Grant Thornton's Top Ten Predictions for the Emergency Budget
on 22nd June 2010
GRANT THORNTON'S HEAD OF TAX, FRANCESCA LAGERBERG
SAYS:
"This is a make or break Budget for the Coalition Government
which will test George Osbourne, leaving his critics to decide
whether he has what it takes to be the Chancellor who can take the
UK forward and provide much needed financial and economic
stability. The Coalition Government has been making substantial
noises on the fairness agenda and so it is likely that this Budget
will focus on families and low income earners. So far the
Government has not shown much sympathy for middle income or high
earners and this Budget does not look to offer them any small
respite. On the basis of election manifesto pledges, it's Lib Dems
1 - Tories 0.
"There have already been some sensible and welcome moves
including the setting up of the Office of Budget Responsibility
which should help to provide more stability and continuity in
economic forecasts but we will be looking to see the detail behind
the various fiscal measures that will be introduced. This is an
opportunity to move away from tinkering with the tax system and
showing that new ideas have been thought through from a practical
and operational basis rather than just from a headline
perspective.
"Whilst the Chancellor has been vocal on how to make the UK
competitive in terms of bringing down the rate of corporation tax,
most focus so far has been on what taxes will be raised and what
cuts will be made. Business will be looking closely to see if he
can deliver some real support for entrepreneurs."
1. National Insurance and Income tax - rise in personal
allowance confirmed
The Coalition Government is not likely to make any further
announcement on headline income tax rates at this Budget but they
have confirmed that they will raise the personal tax-free allowance
(currently £6,475) to £10,000 over the lifetime of this Parliament.
This is of course good news for low income earners as many of them
will be removed from paying tax altogether. Higher earners will
feel little benefit as those with incomes over £100,000 no longer
receive full personal allowances due to a change introduced in
April this year.
What we will see is further clarity on when the increased
personal allowance will be introduced but it is likely that the
allowance will lift between £700 to £1,000 in the first instance.
As this measure aims to help modest income earners we will see
readjustments of the threshold at the upper end of the basic rate
band.
The 1 per cent rise in national insurance contributions (NIC)
from next April for employees is likely to go ahead but the same
uplift for employers NIC has been shelved.
2. Capital gains tax (CGT) increase
We already know CGT is due to increase. This much talked about
measure is likely to go down like a lead balloon, in particular
with investors with share portfolios and anyone with a second home
that provides additional income, but may one day give a useful
capital gain. The Coalition has confirmed that the rise will be a
tax only on "non-business" activities but there is likely to be
some wrangling on what is deemed "business" and "non-business".
There was also discussion of "generous" relief for entrepreneurs
and details will be expected on exactly what that means.
The actual tax rate is yet to be determined but we do know that
it will be more in line with income tax so it could go up to 40%
but the option of taxing up to the highest rate of 50% has not been
ruled out.
We would predict that the capital gains tax increase will be
introduced at the beginning of the new fiscal year (April
2011).However, there is no guarantee at this stage that this will
occur and they could introduce a retrospective date (eg backdate to
6 April 2010) which would prove unpopular and politically
controversial. Alternatively they could make a change from 22 June
but that too would set a poor trend in relation to allowing
sensible planning.
If the introduction date is April 2011 it will give
entrepreneurs and other asset holders time to consider what the new
rules will mean for them and whether they need to take action or
not in full knowledge of what the rules are rather than having to
take rushed decisions based on limited or no information.
It should also be noted that there is no over-arching evidence
that shows that by raising the rate of capital gains tax that it
necessarily translates into higher tax revenue raised. When CGT was
moved to a flat rate of 18 per cent just a few years ago, that rate
was chosen because it accorded with global research that it was
close to the most effective rate in terms of balancing revenue
yield with encouraging investment. Therefore the Government needs
to be cautious as to what message it is sending out to not just
entrepreneurs but those savers who have bought shares and second
homes in hope of a more comfortable future.
