Budget 2014: ICAS Analysis


19 March 2014

ICAS provides expert analysis of the Chancellor's UK Budget Statement.

ICAS has been assessing Chancellor George Osborne's 2014 Budget Statement and what it means for the economy, individuals and businesses. Here are some of the key observations from ICAS CEO Anton Colella and members of the Technical Policy Team.

Overview from Anton Colella, ICAS CEO:

"This is a politically smart budget. The Chancellor is reassuring business while sticking to tackling the structural deficit. The revised growth forecast of 2.7% for 2014 is the strongest sign yet that spring is in the air for corporate UK, even if we've not fully emerged from the economic winter yet. However, a reminder of the scale of the problem is that it won't be until later this year that the economy is expected to be back to the same size as it was before the crisis. The biggest headlines will all be around changes to personal finance with new arrangements for ISAs and one of the most significant changes to personal pensions in recent years. Is this a golden egg to help fund retirement for many of Britain's pensioners? How can we ensure that pensioners are equipped to make the right choices with their lump sums? The positive announcements on exports, North Sea Oil, the whisky industry and air passenger duty are all welcome. While we may find much to question in the small print, on our first examination, it is a budget which feels good."

Reflections from Elspeth Orcharton, ICAS Director of Tax:

"The Chancellor's Budget was a politically astute one, apparently giving everyone what they asked for, from more support for childcare, for business investment through the Annual Investment Allowance doubling to £500,000, and an increase in the annual ISA allowance. Particularly relevant for the Scottish market, the freeze in the rate of alcohol duty on whisky was what was asked for, and the reduction in Air Passenger Duty has been seen as a means to encourage tourism as well as business investment to Scotland.

Pensioners on (savings and pension) income of up to £15,500 will pay no income tax in 2015/16, once the zero (down from ten) per cent savings rate of tax and the increased personal allowance are taken into account. But they will have the facility to avoid the dreaded annuity market, with an apparent opening of defined contribution pensions to a 'free for all' withdrawal policy. The threatened loss of the pension tax free lump sum has not materialised, but the marginal tax rate will instead apply to withdrawals.

The consequences of this need a lot of thought and will no doubt emerge over the next few months, as individual choices do play more of a part in the decisions to be made. Some may squander, and some may squirrel and the financial services sector response remains to be seen. The Government's tax forecasts assume a significant acceleration of taxable pension drawdown will be the consequence. Whilst it's the unexpected approach to managing the tax system cost of pension tax relief, the expected acceleration gives one of the single biggest tax generators in this Budget. Jam today and not tomorrow?

The other significant source of tax revenue is from tax avoidance schemes, where tax is to be paid even though the schemes may not have been through the court process for appeals, and even if they had not been notified as objectionable by HMRC at the time of implementation. ICAS raised a number of concerns with these provisions; firstly on the grounds that, for the first time direct taxes could be demanded without any right of appeal on the payment notice, and regardless of the point of principle being in pending litigation. Secondly, we expressed concerns that the payment notices apply retrospectively, back to the origination of the Disclosure of Tax Avoidance Schemes in 2004.

Whilst we sympathise with the Government's aim and note that these provisions are being introduced on the grounds of "fairness", more safeguards and better legislative alternatives were available. A greater focus on resourcing the speedier resolution of all tax disputes – not just those on avoidance challenges – has been called for by ICAS members. It is disappointing that HMRC seems able to find (or is being given) resources to implement the payment in advance system, but not the resources to permit taxpayers faster resolution of disputes through access to the justice system. Is that"fair"?

The real sting for a future Chancellor may be how much of this tax will have to be repaid in future – is this acceleration or grossly optimistic? Is it jam at all? The Budget Costing on this is fascinating; make your own mind up on pages 36-37.

Overall, one big surprise, the usual tinkering and little sign of simplification. For tax practitioners, it was business as usual.

Pensions - Christine Scott, ICAS Assistant Director, Charities and Pensions:

"The Chancellor took the pensions world by surprise by announcing greater flexibility for all in accessing defined contribution pension pots at the point of retirement. Opportunities to fully withdraw cash from a pension pot and pension drawdown are to be extended to everyone. Annuity purchase will remain an option but annuity providers will have to up their game to compete with these alternatives and with new products which could enter the market. Could the Chancellor be creating a space for the market to develop defined ambition models? If so, providers will need to be convinced that future governments will not tinker with these changes. A further Pensions Bill was anticipated before the 2015 general election to facilitate defined ambition pension arrangements but pension experts everywhere will now be revising what they thought they knew about pension reform.


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