The chancellor has his hands tied when it comes to making big changes on Wednesday
Chancellor of the Exchequer George Osborne has, by common consent, extremely limited room for manoeuvre in this Wednesday's Budget, thanks to the scale of the government’s deficit
Partner at tax accountants TMF, Richard Asquith, says the scale of the shortfall means that tax cuts will not be on the agenda on Wednesday.
“Given the situation that the chancellor of the Exchequer finds himself in, what can be done is very limited. There are no opportunities to cut taxation at the moment,” he says.
Much of the fiscal framework for the next four years, including the headline rate of corporation tax was set out in last summer’s emergency Budget.
The main rate of corporation tax is due to go down from 28% to 27% on 4 April – the first in a series of phased reductions planned for the rest of the parliament.
“The significant headlines are done, although there might be some tinkering,” says Asquith.
Bringing forward CFC rules
The one exception to the wider block on tax cuts revolves around the tax treatment of UK-based companies’ foreign earnings, which are governed by so called Controlled Foreign Company (CFC) rules.
Last year’s Budget contained a pledge to reform by 2012 the existing CFC rules, which many insurers blame for moves to relocate their headquarters from the UK.
The government looks set to bring forward these changes, which are designed to cut the tax UK multinationals pay on their foreign profits, in this week’s statement.
The ABI says it is keen for the government to keep up the momentum on its ambition to have the most competitive tax regime in the G20.
IPT - an easy win?
Meanwhile, the tight fiscal situation that the government finds itself in has inevitably heightened concerns that Osborne will use this week’s Budget to raise insurance premium tax (IPT).
Last year’s emergency Budget saw a 1% rise in the standard IPT rate, the first in nearly a decade, which came into force at the beginning of January.
“I don’t think that’s the end of the story for IPT,” says Asquith, who points out that even the new higher 6% rate is “considerably lower” than the European average IPT of 9%. “We know that the Treasury has looked at this,” he says.
A Biba spokeswoman acknowledged that IPT could be a “quick and easy win” for the government to raise some much-needed additional revenue.
She adds: “We would be really concerned if there was any increase in IPT. We have research showing that sectors have cut insurance protection during the downturn.”
Asquith doesn’t believe that the increase will happen in this week’s Budget, however, partly due to be the poorly handled implementation of last year’s increase.
Keep it simple, please
On a wider front, Lloyd’s finance director Luke Savage urges ministers to be careful about any tax changes they are planning to make.
He says: "We hope that any reform will be business friendly in order to maintain London's competitiveness and appeal.
"The insurance industry is already facing an ever-increasing regulatory and compliance burden, both with Solvency II and the changing UK regulatory structure, and we hope the government won't compound that by further complicating an already onerous tax regime as it seeks to reduce the budget deficit."