I always try to comment on the Pre-Budget Report in ways that Financial Advisers may find helpful. Here are my thoughts on Mr Darling’s efforts this year, with a hopefully forgivable personal twist.

Corporation Tax

One of the headlines of this report was the 2% reduction in the Main Rate of Corporation Tax. Very laudable, except this is not a new announcement at all. It was originally announced six months ago in the 2007 Budget. Shades of Brown here (who is still apparently exercising the same tricks in his announcements of troop reductions – a leopard’s spots and all that!).

At the same time as big business is celebrating this 2% tax benefit, small businesses all over the country will be suffering a 2% additional tax penalty – the Small Business Corporation Tax Rate will rise from 20% to 22%.

Small Business

Overall, next year’s budget will be very much an attack on small business. An increase in the Corporation Tax Rate. A proposal to achieve with yet more legislation the Revenue & Customs attack on husband and wife companies which the House of Lords thwarted in the infamous Arctic Systems case. A near doubling of the Capital Gains Tax hard working business people will pay when they try to sell their business at the end of their working life.

We might also consider the reduction of business support schemes from 3,000 to 100 part of this attack. Maybe I am being too cynical here. Maybe this is a genuine attempt to reduce bureaucracy? Or is it more likely an attempt to reduce spending in this area?

Capital Taxation

The two big changes highlighted by most commentators are the modifications to the Inheritance Tax system and the revamping of the Capital Gains Tax system.

In at least one respectable newspaper report it was suggested the Inheritance Tax Nil Rate Band had been doubled to £600,000. This is at best a half truth. The Nil Rate Band has not actually changed at all. Even the announced increases over the next three years had already been announced in the budget earlier this year. But what has changed is something much more fundamental and something which to me is eminently sensible.

Previously a married couple (or partners in a civil partnership) each had a Nil Rate Band of £300,000. Any assets passed from one to the other were free of Inheritance Tax but could result in the combined estate paying more tax through wasted relief. This resulted in a number of quite complex tax avoidance schemes, many of which involved the marital home, and many of which were aggressively attacked by Revenue and Customs.

No more. There will be no need. Any of the Nil Rate Band not utilised by one partner will simply be passed to the surviving partner. Mr Darling in his preamble announced there would be measures to “make the tax system fairer???. Usually this is code for “let\'s make sure anyone over the national average wage pays a lot more tax - unless they are an MP, of course!??? But in this case, and the words stick in my throat as they say them, I really do think the Chancellor has come up with a vast improvement which is a lot fairer than either the present system or anything I have heard proposed elsewhere (other, perhaps, than scrapping Inheritance Tax altogether).

The promise to consider house price inflation when setting the Nil Rate Band is welcome too, if we can believe this promise will make much difference. The problem is, how can we really measure whether or not they do live up to their promise? Note that the promise is not that the Band will increase with house price inflation, but only that the government will “consider??? house price inflation when setting the band – a very different matter entirely.

My view on the Capital Gains Tax change is more jaundiced. If implemented as Darling has suggested, the change to Capital Gains Tax would certainly be an enormous simplification. The current system is so complex that even many qualified accountants seem to give inaccurate tax advice. Having a “one rate fits all??? approach is most certainly a lot simpler. But it would also remove the tax incentive to concentrate investment in long term rather than short term projects and to focus on the smaller businesses that are the backbone of our economy. Simplification is good in theory, but not if, as seems par for the course, it is synonymous with “let’s increase the tax burden??? which is what really seems to be happening here.

Pensions

There was the rather pompous statement that “successive governments??? have introduced generous tax reliefs to encourage pension saving. This is nothing new, and not even something introduced by Labour. In fact as we all know this government reduced tax relief through Brown’s infamous tinkering with dividend tax credits. Strangely, there was no mention of THAT in the report!

Not so much pompous as ominous was the statement that the budget would “tackle deferral of Corporation Tax through structural management of employer contributions to pension schemes.\" We have only just settled into an understanding with the Revenue that when it comes to pension contributions on behalf of controlling directors all but the most blatant “abuses??? would be regarded as deductible expenses. Hopefully this is not a backward step from that position.

The other blow that we were all, frankly, anticipating, was the announcement that measures will be introduced to prevent scheme pensions & lifetime annuities being used to divert tax relieved savings into inheritance.

Anti Avoidance

Various anti-avoidance proposals were mentioned.

There will be further attacks on the Stamp Duty Land Tax avoidance schemes that are still out there and that still work.

The distinction between “higher paid??? and “lower paid??? employees, when determining whether or not an employment benefit is taxable, is likely to disappear. Given that the threshold for this is only £8,500, and given we now have a minimum wage regime, there are probably not many genuine employees who benefit from “lower paid??? tax treatment. But there may well be a number of spouses and other family members of tax planners’ clients who will suddenly find they have a rather higher tax bill as a result.

Borrowing directly from the Conservative proposals, Darling has announced non-domiciles will have to pay £30,000 a year and lose their personal tax allowances if they wish to keep their “remittance basis??? tax advantage. As commentators stated when the Conservatives made a very similar proposal, it remains to be seen whether the country will lose more from the likely exodus of wealthy expatriates than it could gain from the additional fees or tax revenue.

The rather odd tax rule that says you are not actually in the country on the day you arrive or the day you leave will disappear. Readers of Financial Adviser with a long memory may remember the article I wrote in August 2005 about British Airways pilot Ian Shepherd, who tried to rely on the guidance in IR20 about non-resident status. I stated at the time that case placed doubt on the advisability of relying on the “days of arrival and departure do not count??? rule to make regular “non-visits??? to the UK over the weekend. With the disappearance of the rule altogether we will perhaps see fewer weekend commuters from the Channel Islands.

Sundry Matters

The budget deficit is expected to worsen and not recover until the 2009/10 financial year. Perhaps, therefore, the election will be delayed rather beyond the November 2007 some suggested? Anyone taking odds on a 2009 or even 2010 election?

The report made much of the Financial Inclusion efforts of the Department for Business Enterprise & Regulatory Reform. It is perhaps a little odd, then, that this department is to receive a reduction in government spending in real terms, as is the Department for Work & Pensions, and the various departments concerned with dispensing Justice. But never mind, the really important departments, such as the Cabinet Office, are to receive a significant increase in spending in real terms.

Air Passenger Duty is to be levied per plane rather than per passenger. Get ready for the airlines to try squeezing in even more seats and giving us even less leg room.

Alert readers of the report may have spotted Mr Darling invented a new euphemism – “worklessness???. Is this an example of Orwellian Newspeak? Perhaps the government is unwilling to admit there is any more such a thing as unemployment.

Finally, international peace is apparently to be secured by increased spending on the Armed Forces. This may be a personal view, and I know many will disagree, but as a committed Quaker I cannot accept peace can flow from increased military spending.

I hope you enjoyed this brief review, and more importantly found it helpful.