Analysis of the Chancellor’s Budget

The Chancellor appeared to heed calls for a simple, do-little budget and took the opportunity to develop and implement the previously announced myriad of changes.  Given the concerns on the fragility of the UK economy and the possible further impacts of the credit crunch, a period of stability will be welcomed by Scottish businesses, but one has to wonder whether there was anything in there that would actually stimulate activity?

Anyone who was hoping for an exciting Budget speech packed with economic stimuli would have been disappointed, however given the number of measures, many of them controversial, that had already been preannounced, it was no doubt a sensible approach for the Chancellor to take. 

As expected, the changes to the rates of income tax and corporation tax already proposed will be enacted.  The much debated changes to capital gains tax announced in the 2007 Pre Budget Report will also come into force, but with an entrepreneurial relief which should still enable certain investors to benefit from a 10% rate of capital gains tax. The Chancellor did offer a lifeline to charities, maintaining their gift aid levels at 22% for at least the next three years.

Changes to the North Sea fiscal regime will also be brought in, as expected, allowing increased levels of corporation tax relief on the decommissioning of North Sea infrastructure.  These will hopefully encourage more investment in the North Sea Oil industry and benefit the Scottish economy.

With a series of difficult changes coming down the pipeline in tough economic conditions, the Chancellor deferred a number of changes which had been expected, including the controversial proposed rules to counter “income shifting”.  This will be welcomed by businesses and give more time for further consultation on what are potentially far reaching provisions.

So on the basis we already the bulk of what was in the Budget, what, if anything, did the Chancellor announce that was new, apart from a series of consultations?

There was some good news for small businesses, with the increase in Enterprise Investment Scheme and Executive Management Incentive relief levels.  These should help to promote investment in small businesses, a key element of the Scottish business community.  The Chancellor has also signalled that the government is dedicated to simplifying the taxation of SME’s, again a welcome relief to a sector which is arguably the engine driving Scotland.

As in previous years a focus for the Chancellor was the environment, with increased incentives being announced for fuel efficient cars, and the changes to vehicle excise duty in 2010 to push up the cost of less efficient vehicles, aimed at encouraging people out of their ‘gas-guzzlers’.  Scotland’s renewables sector also looked to be a winner on the day as Mr Darling announced new climate change measures.  Meanwhile those in the transport industry will welcome the deferral of the planned increase in fuel duty rates.

Unsurprisingly following a media backlash on binge-drinking, alcohol duty was always going to be an easy one for the Chancellor to raise, based on the potential health benefits.  The exact impact of this increase on the Scottish whisky industry will need to be monitored, although there has been a period of almost ten years of duty freezes.

The Chancellor went into his first budget under pressure to revisit the proposed non-domicile and residence rules proposed in the 2007 Pre Budget Report, however he refused to bow down and the rules will be brought in as of 6 April 2008 with only minor changes.  As expected, there will be a £30k charge on non-domiciles resident in the UK for seven years, however this will be creditable against the individual’s foreign tax liability, which will be welcomed.  Scotland’s oil and gas industry, which is particularly reliant on overseas expertise, will be the most affected by these new rules, and there are skilled individuals who may be reluctant to stay in the UK if they will now find themselves resident in two countries for tax purposes. 

Further detail on the reform of the taxation of foreign profits had also been anticipated by companies with overseas interests, however the Budget contained no reference to the proposed reform of the taxation of foreign profits, leaving this as a key area of uncertainty for multi-national businesses.  It is perhaps welcome that there is still consultation and therefore the opportunity to influence changes.

In many ways business got what it asked for, no surprises. The Chancellor announced a raft of consultations and hinted at possible legislation on everything from plastic bags levies to pressures on energy companies to lower energy bills, perhaps lining up for number of exciting new announcements in the next pre-Budget. But for now it was steady-as-she goes, but for how long will the economy stay in calm waters?

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Email: Rhona Irving
Tel: +44 (0)131 260 4011