The Pre-Budget Report

Richard Murphy speculates on the forthcoming Pre-Budget Report.

I am still not sure I am a fan of the Pre-Budget Report, if only because it creates a twice-yearly opportunity to speculate on what the Chancellor might do, when once might be enough. I cannot, however, resist the temptation to consider his current scope for action.

Few Chancellors can, in recent years, have faced a more hostile environment in which to offer something to appease a stressed electorate. The government is spending at a level beyond anything it planned, or desired. If Gordon Brown's plan to bail out the banks fails then the burden upon future taxation revenues will be high. The scope for tax cuts seems extraordinarily limited.

We do, however, know that the professional institutes want to see reform of the residence rules, and lurking in the background is the ever-present threat from major corporates to leave the UK if any change to their taxation status is suggested.

The pound is at a low. Not much will change that in the immediate future, especially if interest rates are cut. That only adds to pressure on the economy.

Unemployment is rising, so this is not the time to add to the burdens on business with regard to employment. Small business is under particular cash flow pressure. It is hard to see scope for any increase in taxation in this area.

So is Alistair Darling completely boxed in? Despite it all, I do not think so. He has the opportunity to create some headline-grabbing, business-promoting tax initiatives, even with this background.

There is absolutely no doubt that most people in society would at this time support additional taxation payments by those with very high earnings. I think that starts at around £100,000 a year, but I'm quite relaxed about a higher figure being used. And he has to be sure that this tax will really be paid. That means that avoidance has to be very hard. I have no doubt that this means we should introduce a new band of national insurance, payable on averaged annual salaries (like the directors' scheme) of £200,000 a year and more at the standard employees' rate. This is an effective 10% tax increase for those in this category which it will be hard to avoid. It will be a vote winner.

This is also the time to recoup some of the losses to the Exchequer that have arisen from supporting the banks for the benefit of their depositors. Few could argue with this: it meets the criterion that those who benefit should pay. My suggestion is simple. There should be a class five National Insurance Contribution payable at 11% to match the standard employees' rate, payable on all investment income (interest, dividends, rents, capital gains, and the more esoteric options that the industry will doubtless create to circumvent charges, but excluding pensions of all sorts) of more than £5,000 per annum. That means that those with savings of less than £100,000 should avoid the charge. All pensioners should also be exempt, as would be trusts for the disabled.

That is revenue-raising where the raising of revenue is appropriate. But what is also needed is relief where that is due. That must mean that serious consideration should be given to reducing National Insurance Contributions on the low-paid to protect their employment opportunities.

And it must mean support for small businesses. These might face a particularly difficult time over the next year or two in raising the capital they need to keep going, even if their basic business model is profitable. So, much as I know such schemes are open to abuse, I think we will need to encourage equity investment in small businesses by way of providing tax relief. It is mildly absurd that we give tax relief against income for those who lose money whilst trading with failed small businesses, but do not provide a readily-accessible tax relief for those who provide equity to successful small businesses unless substantial hoops and hurdles are overcome.

I think we should do just that, subject to some reasonable conditions to reduce risk for all involved:

1. First, the business qualifying for relief should be a limited liability partnership (ideally) or a limited company. This means that it will have to prepare accounts in a proper format.
2. Next, this provides protection to the provider of capital who can negotiate a flexible return as a result, whilst registering a charge in support of their loan dependent solely upon the business and which does not therefore put the proprietor's personal assets at risk. It should also protect that provider of capital from a potential claim as a sleeping partner which might arise in the case of an unincorporated business.
3. Also, the trade must be real. It could not, for example, be related to financial services or the renting of property (conditions of all such schemes to date).
4. Further, contrary to some other schemes, the investor and recipient could be related to each other, because to exclude this possibility prevents the most readily available form of capital from relief.
5. Finally, any and every business that accepts an investment of this form would, as a matter of course, have to submit a detailed analysis of its sales income each year to HM Revenue and Customs for inspection with its tax return, or submit a daily sales takings record in the case of a retail business, to prove that real activity was undertaken commensurate with the level of investment made. If that could not be proven then the relief claimed would be denied. In addition, if it were clear that the investment made was simply being used to fund the remuneration of the main participants in the activity, so effectively providing a means of income-shifting, then again tax relief would simply be denied. Targeted anti-avoidance provisions would deal with this situation perfectly adequately. But even so, the result would be a massive boost in the pool of resources available to small business.

Is any of these things likely? I have no idea. But if I were a Chancellor seeking political support at a time when very few options were available, these are the sorts of thing I would be considering.

Article Added Saturday, 15 November 2008

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