Newsletter - October 2007

In this edition:

• Increase in minimum wage comes into force
• New rules to guarantee savings
• Consumer confidence on the rise
• Darling pledges to maintain ‘economic stability’
• 2007 Pre-Budget Report: the political reaction
• 2007 Pre-Budget Report: the business reaction
• The Pre-Budget Report and your business
• Business groups ‘left reeling' by tax reforms
• Darling faces criticism over spending commitment to flood defences
• Credit crisis deepens as one million pay mortgage on card
• Government to review pension schemes
• Business groups united against supplementary business rates
• ‘Insufficient' support on employment law for small businesses

'Increase in minimum wage comes into force

Over a million workers will benefit as the statutory minimum wage increases with effect from October 2007. The adult rate will rise from £5.35 to £5.52 whilst the hourly rate of pay for 18 to 21-year-olds will go up from £4.45 to £4.60. Sixteen and seventeen-year-old workers will also receive a rise as rates inflate from £3.30 to £3.40 an hour.

Full-time workers will also benefit from extra annual leave, as the holiday entitlement will increase from 20 to 24 days a year. These modifications have been welcomed by Employment Relations Minister, Pat McFadden, who said: “These changes will improve the lives of millions of British workers, giving them more time with their families and ensuring our lowest paid workers continue to be able to earn a living wage”.

Brendan Barber, TUC general secretary, has reinforced this message, declaring that the alterations will “provide a much-needed boost” to those receiving a lower income. He went on to state that “unions would have liked a bigger increase but at this level there is nothing for businesses to complain about.”

According to the British Retail Consortium, last year’s rise in the minimum wage is reported to have cost retailers £1.7bn.

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New rules to guarantee savings

Chancellor Alistair Darling has outlined plans to extend UK savers' protection with immediate effect following the recent difficulties experienced by Northern Rock.

Under the new rules the first £35,000 of deposits will now be guaranteed in a bid to prevent the uncertainty caused when Northern Rock was forced to borrow from the Bank of England. Darling has also revealed that he will consider expanding the limits of the Financial Services Compensation Scheme to £100,000. At present only £2,000 of savers' finances are fully protected, with the next £33,000 covered for up to 90%.

‘Savers need to be sure that they can get their money out if they need to', said the Chancellor. ‘For the future, we now need to put in place a better regime', he added.

The reforms come as Gordon Brown praised the stability of the British economy following recent financial turbulence: ‘It is because of the resilience and strength of our financial system - Bank of England independence, the Financial Services Authority, a new system for regulation - that we are able to steer a stable course' he said.

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Consumer confidence on the rise

Consumers' confidence returned during September despite the recent turbulence in the financial markets, the Nationwide Building Society has revealed.

After figures plummeted in August, the building society's consumer confidence index rose by five points - to 99 - for the month of September, wiping out the falls witnessed during the previous month.

The survey found that 60% of consumers were confident about employment and 45% of people were optimistic about the state of the economy.

Speaking on behalf of the Nationwide, Fionnuala Earley said: ‘The pick up in confidence has been driven by confidence in the labour market'.

‘When people feel secure in their employment, it is perhaps not surprising that their general confidence levels are more robust', she added.

However, the research was conducted prior to the Northern Rock crisis and thus fails to account for the widespread anxiety that was experienced when the bank was forced to seek emergency funding.

The Nationwide has indicated it expects evidence of this low mood to surface within the impending weeks.

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Darling pledges to maintain ‘economic stability'

In delivering his first Pre-Budget Report and Comprehensive Spending Review to the House of Commons, Chancellor Alistair Darling described the current climate as one of ‘increased economic uncertainty' with ‘turbulence in America , Asia and Europe '.

In response to this global environment, Darling has downgraded next year's UK economic growth forecast to between 2% and 2.5%. But praising the strength of the British economy, the Chancellor predicted a growth of 2.5% to 3% in 2009 and 2010, in line with target figures.

With net borrowing expected to fall from £38bn this year to £23bn in 2012, Darling stressed that fiscal rules were being met as he planned to borrow ‘not for current consumption, but for investment in Britain 's priorities'.

As widely anticipated, Darling pledged to reform inheritance tax and will raise the tax threshold for married couples and civil partners to £600,000 and to £700,000 by 2010.

The capital gains tax system will also be reviewed and a single rate of 18% introduced in a bid to ensure that those working in private equity pay a ‘fairer share'.

The Chancellor also proposed to ‘close a number of loopholes' for non-domiciled taxpayers and cut the main rate of corporation tax by 2p to 28p next year.

Investment in the National Health Service will rise above inflation, whilst funding for education, science and security and defence will also increase.

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2007 Pre-Budget Report: the political reaction

Political opposition parties have given their reactions to the 2007 Pre-Budget Report.

Shadow Chancellor George Osbourne has dismissed the Pre-Budget statement as ‘a desperate, cynical stunt'.

He accused the Government of poaching the Conservatives' ideas on inheritance tax and slammed the Prime Minister for ‘followership' rather than leadership.

