Budget Briefing
Originally sent: July 19, 2004Chancellor Brown has gained a well earned reputation for spin, and this year?s budget sees no change there.
The Chancellor refers to ?freezing? the rates of Corporation Tax and Capital Gains Tax. This makes it sound as though one would normally expect the rates to increase each year, perhaps in line with inflation, like thresholds. But rates don?t have to increase with inflation ? if the percentage is fixed and the profit or gain increases with inflation, the tax increases with inflation too. And according to the Chancellor, British industry is growing faster even than inflation. So a ?frozen? tax rate will net the Treasury an increased income in real terms. So much for ?freezing? tax rates. A very clever choice of words by a very clever Chancellor.
And why did he single out Corporation Tax and Capital Gains Tax when he referred to this ?freeze?. Why not mention Income Tax and National Insurance too? After all, he has also ?frozen? those rates of tax. Well, to me the choice of the word ?freeze? almost implies a temporary state of affairs. Perhaps the Chancellor recognises it could be political suicide to increase the rate of Income Tax or National Insurance and has no plans to do so in any future budgets ? but as for Corporation Tax and Capital Gains Tax ?????
First year capital allowances for small companies have increased from 40% to 50%. This is a good move for industry, but the Chancellor has made it seem much better than it is in his example. He gives the example of a company with ?25,000 pre-tax profit and a ?10,000 investment in capital equipment ? and refers to a reduction in that company?s tax bill of nearly ?3,000. But wait a minute ? my calculation is that this company will only be ?237.50 better off, so where does the ?nearly ?3,000? come from? The answer is, Mr Brown is comparing the tax rates this coming year with the rates in 1997 ? seven years ago. Hardly a fair indication of the effect of this measure. And I am sure more people heard or read the headline ??3,000 less tax? than noticed the vital ?in 1997?.
Most of the industry has been predicting the Chancellor would impose National Insurance on dividends. This assumption was made from a statement in the pre-budget speech about the need to ensure the ?right amount of tax? is paid regardless of whether profits are extracted through dividends or bonuses. I, for one, did not expect such an imposition, and made this clear in an earlier e-journal. Even I, however, was surprised by the very mild form the Chancellor?s action took. Only companies with profits below ?50,000 will be affected. Low profit companies which would normally enjoy Corporation Tax rates below 19% or even no Corporation Tax at all on their profits, will now have to pay 19% Corporation Tax on all profits distributed through dividends.
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