Monday, 26 March 2012

A Budget for Millionaires, not Business or Granny? I Don’t Think So.

Last Wednesday, Chancellor George Osborne delivered his third budget to the House of Commons on behalf of the coalition government that was trailed as a budget for business, a budget for economic growth. Since then, there has been much media fall-out surrounding his “Granny Tax” and tax breaks for millionaires, but little about what this means for UK plc.

Not unexpectedly, the opposition jumped straight on the headline cut in the higher rate of income tax suggesting that this was unfair and had been enacted for the benefit of the Chancellor’s Christmas card list. I remember thinking at the time, had they really listened to the same budget speech the rest of us had? With selective hearing, they proceeded to ‘spin’ the message for their own purposes. They also, conveniently, forget to congratulate the Chancellor on taking many more people out of tax altogether with the further large increases he announced in the personal tax free limits.

Independent research shows that the 50% rate of income tax, a time bomb legacy from the final days of the Gordon Brown administration, collects no more tax for the treasury than if it had been set at 45% (which was Alistair Darling’s original intention when it was introduced). Indeed, let’s not forget that this is an additional level of higher tax in addition to the upper level tax of previous generations. How can this be fair? I hear the well-worn phrase, “Those with the broadest shoulders should carry more of the burden”, far too often these days – what about being equitable? If everyone paid the same flat rate of income tax, say 25% on every pound of income earnt, we would all be paying our ‘fair’ share, and those with the broadest shoulders would still be contributing considerably more into the coffers!

From a business perspective, with a tax rate the fourth highest in the G20, the 50p tax rate had to be tackled to show the world that the UK is a great place to invest and would be a fair regime for your executives to work from. Reducing this headline rate to 45p does this, although there is still the case for removing this very top rate banding altogether (or at least increasing the threshold to start paying the 45p to £250,000 – earning £150,000 pa does not make you a Millionaire). And in conjunction with the further reduction in Corporation Tax rates for large businesses (with the aim of bringing the CT rate down to 20%), it is a very powerful message to global business – and no surprise that GSK have already subsequently announced a £500m investment in its first UK facility build for 40 years.

One disappointment for business, particularly the manufacturing and engineering sectors, is that there has been no continuation of previous breaks in capital allowances. Surely this is an area that needs looking at during the green shoots of a recovery in order to get companies buying capital equipment again and gearing up for growth?

As for the so called “Granny Tax”, no one has been taxed more – a freezing in the increase of pensioner’s tax free allowance to bring it into line with the rest of the country will affect no one for the next year. But when it does kick in then it is equitable – after all, why should this class of citizen be given additional tax breaks to the rest of the population? Let’s not forget that the current generation of pensioners have had the good times of bull markets, property value increases and inflationary gains. Indeed a recent report suggests that the following generations have little or no hope of ever being as well off.

The message of this budget is that the Chancellor, with very little room to manoeuvre in these difficult economic times, has done quite a lot to encourage inward investment to the UK, to make this a place to do business, and to start the process of economic growth. He should be commended.