His comments follow Alistair Darling's delivery of the Pre-Budget Report, in which the Chancellor unveiled plans to increase the inheritance tax threshold to £600,000.

‘For ten years they have sucked millions out of IHT, pulling first-time buyers into stamp duty and leaving non-doms, now a week after what we put forward they scrabble around to find something to say,' said Osbourne.

The Shadow Chancellor then branded the statement as a ‘pre-election budget without the election'.

Meanwhile, the Liberal Democrats have called on Alistair Darling to give his ‘risk assessment of a recession for Britain '.

Treasury spokesman Vince Cable, said: ‘Isn't it the brutal truth that the growth of the British economy is sustained by consumer spending, penned against record levels of personal debt which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level.'

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2007 Pre-Budget Report: the business reaction

Following Alistair Darling's first Pre-Budget Report and Comprehensive Spending Review, business groups have expressed their reaction to the Chancellor's statement.

Responding to Darling's decision to lower the economic forecast for 2008 to between 2% and 2.5%, the British Chambers of Commerce (BCC) warned that these figures may ‘have to be downgraded further following the global credit crisis and the fallout from Northern Rock'.

The Institute of Directors (IOD) has also agreed ‘that the fiscal outlook is more precarious than the Chancellor suggests'.

Commenting on Darling's plan to introduce a single rate of 18% for capital gains tax, Miles Templeman , Director General of the IOD, described the proposal as ‘another unwelcome tax hit on business'.

He then added that, whilst the Government had ‘moved one step closer to delivering a clearer set of business support products', it must now focus on ‘ensuring that the rationalised offering is not derailed by varied branding and application'.

Meanwhile, the Trades Union Congress (TUC) has praised Darling's pledge to invest in ‘education, health, transport, science and the environment'.

Speaking in light of the 2007 Pre-Budget Report, Brendan Barber, TUC General Secretary, also welcomed ‘the Chancellor's recognition of the tax loopholes enjoyed by the super-rich […] an issue that unions have put firmly on the agenda'.

However, he proceeded to express concern over Darling's ‘generous' plans to increase the threshold of inheritance tax:

‘Only one in twenty estates pay inheritance tax – and many do not realise that tax is only paid on the extra over the threshold, so people with property just over the limit only pay a very small amount. This will do nothing to make Britain more equal, and the money it will cost would have been better spent on better public services and attacking poverty', he said.

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The Pre-Budget Report and your business

Alistair Darling delivered his first Pre-Budget Report, alongside the Comprehensive Spending Review, to the House of Commons on 9 October.

As part of his report, the Chancellor unveiled a number of proposals of significance to businesses.

Amongst these were plans to simplify the business tax regime. Darling proposed that a review of the tax system will ‘let three million self-employed people pay their tax and National Insurance contributions more easily and 500,000 businesses reduce their paperwork by removing a separate payroll'.

He predicts that these, along with other measures, will ‘save British businesses up to £100 million a year'.

A proposed reform of business rates will also be launched, with Darling intending to ‘give local authorities the power to set a business rate supplement for investment and economic development'.

However, business groups have raised some concerns that this could impose significant extra costs on ‘hard-pressed businesses'.

The Chancellor also confirmed plans announced in the main 2007 budget to cut corporation tax by 2p to 28p from next year.

However, calls from the Forum of Private Business (FPB) to reverse the proposed increase in corporation tax for smaller firms, from 19% to 22%, were unheeded.

Mr Darling also proposed to double the investment in transport, which will rise to £14.5 billion a year by 2010. This decision is likely to be welcomed by the British Chambers of Commerce (BCC), who prior to the report urged the Treasury to place transport ‘at the heart of Government policy'.

We can advise you on the latest announcements and how they affect you and your business. Contact us for more information.

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Business groups ‘left reeling' by tax reforms

Leading business groups have criticised the Government's decision to abolish capital gains tax (CGT) taper relief.

In his Pre-Budget Report last week, the Chancellor announced plans to replace varying rates of tax relief with a single flat rate of 18%. Alistair Darling said this measure would ensure that those in private equity would pay a ‘fairer share'.

However, some business organisations have been left reeling by the Government's proposal, concerned that the changes will discourage enterprise growth.

In a letter addresses to the Chancellor, Richard Lambert, the director-general of the Confederation of British Industry (CBI), said the move ‘undermines the ten year effort by [the] Government to promote enterprise and risk-taking within the UK'.

‘The abolition of taper relief provides for some simplification of the CGT regime, but at the cost of hitting a number of groups who are taking significant risks in investing in and building the businesses that generate so much of our employment and wealth', he continued.

Groups fear that small enterprises will be hit the hardest by Darling's reform of the tax system. Speaking on behalf of the British Chambers of Commerce, David Frost described the changes as a ‘savage blow to entrepreneurs', whilst the Forum of Private Business has also expressed its concern.

The new rules will come into force from April 2008.

