By Daniel Hunter
The Chancellor will be hoping to demonstrate his prowess on a tightrope on 20 March as he tries to balance a sluggish economy and a substantial Budget deficit, according to PKF Accountants & business advisers.
“Who would want to be Chancellor at the moment? On the one hand Mr Osborne is under pressure to boost growth in a stubbornly lacklustre economy; on the other, the budget deficit was a major threat to the UK’s financial credibility even before the country’s credit rating was downgraded. How does he strike the balance?" Lisa Macpherson, national director of tax at PKF, said.
“As if that’s not enough, the Chancellor will also want to avoid a repeat of last year’s post-Budget revolts — policies that prove controversial this year may be career suicide. Wiggle room is perhaps more limited than ever before; we’ve gone beyond the easy choices.
“This all points to a carefully targeted package of incentives paid for by yet another crackdown on tax avoidance.
Small to medium sized enterprise funding
“The Chancellor deserves credit for introducing various measures designed to help entrepreneurs secure the funding that they need to establish and grow their businesses - although there is still more that needs to be done, as the reaction to the Bank of England’s latest lending statistics demonstrate.
“We’ve started to see considerable interest from clients wanting to take shareholdings in SMEs through tax efficient schemes - such as the new seed enterprise investment schemes (SEIS) as well as enterprise investment schemes (EIS) and venture capital trusts (VCT). It shows that sensible tax incentives can affect investor behaviour provided the Treasury gets the balance right.
“However, not every entrepreneur is willing to give away equity in his or her business; some would prefer to borrow funds instead. With peer-to-peer lending, or ‘crowd-funding’, emerging as a credible funding source for SMEs, the Chancellor should give tax breaks to investors who lend money to smaller businesses. Allowing peer-to-peer lenders to earn interest income of up to £5,000 each year tax-free would certainly boost interest in this higher risk, higher reward investment opportunity.
“At the same time, the Treasury needs to ensure that potential investors in smaller businesses are not stifled by excessive red tape. Investments of this type are inherently risky so some degree of regulation is desirable — but it’s vital that the rules and regulations themselves do not deter entrepreneurs or investors.
“It is possible that the Chancellor will look at accelerating the reduction in the main rate of corporation tax to 20% (it is currently due to be cut from 24% to 23% from 1 April 2013) to unify the rates for larger and smaller organisations. However, this is about more than just simplifying the system — it will also provide tangible support for the business community and increase the UK’s attractiveness to multinational companies.
“Mr Osborne recognises that the income tax and national insurance contributions paid by, and on behalf of, employees is increasingly becoming a more important source of funds for the Exchequer than corporation tax. In other words, cutting the rate of corporation tax is likely to more than pay for itself through increased tax revenue from workers in the jobs that it creates or saves.
“There is also an argument that businesses may be less inclined to avoid tax in the UK if tax rates are lower — the financial gain from doing so is smaller whilst the risks, particularly in terms of potential reputational damage, remain the same.
“Having said all this, we might still see some attempt to increase the tax take from banks and bankers. Financial institutions remain unpopular with the public, so attempting to extract more revenue from them is unlikely to spark the type of widespread protests that we saw last year after the introduction of the so-called ‘pasty tax’.
Tax breaks for residential developers
“There is growing support for the Government’s idea of converting empty offices and shops into new homes in order to solve the country’s chronic housing shortage: it’s often a cheaper alternative to building new properties and brings empty buildings back to life.
“As well as the expected relaxation of the planning regulations, the Chancellor should introduce time limited capital allowances for such conversions to incentivise developers to start projects quickly. Developers already benefit from various tax breaks but few of these are directly focussed on residential properties and the persistent shortage of properties suggests that more effective incentives are needed.
“Ideally, this initiative would be combined with the reintroduction of the £250,000 stamp duty threshold for first time buyers, which expired last March.
“Beyond the expected announcement of future increases in the personal allowance towards the Liberal Democrats’ £10,000 target, for 2013/14, the Chancellor could look at aligning the starting threshold of national insurance contributions (NIC) with the personal income tax allowance. Not only will this increase the spending power of the lowest paid and part time workers by several hundred pounds a year, aligning the threshold will also make life much simpler for employers.
Investing in HMRC to reduce abuse
“Budgets are all about giving to some and taking from others. The Chancellor has a clear mandate from the public to give to funds to HMRC so it can take back unpaid tax from tax evaders and avoiders. At a time of continued austerity, it provides the Treasury with a credible and less controversial alternative to raising taxes for the majority or slashing spending in order to cut the budget deficit.
“The new general anti-abuse rule (GAAR), which comes into force in July, further extends HMRC’s powers in this important area. However, a lack of legislative backing is not the issue here. HMRC already has an impressive arsenal of abuse-busting weapons at its disposal - including stringent fines and penalties, confiscation orders and dawn raids — but it still doesn’t have enough suitably qualified staff to use them to full effect.
“Admittedly, there have been a number of announcements recently about additional recruitment at HMRC, but if there is just one spending announcement in the Budget then the beneficiary should be the tax man. Supporting the Government department that brings in the most money is almost certain to prove a wise investment in the current economic and political environment.
“With a capable and motivated workforce in place, HMRC can then consider a more expansive strategy, such as a general tax amnesty followed by an all-out assault on tax evaders using its full range of powers on anyone who has failed to come clean.”
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