3. VAT rise
There is growing speculation that the Chancellor will announce
an increase in the standard rate of VAT. Whilst this increase was
not mentioned in the Conservative election manifesto, the Liberal
Democrats included a pledge to address the differing VAT treatment
of new build properties with that of property repairs.
The UK standard rate of 17.5% is relatively low when compared to
other EU countries and having now had an opportunity to review the
country's 'books', the Chancellor may face an irresistible
temptation to increase it to 20% - a figure predicted by many
leading economists. The dilemma for the Chancellor though, is when
to make the increase.
The rate of inflation in the UK is more than 1% above the last
Government's inflation target and the Bank of England may soon come
under pressure to increase the base rate to stave off any further
inflationary pressure. The difficulty for the Government is that
whilst a VAT rate rise would make inroads into the public sector
borrowing deficit and send a clear message to the financial
markets, it would also be inherently inflationary. The Chancellor
may therefore decide to defer the increase, perhaps until early
next year.
Another option for the Chancellor is to review the scope of the
VAT zero and reduced rates and tax certain items at a higher rate
than at present.
Although there may be some uncertainty about when any VAT rate
increase may occur, it is certain that when it happens it will have
huge implications for both businesses and consumers alike. Although
a transaction-based tax, in reality most common purchases are
subject to VAT and increases do tend to hit those on lower incomes
proportionately harder than the rest of the population.
4. Property taxes
When it comes to property, the CGT increases mentioned above
will be the main area of concern. The housing market is already in
a precarious position and consequently introducing further tax
changes will not help this ailing industry. In addition, the
currently weak pound offers good exchange rates for foreign
investors who are increasingly buying up UK property. Another rise
in CGT will slowly edge UK property investors out of the property
market as foreign investors take advantage of the favourable
exchange rates to gather high rates of return.
The Emergency Budget may also introduce changes to "Private
Residence Relief" - which enables people to sell their only or main
residence free of CGT. It is expected that the new Chancellor will
look to tighten up the definition of a 'main residence' and reduce
the opportunities to allow those with more than one property to
vary what counts as their main residence, therefore exposing them
to a greater chance of a CGT charge.
The wide spread speculation of VAT increases could hit the
property sector hard. It is expected that this rise will also apply
to renovations and new build properties. The property sector needs
a level playing field in order to help it back onto its feet. A VAT
hike and the many changes to the property tax system that are
expected to come through are not helping.
In addition, it is likely that the Chancellor may choose to
reduce capital allowances in order to fund a possible corporation
tax cut. If this goes ahead, property investors will not be able to
recoup as much of their costs, therefore hitting their bottom
line.
5. Corporation Tax
The main message of the Coalition Government is that they want
to reduce red tape for businesses and make the UK an attractive
place to do business. The Chancellor has announced that the main
headline rate of corporation tax will be reduced but has not
indicated to what rate. While the Conservative manifesto stated
clearly it would cut the main rate from 28% to 25%, the new
Coalition Government may seek not to go ahead with this full cut
straight away.
A cut of this nature will make us more competitive against other
OECD countries but we would still be nowhere near the top of the
league for offering low corporation tax rates. Companies will
however be concerned by what capital allowances or other reliefs
and exemptions might be taken away to fund this cut. Any downward
reduction in corporation tax rates would need to be part of a
broader package if the UK is going to attract more inward
investment and encourage companies to come to the UK to do
business.
The Chancellor has already mentioned that he will seek to reform
the complex controlled foreign companies (CFC) rules which act as a
deterrent for some companies from establishing themselves in the
UK. This is unlikely to be in the Budget in any detail but he may
announce when the draft CFC legislation will be published. This is
part of an on-going review of UK law started under the previous
Government.
The Coalition Government has also said that it would review
whether to maintain the much disliked "IR35" rules as part of a
review of all small business taxation. These rules impact on small
companies which offer personal service eg computer consultants or
many types of contractor. Despite ten years of existence, they
still are perceived as being poorly thought through and unhelpful
to business.
