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John Whiting: Belt-tightening to continue across the board

Predictably, spending and the economy in general took a major share of 32 minutes duration of Chancellor Alistair Darling's announcements yesterday.

On the economy, the March 2007 Budget had predicted a growth rate for the UK economy in the next years of 2.5 per cent to 3 per cent; that looked a touch optimistic at the time (though not outside the bounds of possibility) but subsequent events have made it inevitable that the forecast had to be scaled back.

The revised figure is 2 to 2.5 per cent for next year, after 3 per cent for the current year – still healthy enough. The first fiscal rule will still be met over the current cycle and the second (debt) rule will also be met. The general message was that any problem is a temporary scaling back rather than a majorstructural change.

The announcements of the Comprehensive Spending Review (CSR) were, in many ways, the centrepiece of the speech. We heard about the expected tight settlement with modest real growth in the coming years. That translates into more money for the health service (but not the size of increases that it has been used to) overseas aid, security and defence (a lot of replacement expenditure) but the CSR also signals a good deal of belt-tightening in spending departments generally.

Tax changes may not have generated the headlines in Mr Darling's speech as they did in Gordon Brown's last Budget in March but they were certainly not forgotten. As anticipated, the tax rules surrounding private equity are to be changed, with the aim of taxing more of thereturn to participants.

Part of this is a general reform to capital gains tax (CGT) taper relief – many people have called for simplification and streamlining but having the whole structure swept away for an overall 18 per cent rate is certainly an interesting move. It is presumably intended to be revenue neutral overall but there is favourable impact on some investors while there are adverse effects for entrepreneurs generally. In fact, the net effect seems to be to raise additionaltax revenues.

Similarly, moves to tighten the rules on non-domicile tax status have long been expected but it is another area needing care to ensure that people who, overall, make a significant contribution to the UK's tax take are not discouraged from doing so. At least this measure is to proceed only after a consultation exercise.

There are a number of areas where consultation has already been under way that are now being taken forward, including on small business – in the wake of the 'Arctic Systems' case, the Treasury had already announced its intention to change the rule to clamp down on what it saw as an unfair diversion of profits. However, predictably it was too soon yesterday to hear more about foreign profits taxation, capital allowances or HMRC powers.

The environment featured, with the main items being a recast of Air Passenger duty. This is to be switched to a charge per plane rather than per passenger, something that many have suggested, from 2009.

The move on inheritance tax was neat in many ways. Allowing, in effect, married couples to use both their inheritance tax nil rate bands will certainly help a lot of people who are really concerned about the tax.

One newish area was Mr Darling's taking forward the idea of simplifying the tax system. He had already said that he would "always strive to make the [tax] system simpler" and some welcome evidence of that has come with a discussion document on the operation of the Pay As You Earn and National Insurance Contributions systems.

If it seems that we are not going to contemplate full integration of the two levies, the prospect of some streamlining will be welcome news to employers who invariably cite this area as their number one request for simplification moves.

John Whiting is a senior tax partner at PricewaterhouseCoopers

Irish Independent

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