So, the eagerly awaited Pre-Budget Report has now been delivered and it’s content begins to be analysed.

Once again, henchmen Brown & Darling act as a modern day Ronnie & Reggie. Giving the illusion of lending money, you can be sure they will be demanding it back, with menaces, before you can say ‘protection racket’.

The headline grabber was the TEMPORARY reduction of VAT from 17.5% to 15% for a thirteen month period.

VAT is an indirect tax, a purchase or ‘luxury’ tax levied on voluntary spending so this measure does nothing to put money into consumers pockets. You cannot spend what you do not have.

Any potential benefit with regard to petrol prices is negated by raised duties on fuel.

Furthermore, retailers are already offering massive incentives to get sales, with huge discounts available to tempt consumers to buy. A paltry 2.5% reduction on the VAT element is hardly likely to have any additional bearing on buyers decision making. Has it given you the urge to buy anything that you wouldn’t have done before the rate cut?

In exchange for the VAT ‘holiday’, Ronnie and Reggie have announced future substantial and PERMANENT tax hikes. The most notable being:

- The increase in National Insurance contributions on employers AND employees.

- Higher rate of income tax for those earning £150,000.00 or more per annum

The Krays would have been proud!

Raising NI contributions further will put an additional burden on payroll costs for businesses and does not tie in with economic growth. Raising NI for employees is simply an income tax rise by another name.

The introduction of higher rate tax for high earners is laughable for two reasons:

Firstly, high earners are the backbone and foundation of the economy. It is through their creativity, dedication, drive and risk taking that jobs are created and the economy thrives. There is no place for envy – anyone who earns (by legitimate means) in excess of £150,000.00 per annum deserves to. To tax nearly half of their income over the threshold will incentivise many entrepeneurs to relocate to more tax friendly countries who would welcome them with open arms.

Secondly, most people earning over £150,000.00 per annum would rather arrange their affairs through effective planning to avoid the higher rate, whilst previously just about willing to pay at 40%. Share schemes may come back into fashion (where high earners get paid in employers stock) to reduce their tax liabilities to less than 20%. Whilst the government were ‘getting away with it’ at 40%, the move to 45% could be one step too far and they could find themselves collecting a lot less in revenue from high earners than they are already.

Now for some good news!

The proposed rise of Corporation tax for small companies from 21% to 22% is postponed for a year (but let’s face it, small companies pay too much tax anyway and have already had two corporation tax rises in as many years, AND lost the first £10k of profit at 0%)

Income shifting is also delayed by another year – and with the next PBR falling just before the general election this would be a very poor time for the government to bring in such an unpopular piece of legislation. This is very good news, especially for contractors – many of whom are struggling over fewer contracts at present (try telling those out of work that they are ‘disguised employees’). Furthermore, the double whammy of income shifting legislation AND higher rate of tax for high earners could not be lost even on this government.

So the verdict? Whilst we at Dormer Finance Ltd should rejoice that we will never be short of tax work with this current government at the helm, the lack of transparency and the underhand methods of the treasury leaves a nasty taste in the mouth. Yet again, we as consumers and businesses are left to pick up the tab for the mismanagement of the economy during the good times.

PLEASE CONTACT US IF YOU WOULD LIKE SPECIFIC ADVICE ON HOW THE CHANGES CONTAINED WITHIN THE PRE-BUDGET REPORT WILL AFFECT YOU OR YOUR BUSINESS.