Grant Thornton's wishlist for Budget 2009

With an election looming next year, this has to be the make or break Budget for Chancellor, Alistair Darling. However, with public finances stretched to the limit, rescue packages to support the banking industry and the UK's gross domestic product nose-diving, can the Chancellor get public finances back in order?

What would we like to see on VAT?

At present, a business is eligible for cash accounting if the turnover is no more than £1.35 million. However, it could be argued that this benefit should be extended to more businesses during these difficult times. In addition to the obvious benefit of only having to account for output tax when payment has been received from a customer, cash accounting means that the business will not suffer from VAT bad debts. The cash accounting threshold could be increased to include businesses that have an annual turnover of up to £10 million.

The VAT rate is due to revert back to 17.5% at the end of the year, as set out in last year's Pre Budget Report (PBR) but this would be hard for retailers who will have post-Christmas sales on their mind and will not welcome the administrative distraction of having to alter prices. Equally anyone affected by the VAT package changes in January 2010 (broadly those with cross-border trading) will not welcome another significant issue to deal with. The Chancellor needs to give a clear steer on this issue on Budget day to give certainty and clarity for all those affected.

What about business taxes ?

Tax simplification for businesses. Many businesses find the corporate taxation system in the UK complicated and not always as competitive as its neighbours so, at a time when the UK is desperate to attract foreign investment back into the country, the Chancellor should look at ways to improve the corporate taxation system. While the Chancellor attempted to address the issue of simplification for smaller corporates at last year's PBR, and is proposing to introduce an exemption for foreign dividends for large and medium sized businesses, the Government still needs to look at further ways of reducing the tax burdens and legislation for businesses.

The complex tax structure in the UK is arguably why so many multi national companies (MNCs) are moving their holding companies away from the UK. The country needs to bring investment back into the economy and simplifying business taxation would provide the incentive to large MNCs to choose the UK as a location for their holding companies.

Small companies rate change. The increase in the small companies' rate of corporation tax to 22% was scheduled to come into force in April 2009 and it was announced at the PBR that the increase would be delayed until April 2010. If this were delayed until April 2011 it would allow small companies to get back on an even keel before this rate increase is enforced. Steady cash flow management is essential for businesses in these uncertain economic times and an increase in the rate of corporation tax is another burden that small companies can live without.

Greater relief for losses. An extended relief for £50,000 of trading losses was announced in last year's PBR. The extension applies to losses arising in the 2008/09 tax year for unincorporated businesses and for losses incurred in accounting periods ending between 24 November 2008 and 23 November 2009 for companies. After the unrestricted one year carry back of trading losses, the remaining loss of an unincorporated business can be carried back against profits of the same trade, profession or vocation to 2005/06 and 2006/07 too, but for companies, the extended £50,000 three year carry back is against all profits (i.e. not restricted to trading profits).

Although a welcome relief, there needs to be greater consistency between the application of the rules for unincorporated businesses and companies. Most importantly the restrictions for unincorporated entities may be less helpful to businesses that face their worse losses in late 2009 which will not qualify for the extended relief.

Change to the tax year end. The current tax year end is 5 April for income tax, capital gains tax and inheritance tax.

Corporation tax is generally driven by accounting dates, which some businesses also adopt for VAT purposes. However, changes in rates and thresholds for corporation tax and VAT are normally introduced with effect from 1 April each year. The current April year end in the UK is based on feudal law and seems anachronistic in this day and age. Aligning the tax accounting year with other countries, such as 31 December so that it is in line with the rest of Europe, would make the UK an even more attractive place to invest.

What personal tax measures can we hope for?

Push on savings. A rise in the current ISA savings threshold from £7,200 to £9,000. The expanded threshold would help to alleviate the impact of the reduction in interest income for savers caused by falling interest rates following recent cuts in the interest rate by the Bank of England.

Stimulus in the property market. The temporary reduction in stamp duty land tax has not yet been enough to bolster the market. A package of measures to stimulate the property market could include more support and help given to first time buyers, more availability of mortgages to first time buyers, a reform of Stamp Duty Land Tax including the abolition of the 'slab system' that causes artificial price ceilings around the thresholds and greater protection for those with mortgages.

Review of personal allowances and thresholds. The income tax personal allowances levels are set to be worth £6,475, rising to £9,490 at age 65 and to £9,640 for those 75 and over in the 2009/10 tax year. National insurance contributions will be payable from a lower threshold of £5,715 per annum or £110 per week.

The income tax personal allowance for the under 65s and the NICs primary threshold are not set to be realigned until April 2011. Tax credits start to be withdrawn at yet another different income threshold of £6,420. This leads to a range of confusing marginal tax rates for individuals with income around these levels. Alignment would simplify the system.

As well as not being aligned, all of these figures are much lower than someone working 37 ½ hours a week on the minimum wage would earn and it seems ill-considered that the minimum wage suffers a tax liability. A person working 37 ½ hours per week on the minimum wage of £5.73 an hour would earn £11,173.50 per annum.

Withdrawal of personal allowance. The Chancellor announced in last year's PBR that from April 2010, the income tax personal allowance will be reduced in two stages for those with gross incomes above £100,000 and £140,000. This creates an effective rate of income tax of 60% in small bands of income above these thresholds.

Not only will people be keen to undertake planning, for example by making pension contributions to ensure that their income does not fall within one of these narrow bands, it will also prove an administrative headache as PAYE coding notices will simply not be able to cope with this mechanism of withdrawal. There has been much lobbying on this point, in the hope that the Chancellor will come up with a sensible alternative at the time of the Budget.

Francesca Lagerberg, Head of Tax at Grant Thornton says: "The Chancellor has now conceded that he will have to revise his economic forecast for 2009-2010 alongside his forecasts for government borrowing and that his Pre-Budget Report (PBR) predictions were wrong. With the recession now in full kilter, Darling will be hard pushed to hand out any significant tax benefits. His focus is more likely to be on how financial stability can be restored to the UK and allaying fears for the distressed state of the public finances. "

Please contact us if you would like further advice on any of the above.