Chancellor Alistair Darling’s Pre-Budget Report is one of the most important Pre-Budget Reports in living memory. Unlike the rest of the G20, the UK is the only country still stuck in recession after its economy contracted for the sixth straight quarter in November. With the projected fiscal deficits for 2009/10 and 2010/11 being revised upwards from £175bn, businesses are facing more attempts by the government to claw back cash.

How will the new changes affect your business? From corporation tax, VAT and stamp duty, the green agenda and employee issues, there are a lot of adjustments that need to be made. Companies must react quickly and sensibly or face being left behind by the competition.

In our live and interactive WebTV show Stephen Herring and Tony Spillett, Tax Partners from BDO, will explain exactly how the Chancellor’s Pre-Budget Report will affect your company and offer expert advice on how to handle the changes. Submit your PBR related questions ahead of time here:

Stephen Herring  and Tony Spillett join us live on Thursday 10th December at 12.15pm to discuss the Pre-Budget report.

For more information visit www.bdo.co.uk/prebudget2009

Hello, I’m Jane Constantinis, welcome to the business show. Against a backdrop of one of the most challenging economic times since the 1940s, the chancellor has unleashed his pre-budget report. On today’s show we’ll be analysing his plans and looking at what it will mean for you and your business. Joining me to do that are tax partners, Steven Herring and Tony Spillett from accountancy firm BDO. Gentlemen, welcome. And of course we’re live, so if you’ve got a question for our guests then type it into the box on your screen and send it to us with your name, of course we’ll get through as many as we can during the course of the show.

Erm, Steven, let me start with you: the two sort of, headline-grabbers, in the media certainly, have been National Insurance and the 50% tax on bankers’ bonuses. What though has grabbed your attention? What’s your overall impression of the PBR?

Well, if you look down the summary schedule included in the PBR, about the big tax collections and the tax spending, those are the only two items that really jump out at you. In other words, a lot of the other measures cost so little that they really mean so little or collect so little that you wonder why the chancellor was bothered with them. So we’re quite disappointed at the number of environmentally-friendly tax reliefs that were made available; they add up to a row of beans really. And correspondingly he still hasn’t shown his hand about where the big tax collections are going to come to with the exception of National Insurance to close the horrendous fiscal deficit that he’s facing.

Yeah, what about you Tony? Is it more what he’s left out that’s of interest?

I think it is because you’ve got to be really optimistic to agree with the growth forecasts that are in the pre-budget report, which are intended to close the gap between the level of spending and the level of receipts that are coming in and I think that there is a lot more to come. And it is a real shame that business will not be able to plan in any sort of medium-term way because we just don’t know what that is going to look like when it comes out.

I mean, as tax experts, you presumably spent a lot of time anticipating what might be in it. Were there any big surprises?

Erm…I suppose the biggest disappointment is that in targeting National Insurance, which was a fairly obvious target that has included increasing the employers’ National Insurance, which is a tax on jobs and unemployment is high and still rising, albeit somewhat more slowly than it was a few months ago. So that’s a big disappointment. I suppose the second one would be that he has not addressed the issue of our headline corporation tax rate of 28%, which is still higher than most of our European and global competitors. And I would have thought it wouldn’t have cost him very much to have indicated that over the next 2, 3 years that he was going to reduce that to a 25% rate. Er maybe the highest 25, maybe lower, because we have the Irish with a 12 and a half % rate, Poland with a 19, even the German Federal rate er before their state tax rate is only 15%. So that’s a disappointment and he er…he could have done that whilst still making his sums add up.

Mmm, what about you? Surprises? Disappointments?

