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Chancellor gets £7bn wriggle room

Osborne to offer ‘mischievous list of giveaways’ in Budget

Chancellor BudgetChancellor George Osborne may be in a position to offer a few “mischievous giveaways” in Wednesday’s Budget and ease up on the austerity measures.

There are expectations that he will accept the need to help the oil industry, raise tax thresholds taking more people out of paying tax and possibly cut the top rate of tax to 40p.

As first indicated in the middle of last week, he is also expected to allow five millions pensioners to cash in their annuities in what will be an extension to the reforms he announced last year.

There will be further moves to tackle tax avoidance and evasion.

Mr Osborne has extra funds available as a result of better tax receipts and the sale of shares in Lloyds Banking Group.

Economists estimate he will have between £5 billion and £7bn to play with in the final Budget before the General Election and believe he will use this “wriggle room” by offering a few titbits to tempt voters.

PwC suggests that public borrowing could be revised down by the Office for Budget Responsibility throughout the next five years, leaving a budget surplus in 2019/20 of around £30 billion rather than £23bn as estimated at the time of the Autumn Statement in December.

John Hawksworth, chief economist at PwC, said public borrowing was being pushed down by lower oil prices.

He said the figures “may give the Chancellor some wriggle room to, for example, make his assumed real public spending cuts somewhat less severe in 2018/19 and 2019/20”

Mr Osborne could do this while keeping the projected budget surplus unchanged at the end of the next Parliament, said Mr Hawksworth.

“However, this would be a fine adjustment on the tiller, not a significant change in the fiscal stance.”

Simon Blowey, Divisional Director, Financial Planning at Brewin Dolphin, agrees that the Chancellor could offer a few titbits.

“The Chancellor has actually managed to buy some leeway in next week’s Budget, to allow the ‘pre-election giveaway’ ditty to be coined once again,” he says.

“Lower borrowing costs, higher tax receipts, spending cuts and better forecasted long term surpluses in the public finances, will allow Osborne to create a politically mischievous list of giveaways to take wind out of his opponent’s sails.

“Whilst a cocktail of giveaways may receive a cynical response in some quarters, the figures will likely stack-up, with a mooted war-chest of £5 billion ready to be deployed.

“Many will benefit and may just remember the bounce in the polling booth on 7 May 7. A signal that the top rate of tax will be reduced from 45% to 40%, will actually increase the Exchequer’s revenue and can be in exchange for a flat and fair 30% income tax relief on all pension contributions.”

However, a slightly more cautious tone was struck by Stephen Hay, Head of Tax at Baker Tilly in Scotland. He said: “Last year’s Independence Referendum and the subsequent Smith Commission recommendations have focussed attention on the future of taxation in Scotland.  However, as none of the proposed changes to Scottish tax will take effect until at least 2016, the upcoming Budget on 18 March should be viewed in the broader context of the forthcoming UK General Election.

“The Chancellor will want to give the impression that this Budget will be ‘business as usual’ in support of the Government’s long term economic plan. One or two announcements about post-election giveaways are likely, but the public finances are such that any tax promises which benefit some will have to be paid for by tax increases for others, cuts in services or increased borrowings.”

Mr Hay said attention in Scotland will focus on help for the North Sea oil industry, while more generally there is expected to be a further crackdown on tax avoidance and evasion.

He also expects a reform of the UK Patent Box regime amid suggestions that it gives preferential tax treatment to companies that have not undertaken the R&D underlying the patent.

As a result of the increasing pressure to ensure that large corporates are paying their ‘fair share’ of tax, further detail is expected on how the Government proposes to change the way profits arising from international transactions are taxed in the UK, through the OECD’s Base Erosion and Profit Shifting (BEPS) project as well as the UK’s Diverted Profits Tax, commonly known as the ‘Google tax’.

A change to the way business profits are measured for tax purposes is also possible, to address concerns raised by the Office of Tax Simplification.

The Government could announce new legislation to remove the ability of employment intermediaries to allow temporary workers to sacrifice salary and claim tax relief on home to work travel, a practice seen by the Government as unacceptable tax avoidance.

An announcement is also expected on actions to be taken to resolve the uncertainty over individuals’ employment status, which provides the financial incentive for individuals to work with business on a self-employed basis.

If the Chancellor decides to bite the bullet, he may also take steps to harmonise Income Tax and Class 1 National Insurance Contributions (NICs) to simplify payroll for employers and remove the scope for errors.

Another possibility is a change to the company car scale charges for 2015/16 to encourage employers and employees to select greener vehicles.

The Government may announce that HMRC will remove a number of VAT extra statutory concessions, meaning suppliers of long-term residential accommodation (including Higher Education Institutions, hotels and boarding houses) may face higher VAT costs.

The removal of the reduced rate of VAT in the installation of energy-saving materials is also possible. This would have an impact on consumers, housing associations, charities and not-for-profit organisations that are unable to recover VAT on underlying costs.

 >> Daily Business’s live Budget Day coverage will be supplied in association with PwC

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