JOURNAL 38

THE BUDGET

Gordon Brown’s budget last week was an odd affair. As his last budget before becoming Prime Minister (he hopes) one might have expected the normal mixture of lots of anti-avoidance provisions, increases in allowances and rate bands in line with inflation and not much else. Instead we got a reforming budget that seems far more appropriate to an incoming Chancellor than an outgoing one. Indeed we seem to have got four budgets, Gordon’s 2007 budget, his 2008 budget, his 2009 budget and his 2010 budget all rolled into one. Perhaps there is nobody in the Labour party that he trusts as Chancellor to himself as Prime Minister so he is going to have to appoint somebody uninspiring to carry into effect the changes that he himself has already laid down.. Or perhaps he remembers that for much of the 19^th Century the Prime Minister also acted as Chancellor and Gordon intends to resurrect this practice, so is now laying down the foundations for the reforms he will carry out over the next few years.

Although the budget appeared to be a reforming budget, in reality he has not made grand changes but is merely proposing to tinker with the system. The logic of some of the changes is difficult to fathom. For example, the main corporation tax change is the proposal to reduce the main corporation tax rate from 30% to 28% (although not until next year) but this is to be paid for by substantially reducing capital allowances. The effect of this is to penalise the UK’s dwindling manufacturing industries in order to reduce the tax on service industries, which seems a very strange combination for a Labour Chancellor.

Perhaps the nastiest surprise was the proposal to increase the rate of tax on small companies from 19% to 22% by means of a 1% increase each year until 2009 but to compensate some businesses by allowing 100% tax relief on the first £50,000 of expenditure on plant and machinery. This is likely to result in a reduction of the tax bills of manufacturing businesses paid for by higher tax bills for the service and retail trades, which are unlikely to have heavy capital expenditure on plant and machinery in most years. The logic in discouraging capital investments in plant and machinery by large companies by slashing their capital allowances and at the same time encouraging that by small businesses by increasing their capital allowances is hard to discern. Gordon Brown has justified the increase in the tax on small companies by saying that he wishes to discourage small businesses from incorporating solely to reduce their tax bills. As his starting rate of tax, which he introduced in 2002 and scrapped last year, was seen by many as an encouragement towards incorporation, this looks like a U turn on a massive scale.

The other supposed reform – a reduction from 22% to 20% in the basic rate of income tax in a year’s time - is to be paid for partly by scrapping the 10% lower rate in relation to earnings and pensions (but oddly retaining it in relation to investment income) and increasing national insurance contributions for employees. There has been a fair amount of press comment that the effect of this is to increase the tax bills of the lower paid in order to pay for tax reductions for the middle classes, again an odd strategy for a Labour Chancellor. Gordon will of course retort that he is increasing child benefits and working tax credit to protect the lower paid. To an extent that is right, but there will still be quite a number who are worse off.

For those interested in the details of the budget and my reaction to them our budget booklet can be found on the Blackstone Franks website at www.blackstonefranks.com

Robert W Maas