There will be much interest to see if any reference is made to
reduce or alter the ability to "income shift" between individuals,
such as married couples, which can be tax advantageous. This is
permissible within the law but has been the subject of much
controversy after cases such as Jones v Garnett (Arctic Systems Ltd
case) which the taxpayer won. Following that case, proposals were
put forward by the previous Government to introduce legislation to
curb the ability to income shift but these were shelved due to the
inability to find something that was operationally viable. Many
will be looking for positive signs that such proposals are not
going to be back on the agenda.
There will be considerable interest in any review on
simplification for tax for smaller businesses and this will be much
welcomed although it will also be useful to see a sensible
timetable for detailed discussion of the issues.
6. Banking levy
The Coalition Government has already stated that it will
introduce a banking levy and in this Budget the Chancellor is
likely to press ahead with his proposals aside from the European
Union (EU) initiative on providing a regulatory framework for a
pan-European banking levy. There is clearly a desire to be able to
apply the funds raised by a UK levy more widely as opposed to
reserving in an EU fund to address potential future bank failures
as envisaged by the EU.
The Government has also been clear that there will be a clamp
down on bonuses in the financial services sector. Whilst a
clampdown on bonuses will be seen by many as justified we do not
think that tax should be imposed on individuals but on the industry
as a whole in order to influence corporate behaviour away from a
short term bonus culture. Measures which impact adversely on
individuals disincentivises key executives and potentially
precipitates talent flight from the UK financial services sector.
The answer to shaping behaviour of financial institutions must
surely lie with transparent and effective regulation rather than
more tax measures.
7. Tax avoidance and anti-avoidance
measures
The Liberal Democrats manifesto had a clear message that they
believe large revenues could be raised from clamping down on tax
loopholes and tax avoidance schemes so we predict that the
Chancellor will set out quite clear messages on anti-avoidance
measures. However, there are already detailed rules in the UK
restricting aggressive tax planning and there may not be a "pot of
gold" that the Coalition Government can find to help bridge the
deficit gap. Furthermore, Her Majesty's Revenue & Customs
(HMRC) are already operating on limited resources and thought will
need to be given as to how they can enforce any new proposals.
8. Non Domiciled ("non-dom") individuals
Residence and domicile status can have a significant impact on
an individual's liability to UK income and capital gains tax. This
area gained large media coverage during the election campaign and
the Coalition Government has stated that it will review the
taxation of non- doms.
History shows how hard it is to make progress on such issues.
Major changes were made to the taxation of non-domiciled
individuals in the Finance Act 2008, introducing some of the most
complex rules the UK tax legislation has seen to date, but the UK
still lacks a statutory residence test to provide certainty on an
individual's status. The key here is to avoid the law of unintended
consequences. If cuts in the corporation tax rate are to be
proposed to encourage inward investment, radical changes to the
taxation of non-doms may keep away the very entrepreneurs we are
looking to encourage to relocate to the UK.
9. Pensions
The Coalition Government has agreed to restore the link between
the basic state pension and earnings. This was initially suggested
in the Turner Commission 2005 and would be welcomed.
The Coalition Government could go further. It could look to
implement many of the other reforms set out in this report
including increasing the state retirement age for men and women. It
is also likely that the further pension reliefs will be taken away
from high income earners perhaps lowering the proposed threshold
for tapering of higher rate relief, which is set at £150,000 of
income and is due to apply from next April.
There are also already signs that the Government will remove the
rule to buy annuities at the age of 75.
10. Inheritance tax
It is unlikely that there will be any change to the current
inheritance tax (IHT) threshold of £325,000 much to the
disappointment of many Tory backbenchers and their supporters who
enthusiastically supported an earlier proposal to increase the nil
rate band to £1 million.
We may see some restrictions to IHT. The current deemed
domiciled rules bring a non-dom under the IHT net if they have been
resident in the UK for the last 17 out of 20 years. This could be
shortened to the last 7 out of 9 years to align it with the test
that is used for the remittance basis charge.
ENDS
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