Pre-Budget Report expected to target self employed and property

Further increases in National Insurance Contributions, particularly for the self-employed, together with an extra higher rate of Stamp Duty on property, are the most likely targets in December’s Pre-Budget Report as Chancellor Gordon Brown seeks to tackle the growing deficit in the public finances, according to accountants MacIntyre Hudson.

With employers and employees still smarting from the increases in National Insurance Contributions (NICs) that took effect in April 2003, it is likely that the Chancellor will hold off announcing further increases in the main rates in this Pre-Budget Report. However, accountants MacIntyre Hudson warn that Gordon Brown may turn his attention instead to Britain’s 3.5 million self-employed.

At 8%, the Class IV rate of National Insurance Contributions paid by the self employed is 3% lower than the 11% paid by employees, and is little more than a third of the combined rate of 23.8% paid by employers and employees. MacIntyre Hudson warns that this discrepancy makes the self-employed an attractive target, and predicts a 1% increase in the Class IV self-employed rate, which would raise about £1/2 billion a year.

Victor Dauppe, Tax Partner at MacIntyre Hudson, comments:
“We think Gordon Brown will seek to ‘redress the balance’ between the self-employed and employees by increasing National Insurance Contributions for self-employed people. The Inland Revenue will welcome any measures which make self-employment less attractive so that more people are encouraged into the PAYE system.

“However, the self-employed get a poor deal from National Insurance, and any increase will exacerbate this. They receive substantially fewer benefits than the employed, in particular missing out on unemployment benefit and the State 2nd pension. Any increase will also confirm that National Insurance is increasingly a tax rather than an insurance charge for benefits.”

MacIntyre Hudson also warns that the Chancellor may increase the National Insurance Contribution payable above the Upper Earnings Limit, for both the employed and self-employed, perhaps by 0.5%.

Other potential budget changes

Mixed blessings for house buyers
As house prices in the South have rocketed, many middle income home buyers have joined the rich in the privilege of paying the higher rates of stamp duty and, no doubt, will be watching nervously in case the Chancellor further increases these rates.

MacIntyre Hudson believes that, although the Chancellor could claim that further increases would help to dampen the housing market, he will be sensitive to the impact the higher rates are now having on ‘Middle England’ as more property transactions exceed the £250,000 threshold. He is therefore likely to look to the higher end of the property market, while allowing inflation to bring more transactions into the existing higher rates.

MacInytre Hudson therefore predicts that the Chancellor will introduce new bands for stamp duty at 5% on property transactions between £500,001 and £750,000, 6% on property transactions between £750,001 and £1 million and 7% thereafter.

Victor Dauppe, Tax Partner at MacIntyre Hudson comments: “Politically this will be the easiest move for Gordon Brown to make and the one that sits nicely with his own personal beliefs. Naturally, there will be immediate rewards for the Treasury coffers, but the Chancellor can also bet upon a natural increase as more and more properties enter the higher bands.”

Further extension to Capital Gains Tax Taper Relief
Few Budget announcements from the current Chancellor have been free from changes to Taper Relief on Capital Gains Tax, and MacIntyre Hudson believes this Pre-Budget Report will be no different, although this time those in possession of non-business assets stand to benefit.

MacIntyre Hudson predicts that Gordon Brown will announce a reduction – from 10 years to 6 years – in the holding period of non business assets to qualify for the maximum Taper Relief.

Victor Dauppe, Partner at MacIntyre Hudson says: “Whilst taper relief remains a highly confusing area, there is no doubt that this would be good news for owners of non-business assets. With full taper relief now available for business assets after just two years, but only after ten years for non-business assets, there is an increasing focus on meeting the criteria for business assets. By reducing the qualifying period for full taper relief for non-business assets, Gordon Brown could eliminate many of the disputes in this area.”

Budget airlines brought back to earth
Despite lobbying from the Airline industry, MacIntyre Hudson believes that Brown will bite the bullet and announce an increase in Air Passenger Duty from £5 to £10 on short haul flights and from £20 to £40 on flights to other destinations.

Victor Dauppe, Partner at MacIntyre Hudson says: “With many stealth tax routes exhausted, we believe that Gordon Brown will risk the wrath of the budget airline industry – which in effect could lead to a 100% increase in the price of some budget flights. Recent demands from the green lobby for airlines to pay duty on fuel, which the Government cannot impose unilaterally under the Chicago Convention, could be assuaged by the blunt instrument of Air Passenger Duty.”

Respite for consumers
At 17.5%, the standard rate VAT level has not been touched for over ten years. The temptation to significantly boost Government income by a minor increase in the standard rate of VAT, which is still somewhat lower than that in most other EU countries, may seem attractive to Gordon Brown.

However, MacIntyre Hudson predicts that the Chancellor will hold the standard rate of VAT at 17.5%.

Victor Dauppe, Tax Partner at MacIntyre Hudson explains: “Following the recent increase in interest rates (with more expected in the coming 18 months), observers will be keeping a close eye on consumer spending. Increasing VAT, even slightly, could provide a psychological barrier in the minds of consumers – and subsequently exacerbate a slowdown in the consumer spree of the past few years – as well as putting additional pressure on business spending and investment.”

Nov 27, 2003
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