The Budget 2008
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Welcome to the third of this year’s Budget bulletins
Having looked last week at some business tax issues we want now to turn to the taxation of individuals.
Much as we would love, purely for professional reasons, to predict radical changes to the personal tax system we would be very surprised if we were to see major reform to the basic structure of income tax. Last year’s announcement of the abolition of the 10% rate band comes into effect on 6 April this year and we can’t see this being reversed. So I think that it is a safe bet that when the Chancellor sits down after the speech we will still have the two rates: 20% and 40%, for taxes on income.
But of course, as regular readers of these bulletins over the years will know, behind that apparently simple two-rate headline lurks a mass of highly complicated detail. When you take into account national insurance, tax credits and various special exemptions and reliefs the actual number of marginal rates at which individuals pay tax is much greater. Last time we gave up counting after we had got to a dozen, but we are sure that we hadn’t captured all of them! So we would not be surprised to see some tinkering round the edges to tidy things up.
But we will be looking at the small print very carefully indeed. Last year the Chancellor managed to give the impression in the Budget speech that he was making big tax cuts. The headlines were certainly good – a reduction of 2p in the basic rate of tax – but when we did the maths it turned out that what appeared to be some minor alignment in NIC thresholds had, in most cases, the effect of cancelling out the benefit of the tax cut and, in some cases, increasing the overall burden of taxation. We well remember that on Budget night last year several of the most experienced Tax Directors in the firm worked long hours simply trying to piece together, from fragments of information spread between lots of separate documents, a coherent picture of what the changes actually were.
We have a new Chancellor this year, who has simplicity as one of his key mantras. Let’s hope that he follows his own guiding principles and makes the Budget announcements themselves unambiguous and easy to follow.
So what might he actually announce?
The first thing to look out for is some unfinished business dealing with residence and domicile. Although the main shape of the new regime for taxation of non-domiciled individuals is now relatively clear there are still a lot of loose ends that need to be tidied up and we await details of these. Perhaps more interesting is whether or not there will be any further movement on residence. At the moment the UK doesn’t have a set of clear objective rules for determining whether somebody is resident in the UK. We still have to rely on subjective tests based largely on very old case law concerning master mariners who spend months on long voyages overseas or rich Americans who hired hunting lodges for the shooting season. We think that it is quite possible that we will get some form of further review here. We hope so, because at the moment the lack of precision in our rules does certainly put some people off coming to the UK for fear that they could become classed as resident
The second area is something that will apply to all employees: payrolling benefits. This sounds rather dull but it could in fact make quite a difference. Essentially what this would involve would be the abolition of the PIID and instead collecting tax on benefits through the payroll each month. Given that the PIID is one of the most complained-about forms that HMRC issues, most people will regard this as a very positive development, although there are some concerns that all that this will actually do is accelerate the Government’s cash flow and will do nothing to ease administrative burdens.
So, if we are honest we doubt that many people are going to see huge changes in the amount that the tax man takes out of their income next year. But the position for taxes on capital could be very different from 6 April, and we will have a more detailed look at this in the next bulletin.
Andrew Jupp
National Head of Tax
Andrew Hubbard
National Tax Technical Director
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