If you would like to know how the changes may affect your business, please do contact us.

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Darling faces criticism over spending commitment to flood defences

Chancellor Alistair Darling has faced criticism from the insurance industry over his spending commitments for combating flooding.

As part of the Comprehensive Spending Review delivered on Tuesday 9 October, the Chancellor pledged £800mn for flood defences - part of a three year £4bn increase in funding for the Department for Environment , Food and Rural Affairs.

Whilst the Environment Agency has acknowledged that this investment is a move ‘in the right direction', Stephen Haddrill , director for the Association of British Insurers (ABI), was less complimentary.

Speaking to the BBC, Haddrill said: ‘Millions of homeowners and businesses around the country have been let down by the Government's failure to commit sufficient money to new and improved flood defences'.

‘Government spending for the next three years is less than we were asking for, even before the floods. It does not begin to address the major issues, including drainage, which were highlighted this summer', he added.

Responding to his critics, Alistair Darling declared that the Government would keep the amount of money allocated to flood defences ‘under review'.

‘The amount of money that has been allocated for flood defences is almost as much as the ABI actually asked for and, as my colleague Hilary Benn has said, that is something we will keep under review', he said.

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Credit crisis deepens as one million pay mortgage on card

A recent survey has revealed that over one million households have used their credit cards to pay their mortgage or rent in the past year – evidence of the country's mounting debt crisis .

Around 6% of people admitted they had needed to use credit to meet their housing costs in the past 12 months, according to housing charity Shelter.

Younger people are the most likely to rely on credit to stay on the property ladder, with 7.5% of 18-24 year olds surveyed reporting that they use their card to pay their mortgage or rent.

Shelter has partially blamed the problem on irresponsible lending by banks and building societies, forcing people to overstretch themselves financially.

Adam Sampson, chief executive for the charity said: ‘The number of people hit by the credit crunch, interest rate hikes and unaffordable housing costs are rapidly rising'.

‘For many people trying to keep a roof over their head desperation is driving them to short-term, high-cost borrowing', he added.

Meanwhile, the Community Housing Advice Service has warned that thousands of people will continue to slide into an ‘ever-spiralling maze of debt'.

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Government to review pension schemes

The Government has unveiled plans to reduce some of the protection against inflation incorporated in company pension schemes.

If the new rules come into effect, the revaluation of deferred pensions will be capped at 2.5%. Currently, pension schemes are obliged to revalue deferred pensions by up to 5%.

The proposal, which aims to make it cheaper for employers to run schemes, is part of a rolling Government programme of deregulation.

‘These measures will reduce costs and will make it easier for schemes' rules to take advantage of specific relaxations to legislation' said Mike O'Brien, Minister for Pensions Reform.

The plans were welcomed by the National Association of Pension Funds (NAPF).

‘These proposals will help sustain the future of defined benefit pensions, which provide valuable income to millions of working people in retirement,' said the NAPF's Joanne Segars.

However, the Trades Union Congress (TUC) has criticised plans to reduce the cap on the revaluation. ‘This is particularly important for those with broken careers, typically women and carers,' said Brendan Barber, TUC general secretary.

‘If we were to return to higher rates of inflation in the future this could quickly eat away at benefits built up early in a working life - something that seems to go against the Government's message that we should all start saving as early as possible.'

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Business groups united against supplementary business rates

The Federation of Small Businesses (FSB), the British Chambers of Commerce (BCC) and the Institute of Directors (IoD) have united to urge the Government to rethink its plans to introduce a new tax burden on businesses.

Chancellor Alistair Darling has launched a White Paper relating to supplementary business rates, in which he proposed to give local authorities the power to raise and retain local supplements on the national business rate.

The new system would create additional funding for projects in local communities, said Mr Darling.

However, the FSB, BCC and IoD – representing over 350,000 businesses – have expressed concern over the proposals.

‘ UK companies are facing global competitive pressures and any additional tax will further harm their ability to compete', David Frost, Director General of the BCC has argued.

The three lobby groups have called for businesses to be given the right to vote on the issue.

‘Higher rates without a mandatory vote will only deepen the disconnect between local politics and the business community', warned Miles Templeman, Director General of the IoD.

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‘Insufficient' support on employment law for small businesses

Small business owners are not getting enough support when dealing with employment law, a recent Federation of Small Businesses (FSB) survey has revealed.

In a study of 2,826 small firms, nearly 80% of owners said they had to deal with increasing levels of employment law on their own.

A third of those surveyed did not know where to find Government advice on legislation affecting small businesses, whilst 78% deal with employment paperwork unaided.

Furthermore, 32% of small business owners admitted that the ‘complexity of employment law' prevented them from taking on new staff.

The Government ‘should be taking responsibility for ensuring that laws are realistic, practical and understandable,' said Alan Tyrrell, FSB Chairman.

‘The relentless, one-size-fits-all approach to employment law has got to stop.

‘All the evidence shows that small businesses can create more wealth and more jobs when employment laws are simple and flexible,' he added.

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