BDO’s Overall Response to today’s Pre-Budget Report

Media Statement Date 9th December 2009 For immediate release Subject BDO’s overall response to today’s Pre-Budget Report BDO’s Overall Response to today’s Pre-Budget Report Unusually, it’s all about national insurance rather than business taxation and protecting tax revenues This could be viewed as a cautious PBR, lacking bold pre-election measures, delivered by a Chancellor who is clearly biding his time. Alternatively, it could be a missed opportunity to announce tax increases in the future which will not affect business or employment but will be unavoidable unless the fiscal position is clearly improving by Budget 2010. The main measures focussed on taxing bank bonuses, national insurance and freezing personal allowances, however, these measures, in aggregate, will not make a sufficiently sizeable dent in the significant fiscal deficit. Indeed, it is only the across the board national insurance increases which make a material inroad into the fiscal deficit. No doubt this means that the other two largest taxes, income tax and VAT, will be focussed upon in Budget 2010. The Chancellor has, however, announced some good news in measures to encourage entrepreneurialism and small businesses although most measures neither cost much to the Exchequer nor provide significant tax reliefs to growing businesses. Stephen Herring, Senior Tax Partner, BDO LLP commented: “The Chancellor has stressed the immediate need to boost growth rather than cutting his £175 billion fiscal deficit in the short term. However, at some point over the next 12 months, the impact of the increased black hole in public finances will inevitably lead to uncomfortable tax increases for individuals and consumers, with the virtual certainty of more tax rises to come in the March 2010 Budget.” As was widely predicted, the Chancellor announced a 50 per cent tax charge on banks for large bonuses which is, in our view, bad news for the competitive position of the UK financial services sector. At the margin, this will discourage financial services executives from transferring to London as they may consider that a short term tax rate could be continued. Similarly, London's competitors in financial services such as Paris, Frankfurt and Switzerland will exploit the measure as a further example of an increasingly less-friendly tax regime in London for global financial services businesses. In essence, the £550 million forecasted tax revenues will not be worth the long term price paid for them. The Chancellor today announced a further 0.5 per cent hike for national insurance across the board for employees, employers and the self employed. This will apply from April 2011 and comes on top of the 0.5 per cent rise already announced only a year ago in the 2008 Pre-Budget Report. This is a huge tax raising measure which will collect the Exchequer over £4bn net per annum from 2011/12. Stephen Herring added: “Together with VAT and income tax, national insurance is one of the three largest tax collectors and this was a predictable response by an administration that has 'form' with previous national insurance raids. However, I am particularly concerned that the rise in employer's national insurance rise may inhibit improvement in the aggregate level of employment. In essence, employers’ national insurance contributions represent nothing more than a tax on jobs.” Both the PBR and the Budget are, of course, political occasions and whilst the Chancellor might have seen an immediate political advantage from deferring increases in tax rates until the Budget 2010, it is not clear that this will help the Government in the forthcoming general election because any increases which can no longer be postponed will be more front of mind at the ballot box. There were a few eye-catching measures on protecting the environment. Notably, electric cars will be exempt from the benefit in kind for company car taxation for the next five years. Employers will benefit from national insurance exemption and will also benefit from higher tax allowances for electric vans. The Chancellor also committed to maintaining the reduced rate climate change levy at 20 per cent however, according to Stephen Herring, Tax Partner at BDO: “The devil is in the detail on this measure and it appears that this reduced rate will be short lived as it is due to rise to by 15 per cent to 35 per cent in the Finance Bill 2010. In aggregate, the PBR 2009 measures will increase taxation by approximately £3.5bn in 2011/12 and £5.1bn in 2012/13. The only substantial changes concern national insurance and, to a much lesser extent, the deferment of the previously proposed increase in the small companies rate of corporation tax. Stephen Herring concluded: “The remaining tax reliefs and tax increases are, in aggregate, a drop in the ocean. Even the Chancellor’s expected PBR attack on tax avoidance is only expected to collect a mere £200m over the next three fiscal years. As always, the Chancellor has highlighted in the PBR pack a heading for “Protected Revenues”, one wonders why he bothered.” - Ends -