BVCA gives cautious welcome to Pre Budget Report The British Venture Capital Association (BVCA) welcomes the Chancellor’s emphasis on entrepreneurship. As we have said, we are calling on the Chancellor to rule out any further increases in business taxation or any new imposition of regulation on business.
We remain concerned that increasing levels of public borrowing should not undermine confidence in the economy or lead to any further increases in interest rates.
Norman Cowen, Wilder Coe Business Recovery
So far, under Chancellor Gordon Brown’s stewardship, the British economy has grown annually at around three per cent. The reason, despite shrinking manufacturing capacity, has been the strength of the pound against the dollar and euro together with low interest rates. Above all, since the war, an unknown low inflation rate of around two per cent.
Mr Brown thinks that his golden rule, which calls for the balance of tax revenues less non-investment spending, has worked? He predicts that the current budget deficit of £10.5bn will fall to £5bn in 2005-6. But no one knows how close to full capacity the UK economy is.
The Office for National Statistics has revealed that Public sector net borrowing hit a £751m deficit in October, compared with a predicted £1.1bn surplus. To add to the problem, increased Government spending offset the rise in income from tax receipts in October, making the first recorded October deficit since 1994. The Chancellor is likely to need to revise his budget deficit predictions for 2004/05 upwards.
As far as company failures are concerned, they are down, possibly suggesting that the pressure on businesses has been marginal. But personal bankruptcies are set to hit over 40,000 for 2004, due mainly to domestic debt.
No one quite knows what is in store for 2005, although there are the following indicators:-
Manufacturing is less than average with the exchange rate depressing exports. Therefore UK’s share in the global economy is shrinking, which will depress growth.
The US treasury is borrowing $1b per day to keep its wheels turning, which together with the falling value of the dollar will undoubtedly have an adverse effect on the US economic growth. Remember, in 2001 when the US economy dipped so did the world economy. Again a factor that will affect the UK economy, which the government may not be able to control.
At present, personal debt in the UK is topping the £1trillion mark and may have reached its upper limit. This factor could slow down on credit card borrowing and put a break on consumer spending.
Interest rates are set to rise to five per cent by the next election sometime in the next 12 months. After that, if Labour is returned, there is a strong possibility that taxes will rise or government spending will decrease. A good recipe to damp down consumer spending.
The over inflated Internet bubble that burst was transferred to the housing market, which is due to see a 20 per cent collapse over the next three years. The knock on effect on personal bankruptcies and general business confidence can only be a matter of conjecture.
Where do we go from here? Growth for the next 12 months will slow down but no major global economic disaster is predicted. Overall, there is unlikely to be a total economic disaster for the UK economy. For how long will depend on the government to balance its books, together with a continued low rate of inflation and an upturn in the US economy to stimulate the world economy.
ABN Amro Pre-Budget Report summary:
UK GDP growth was unchanged at 3-3.5% in 2005. Growth components were
also left largely unchanged. The Treasury appears to be ignoring all the signs that both the world economy and UK economy are already slowing. They expect robust global and domestic growth in the next few quarters.
While we expect some improvement in UK GDP in Q4, next year is set to
disappoint. We expect a weaker global economy than the Chancellor and we expect UK house prices to fall and unemployment to rise. Our forecast is for growth of only 1.9% in 2005. The Treasury down-play the risks of house prices falls and similarly to the Bank of England, they suggest the links between house prices and consumption have weakened. They also fail to mention the link between household investment and house prices.
Public sector borrowing has been revised by up only £1-2bn each year.
We think the fiscal projections are optimistic even on the Chancellor’s growth forecasts. The Government is unlikely to renege on their spending commitments, which are now fixed for the next 3 years. We expect a general election in the spring / summer. After the election the chancellor will have to decide whether to break the fiscal rules or raise taxes.
Chiltern
Pre-budget report VAT anti-avoidance measures: a damp squib?
Customs have tabled two new measures aimed at combating so-called tax avoidance schemes. The first deals with VAT incurred by off-shore insurers in relation to the settlement of UK insurance claims and is aimed at closing a loophole exposed during the recent decision of the Court of Appeal in WHA/Oriel. The second is aimed at restricting VAT recovery by businesses which raise capital through share issues or are involved in share for share exchanges as part of a takeover. Marc Welby, Director of VAT Services at Chiltern, said: ?The first measure is hardly a surprise, in fact the only surprise is that Customs waited as long as the PBR to announce it. There was a clear loophole in UK VAT law but it is one which has not been exploited significantly and was one of Customs’ own making ? if they had implemented the relevant EC legislation correctly in the first place the arrangements in WHA/Oriel would not have succeeded and the Chancellor wouldn’t be out of pocket? Marc Welby added:
?The recovery of input tax on share issues has been a bug-bear of Customs for many years and they have lost a number of successive cases on this before the VAT Tribunals. This is simply the latest attempt to reverse their defeats. They hail it as an anti-avoidance measure but in reality it is simply a way to restrict companies’ VAT recovery and so increase the VAT yield for the Treasury. As before, it is surprising that they waited for the PBR to introduce it. Perhaps someone thought the PBR needed some padding.?
Tax avoidance ? don’t even think about
As widely predicted, the Chancellor has today announced a wide range of anti-avoidance measures designed to counter employer/employee tax schemes. Some of such schemes have been brought to the Chancellor’s attention as a result of information received under the Disclosure of Tax Avoidance Schemes (DOTAS) arrangements introduced in the last Budget.
It is quite clear that the Chancellor means business. His intention is that ?employers and employees should pay the proper amount of tax and National Insurance Contributions on rewards from employment.? However, he has also confirmed that he will once again not hesitate to use retrospective legislation to achieve his ends.
In a landmark change of policy, the Chancellor has announced that any newly devised avoidance schemes could be blocked as of today’s date.