Yes erm not too many surprises, given the timing of the pre-budget report and the election to follow. But erm certainly disappointments in that erm I think actually, he needs to really consider himself responsible for making the UK a good place for corporates to locate themselves and for entrepreneurs to do business. And that is the basis on which tax receipts will increase, ultimately. And by saddling corporates with a lot of uncertainty as regards the future taxation of overseas profits, er with red tape in the form of senior accounting officers and XPRL filing and with this still relatively high now erm mainstream rate, not only is he making the UK an attractive place to leave –and there is a whole list of companies that have left and are planning to leave- er but he’s just not making it a competitive place amongst the major European territories and that’s my real worry –that the entrepreneurial spirit is not going to fill the UK as a good place to do business in.

So what size, I was going to ask you who were the losers, what size of business has really come in for the worst attack as it were?

I think it’s the largest business really, will find this the most unsatisfactory pre-budget report. It’s those big international businesses that employee a lot of people and contribute a lot of tax, er will still be looking to see whether the UK is the place they want to locate their headquarters now.

What about small businesses?

Well I think that um there’s a bit of a feeling here that he’s run out of steam. There were no great reforms; he announces that he’s going to increase the small companies’ rate of corporation tax from 21 to 22. Then now, he deferred it last year, he’s deferred it again, I think probably small businesses are going to start to be confused about what the messages are; you’ve got an increase that was proposed that’s been deferred twice, should you feel good or bad about it? That he still seems to have left it on the agenda that it might be increased, and he’s trying to say it’s a relief the fact that he hasn’t increased it. I don’t think many small businesses will view that as a relief. I think there’s another area which small businesses are really focused on, which is if you can’t have much lower taxes, at least you could have much simpler taxes. And really we haven’t seen him significantly reduce the complexity of tax compliance for entrepreneurial businesses, I mean it’s similar for the large businesses as well, but I think the entrepreneurial businesses feel it particularly acutely and I think there’s some...there will be some understandable disappointment that he’s not making compliance easier for those businesses.

Mmm. Let’s take a question that’s come in apropos of that. We’ll come on to individuals in a minute. But Rachel Cox has said ‘How will the rise in employers’ National Insurance contributions inhibit the level of employment? I’m concerned about this.’ I’m guessing that she runs her own business. How would you answer that Tony?

Well now effectively when you’re taking some one on, you’re going to have to pay –in addition to all the costs alongside their salary- a 13.8% charge to the government, whereas previously it was 12.8. Many will say that 13.8 is still relatively cheap in the European context, but actually the more that keeps going up, the more that people are going to have think twice before whether they do have a real, new position available, or whether they can just work everyone else a bit harder! Because it is quite a big tax.

That’s for the growing businesses, if you look it, you flip it round to a business that’s, you know, struggling for the moment –obviously it’s been a difficult time and a credit quake for a lot of businesses. Quite often I hear clients talking about having to take, you know, a million pounds/five million pounds out of the payroll cost. Typically you think in terms of a cost that you’ve got to reduce, and now of course you’ll be saying well in a couple of years’ time erm, there’s a higher cost of National Insurance, so it might mean that in the that a few more people go than would’ve gone because you’ve got this coming over the horizon of a higher rate of employers’ National Insurance. In my view, the better thing to have done would have been to have put all of the cost onto the employee rather than onto the businesses. Because at the end of the day it’s much better to have people in work; paying tax, paying National Insurance than out of work receiving benefits.

So why do you think…he didn’t do that?

I think that, he…it’s collected…it collects nearly 5 billion in total –the increase. And I think it’s just been ‘well we’ve put half a percent on and we’ll increase that across the board on all the rate to 1%’ and it brings in the best part of 5 billion, which is a good chunk out of the probably 20 billion that he’s going to need to collect to balance his books, after you know, dramatic public spending cuts he’s still probably going to have 20/25 billion that he’s got to look to tax revenues to support.

So businesses, there’s bad news, but also you’ve talked about uncertainty which is very damaging isn’t it? -To confidence and growth and so on. What about from an individual perspective? Obviously we’ve got the 50% tax on bankers’ bonuses, what other measures were aimed specifically at individuals?

