically-charged occasions, but stripping away all of the rhetoric and hyperbole I actually expect this to be quite a boring budget.

 

There may be the odd surprise, like the unexpected changes to stamp duty we saw in the autumn statement, but this will be another fiscally neutral budget in line with George Osborne’s mantra of reducing the deficit and getting back to economic stability. There’s just no money to spare for unfunded tax cuts or spending increases.

 

Without wanting to get political, this budget comes before an election where there is no clear frontrunner and where non-mainstream parties look like they could have more influence. It’s quite possible that we could end up with another coalition. Furthermore, if there’s a change of government, it’s almost certain we’ll see an emergency budget in June, like we had five years ago.

 

Corporation Tax

 

The main rate of corporation tax has fallen throughout this parliament, from 28 per cent when the Coalition came to power to 20 per cent from April 1 2015. This brings it in line with the small profits rate and so effectively creates one corporate tax rate. According to Mr Osborne, this gives us “the lowest corporate tax rate of any major economy in the world”. With so much change in recent years, I think it’s highly unlikely we’ll see any further changes to corporate tax rates this time.

 

However, shadow chancellor Ed Balls has made some comments about wanting to increase corporation tax, so if Labour get elected and we have an emergency budget, I would expect that to increase the likelihood of change.

 

Probability of change: 10%
Probability of change in event of an emergency budget: 75%

 

Inheritance Tax

 

The Conservatives have previously stated their ambition of seeing the inheritance tax threshold raised to £1m from its current £325,000 (£650,000 for a couple with a surviving spouse). David Cameron hinted in October last year that he was looking at ways to bring this in before April 2015, but said that we may have to wait until after the election before any changes can be made. With Labour doing their best to portray the Conservatives as a party that only helps the rich, it may prove too much of a risk for them to bring in a policy that would largely benefit the middle classes.

 

Probability of change: 25%

 

Income Tax

 

In this parliament we’ve seen the Personal Allowance for income tax, the tax free amount an individual can earn, gradually being raised from £7,475 in 2011 to £10,000 in 2015, largely driven by the Lib Dems. Is there the appetite to increase this further? Probably. Can further increases be funded at this stage? I don’t think so.

 

As for the higher and additional rates of income tax, the Conservatives will be buoyed by figures published by HMRC in February that showed the proportion of the nation’s tax bill paid by the richest has risen under the Coalition, with their reduction in the top rate of tax from 50p to 45p actually increasing revenues. Meanwhile, Labour has seized on figures from the Institute for Fiscal Studies think tank which appear to show that low-income families have been hit hardest by the Coalition’s tax and benefit changes. Labour has already pledged to re-introduce the 50p rate of tax should it get elected.

 

Probability of change: 20%
Probability of change in event of an emergency budget: 80%

 

Capital Gains Tax

 

There’s been little change to Capital Gains Tax rules in recent years and I’m not expecting any significant changes to the rates and allowances this time. In terms of what we already know is coming in from this year, non-resident UK homeowners who have spent less than 90 days in their UK property in the previous tax year will be liable to pay CGT on any gains when they sell that property. This brings the rules for non-residents in line with those for residents. To date the Lib Dems appear to be the only party saying they would increase CGT from the current 28 per cent to 35 per cent, if they are elected in May.

 

Probability of change: 10%
Probability of change in event of an emergency budget: 50%

 

VAT

 

VAT will continue to be a major earner for the government as consumer spending rises in our current low-inflation economy. It will be seen as key to recovering some of the tax revenue being lost due to falling fuel duty and road tax receipts, so it’s certainly not going to be lowered. Some business sectors, for example tourism, have lobbied hard in recent years for a VAT rate cut on related activity, but it would be unrealistic to expect any such changes. What we might well see is an increase in the threshold at which small businesses have to be VAT registered. However, with an election just around the corner, I don’t foresee any other changes, especially considering the way the ‘pasty tax’ blew up into a media storm when Mr Osborne applied VAT to hot takeaway food in 2012.

 

Probability of change: 20%

 

Fuel Duty

 

“Despite falling fuel prices let me make this clear: we’ve cut fuel duty and we will keep it frozen,” said Mr Osborne in his autumn statement back in December. At the time the chancellor ruled out any duty increases until at least after the election. However, as fuel prices have fallen further since those comments were made, it gives the chancellor some room to increase duty. That said, it would be giving the opposition a huge stick to beat him with if he announced any fuel duty rises this close to the election.

 

Probability of change: 30%

 

Tobacco and alcohol duty

 

This is the one your average punter judges the budget on, especially being one of the few measures that come into effect almost immediately. While the last two budgets both saw cuts to beer duty and a scrapping of the beer escalator, which links duty rises to inflation, duty on tobacco has risen consistently amid concerns of its impact on public health. I think it’s safe to say there will be an announcement on both tobacco and alcohol duty in this budget.

 

Both the Conservative and Labour parties have announced their intention to introduce a windfall tax or levy on tobacco companies, but neither have given specific details. Critics believe this would actually lead to a net loss in income for the government as manufacturers pass on the increased costs to smokers, leading to falling sales and lower duty receipts. However, I think this is more likely to be an election issue, rather than a budget issue.

 

Probability of change: 90%

 

Business rate reform

 

Business rates are a major headache for business owners, but I can’t see any further action being taken to reform this punitive tax in the short-term. Mr Osborne has already used his autumn statement to extend the doubling of the small business rate relief to April 2016 and announced a 50 per cent increase in the existing rates discount to help high street shops, pubs and cafes to £1,500.

 

In terms of wider reform to business rates, we already know there’s a review underway but the committee looking into the issue is not due to report until March 2016, so it could be another couple of years before we see any real changes to the business rates system.

 

Probability of change: 10%

 

Mansion tax / council tax reform

 

Labour has pledged to introduce a mansion tax on properties over £2m if it is elected, an idea that was originally floated by the Lib Dems’ Vince Cable in 2009. The Conservatives are known to favour a re-banding of council tax to raise receipts from wealthy households. Again, I think this one is more likely to be an election issue, than a budget measure, but don’t be surprised to see the mansion tax in an emergency budget should there be a change of government.

 

Probability of change: 0%
Probability of change in event of an emergency budget: 75%  

 

Tony’s other budget odds

 

•    George Osborne to wear a green tie: 80% chance
•    George Osborne to have an alcoholic drink at the despatch box: 1% chance
•    Budget speech to last more than 90 minutes: 5% chance
•    George Osborne to use all the words on our Budget Buzzword Bingo card: 50% chance

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