There was relatively little actually. Inheritance tax rates were…inheritance tax free allowances were left where they were. There’s talk of freezing of the higher rate threshold, but not until 2012/13, I think. There’s actually relatively little in there. There are some good things, in that there was no announcement of income tax rates going up again, capital gains tax now remains…actually sticks out as being quite cheap in the UK tax contexts. Which I think is a good thing. We mustn’t forget though that the bankers’ bonus tax, as currently drafted, effects more than just bankers. So it extends far more widely into the financial services community, I’m not sure whether that was by design or by accident –I’ve got a feeling it was by accident. But that draft legislation will need a lot of tightening up if what he wants to really do is to effectively force those banks that have received state aid to think twice before paying money out to their staff in bonuses and to keep that money there as a way of additional…putting additional lending into the system.

Yes I think the two messages, I would say for the individuals are: that one of them is I fear that there might have been some sort of…to use the term that’s now come into tax: anti-forestalling, you know, he’s stopped people putting a lot of money into pension funds, before the new rules for the over 150,000 people came into effect, so for the 2 years there’s this anti-forestalling provisions. What he might have done is to have a look at another set of anti-forestalling provisions for the higher rate of tax, the 50% rate of tax, and you can have some relatively straightforward situations, like an owner-managed business that trades for a limited company feared that he might somehow try and say well if you pay an unusually high dividend in the current tax year, before the 50% comes in, we’re going to try and tax part of that dividend. Thankfully he’s not gone there, I think he’s quite right not to, it would’ve been a nightmare and would’ve involved thousands and thousands of hours of correspondence about what’s a normal dividend and what’s an unusual dividend. So I think that there is probably that modicum of satisfaction that that wasn’t introduced. Now the other area where I would say that for all higher rate tax payers er that are perhaps below the 150,000 there is the issue that tax reliefs are received at the marginal rate of tax, like for pension contributions. So I think that that probably stays on this transfers list as something that he might return to and even at the budget next March, so I think individuals…the advice would be: use those reliefs whilst their available at the higher rate because… to the maximum extent that you can –like for a pension contribution, because it might just be that he needs money if the growth forecasts don’t look like they’re going to be met, then he could make the argument from a political standpoint that all taxpayers should receive the same amount of relief for a personal allowance or a pension contribution regardless of the amount that they’re paid.

You’ve touched there on things that were left out of the budget. Things that were waiting in the wings, as it were, vat and income tax to name but two. What do you think is on the backburner?

Well we’ve clearly seen National Insurance, which has been dealt with probably, for the moment. I think V.A.T is definitely on his list –I don’t see why it wouldn’t be. It’s a very simple tax to amend and collect a very large amount of money from, and we’ve got examples from across Europe of rates up to 25%. It just wouldn’t surprise me to see that the rate goes up again, which could even produce a further, little mini spending boom if it was announced in advance. And I would be surprised if he’s finished on income tax. I mean there are also some potentially good things that are waiting in the wings as well; there was an announcement yesterday on the patent box which would provide a reduced rate of corporation tax, I think it was talking 10%, for um income deriving from new patents after 2013. But we won’t see what that is actually going to mean for about another year. Er so I sense that we haven’t got a lot of clarity over potentially good things for business that might be about to happen, but I think that everyone can see the writing on the wall for the vat rate. Potentially more on income tax and even CGT.

Yes on income tax I agree with Tony that we haven’t seen the last of it, I mean because at the end of the day the really big tax collectors are National Insurance, income tax and V.A.T. You would have corporation tax on that list but er a lot of it was collected from the financial services sector which has found other ways to reduce its tax viability sadly in the last year or so. So he will look again, if he needs to collect revenue, to those 3 largest taxes. I suspect with income tax he wouldn’t increase the basic rate because that is so much a political totem, so it would come more in terms of er reducing reliefs, like we were just talking about, with pension relief er contribution relief. So I think it could well return to income tax but it probably wouldn’t be the basic rate that he’d look to.

Mm. Let’s take a question that’s come in from um Dan Martin from businesszone.co.uk. Do you have any more details on the Government’s new 500 million growth capital fund that was announced in the PBR?

The…as I understand it, we’ve been here lots of times and to some degree this is re-hashing old products that we already have available. I remember many, many years ago there was a fund to…that I think Tony Benn was one of the first sponsors of it. And we’ve had these things keep returning. Now as often as not you find that it’s an announcement on the day that sounds you know, excellent, but quite often the criteria end up being so tight that people find it very difficult…to get their hands on the money…to get their hands on the money and that’s what I fear: we haven’t seen the full documents about it yet. I fear that that’s probably the maximum it might cost, and some of these schemes have a very very low take-up indeed because people that, to meet the scheme you could get the funds from another source.

Oh re-hashing, you old cynic! Surely not!

The pre-budget report document is actually littered with um a whole graft of potential new allowances and pots of money and good-sounding things like that, but having some experience of trying to get clients um within them, the classic one is the R and D relief which is quite hard to get unless you’re a pure research organisation. Er I’m quite cynical I’m afraid about those.

It’s in your job description, I think to be cynical isn’t it?

Ah this is true.

Let’s take this question from Simon Jenkins: Give us an insight into what this PBR has meant for your last 24 hours, as a business you’re having to advise your clients on the implications no doubt. Steven how busy have you been? How many calls have been coming in?

Erm in the …in the run up to the PBR there was some caution about those people who anticipated having capital gains. There was a fear that that 18% rate might be increased by 10% to reflect that…the top rate of income tax increased by 10%. So there was certainly some crystallisation of gains at the 18% rate, normally only if you really knew you were going to have that um that it was going to be taxed anyway. You may as well do it at 18% now than wait for the PBR of course as it turned out that was not necessary, but people only really did it when they knew the tax was going to be crystallised. Some people paid some dividends, for the reasons we were discussing, just from fear that the rate of dividend tax might go up or that there might be some sort of anti-forestalling provisions. So there was…now it’s not wrong to have secured that you get an existing treatment. If it turns out that you didn’t need to, you’ve not lost anything, so I think in the erm in terms of immediately after the budget and the PBR, I have a lot of clients in the real estate sector, the construction sector, there was erm a lot of disappointment that some of the treatment to UK real estate investment trusts wasn’t clarified. There was disappointment that there wasn’t some simplification of the qualifications for capital allowances. At the moment the government have this website for energy efficient plant and machinery and frankly it is just so over-engineered and expensive to go and look through these lists in terms of time that a lot of people just don’t bother with it. So I think there was a disappointment that there wasn’t simplification for businesses and but as I say it’s the National Insurance and the bankers’ tax which were the two big items.

Yeah. We’re almost out of time. Can I ask you in literally 10 seconds to say, do you think he has achieved…he will achieve his objectives? And will this damage the UK and London as a financial sector?

I think if he wants to achieve his objectives in relation to the financial responsibility act he’s going to have to follow this up with a lot more er meat in terms of tax increases in the April budget which will be two months before the election. And I don’t see this budget as making the UK a more attractive place to do business.

I’m concerned that over the next month or two, at some point, the financial markets will say do we think we know enough about his plans to raise extra taxes if he doesn’t meet his growth forecast. That there will be a lack of confidence that he hasn’t shown his hand. So far as the UK is concerned, I think the bankers’ tax was a bad idea, although you know people outside the banking sector may sympathise with some of the motives. I think it was a bad idea because it’s another thing where the UK seem to have taken the lead in taking something to a less business-friendly environment. People do remember these things and he’s already done it previously with Non-Doms and erm some people who at the margin say well do we come to Geneva or London? There’ll be a few more who look to Geneva rather than London, which is very disappointing.

I’m afraid we’re out of time, thanks very much. Let’s come back and er see if your predictions come true in about 6 months shall we? Thank you very much. Thanks for watching, for further information and of course if you need any tax advice you can visit bdo.co.uk. Thanks very much, see you again soon, bye bye.