Prudence becomes progressive

KEY POINTS

• Good news for basic rate taxpayers.
• Restrictions on higher rate pensions relief to be reviewed.
• Corporation tax eased.
• Capital gains tax rises.
• VAT to increase to 20% from January 2011.
• Download a Budget summary document.

On the way to the office this morning, our thoughts turned to the possible contents of George Osborne’s first Budget and the measures likely to be contained within.

We were conscious that we would have to write an initial review of those measures. Sometimes, the most difficult part of an article is to alight upon a theme to which the various following aspects can be related. What would that be, we wondered, as we turned on our computers.

Helpfully, the LexisNexis intranet had a ‘thought of the day’ in the corner of its home page. We are always interested in meaningful coincidences; could this be one?

‘Do not let the pain of one season destroy the joy of all the rest. Do not judge life by one difficult season. Persevere through the difficult patches and better times are sure to come.’

Contributed by a colleague in India, this moral of an Islamic fable might be apposite for our current economic circumstances. There has been a view that we, UK taxpayers, are in for some painful fiscal experiences, but our reward will be good times in the future. Well, the future, as they say, will take care of itself; our job is to analyse the pain.

After 55 minutes, the pain was over. The first Budget of the coalition Government pretty much lived up to its promise of being tough, with everyone having to pay something towards reducing the country’s deficit. Certainly, there wasn’t much to laugh about.

Although, it was mildly amusing to learn, after Mr Osborne said the UK ‘will not be joining the euro in this Parliament’, that he had therefore abolished the Treasury’s euro preparations unit. No doubt everyone will be relieved to know that ‘the official concerned has been redeployed to more productive activities’.

Personal tax

As flagged up in advance, the Chancellor announced that the normal increase in the personal tax allowance for 2011/12 will be overridden and increased by £1,000 to £7,475 for those aged under 65. This will reduce tax bills by up to £200 for basic rate taxpayers.

Higher rate taxpayers will not benefit because the basic rate limit will be reduced by a figure to be confirmed once the September RPI figure is known.

National Insurance

While the previously planned increase in National Insurance contributions will go ahead with effect from 6 April 2011, the secondary threshold, the point at which employers start to pay Class 1 NICs, will be increased by an extra £21 per week above indexation.

And in another measure designed to encourage new businesses and new employments, the Budget speech included an announcement that anyone setting up a new business outside of London, the south-east and the eastern region will be exempt from up to £5,000 of employer NICs for each of the first ten employees hired.

The scheme should be ‘up and running’ from September, but will apply from Budget day. To maintain the alignment of the upper earnings/profits limit with the higher-rate tax threshold, the UEL/UPL will be reduced by an equivalent amount.

Capital gains tax

It was feared that capital gains tax would be raised to income tax rates, but the rates applicable from Budget day are to be 18% and 28%. In his speech, Mr Osborne said:

‘Low and middle income savers who pay income tax at the basic rate make up over half of all capital gains taxpayers. They will continue to pay tax on their capital gains at 18%. From midnight, taxpayers on higher rates will pay 28% on their capital gains.’

Perhaps unsurprisingly, closer investigation of Budget Note BN20 shows that ‘the rate of CGT remains 18% where total taxable gains and income are less than the upper limit of the income tax basic rate band. The 28% rate applies to gains (or any parts of gains) above that limit’.

On the subject of CGT: for trustees and personal representatives, the rate is increased from 18% to 28%; the annual exempt amount will remain at £10,100 for 2010/11 (but is planned to rise with inflation in future); and the 10% rate for entrepreneurs’ relief remains, but with the lifetime relief limit raised from £2 million to £5 million.

BN20 also explains that gains arising between 6 April and 22 June 2010 – and chargeable at 18% – will not be taken into account in determining the rate of tax applicable to gains arising after that period.

However, pre-23 June 2010 gains that are deferred until after that date will be chargeable at 18% or 28% in the same way as any other gain arising after 23 June 2010.

Regarding losses and the annual exemption for 2010/11, it is stated that these can be used in the manner most beneficial to the taxpayer.

Commenting on the increase in capital gains tax for higher earners, Andrew Hubbard, tax policy director at RSM Tenon, said:

‘Even though the rise will force people to dig deeper into their pockets, many will be breathing a huge sigh of relief. Things could have been far worse, with today’s rise in capital gains tax much less than we had been led to believe. This might however be a false dawn. Today’s Budget showed just how deep a hole the economy is in, and it’s realistic to expect that further increases may be introduced in the foreseeable future.’

Pensions

There was good news in relation to pensions in the Budget. First, there could be a glimmer of light for the much-reviled measures restricting higher rate relief on pension contributions.

While the Chancellor believes reform is ‘necessary’, he has apparently ‘listened to the concerns of the pensions industry and employers’, and realised that ‘the approach adopted in Finance Act 2010… could have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness’.

It seems the Government is considering the alternative approach involving a reduced annual allowance, as was mooted by many in the pensions industry, including the National Association of Pension Funds, before the March Budget.

To this end, the Government will consult employers, pension schemes, experts and other interested parties to determine the best design of a regime.

The idea is to introduce legislation before the summer recess to repeal through regulations the legislation passed at Finance Act 2010 once it has decided on the detail of its approach. There will, however, be no changes to the anti-forestalling regime.

Describing the previous Government’s proposals as ‘a disaster in the making’, Joanne Segars, NAPF chief executive, said:

‘Reducing the amount that can be paid into a pension tax free each year will protect the Treasury’s tax take, but it will be much more supportive to pensions saving and less costly to implement.’

She added that there would be ‘a lot of detail to be ironed out, and the level of the allowance is critical’.

The Chancellor plans to end from April 2011 the existing rules that create an effective obligation to purchase an annuity by age 75. Legislation will be introduced in Finance Bill 2010 to increase the age to 77.

The change will apply for the purposes of the inheritance tax charges that specifically apply to pension scheme members aged 75 and over.

With regard to the state pension, this is to be realigned to the earnings index when it comes to annual increases. In future it will be uprated either by earnings, prices or 2.5%: whichever is the higher.

Finally, the Chancellor announced that the move to a state pension age to 66 is to be accelerated, and he also said there would be a consultation on the removal of the default retirement age: the ability of employers to force workers to retire at age 65.

Business tax

Saying that ‘low rates act as adverts for the countries that introduce them’, Mr Osborne announced that the rate of mainstream corporation tax would be reduced to 27% from 1 April 2011, and then by 1% for each of the following years until it was 24% in April 2014:

‘One of the lowest rates in the G20 and the lowest rate this country has ever known.’

Those dealing with the oil industry should note that the rate for profits from oil extraction and rights remains at 30%.

Rumours had been circulating that if mainstream rates were reduced, then the small companies rate might be abolished.

However, in something of a surprise move, it was announced that rather than increasing this to 22% as planned by the previous Government, the rate was to be cut to 20% with effect from 1 April 2011.

This was estimated to help 850,000 companies, who would also be assisted by an extension of the enterprise finance guarantee scheme. The equivalent rate for the oil industry will be 19%.

Presumably to help pay for the reduction in CT taxes, the rates of capital allowances are to be lowered. The rate for most plant and machinery falls from 20% to 18%, and for long-life assets from 10% to 8%. The annual investment allowance is reduced to £25,000; all measures are effective from April 2012.

The Government no doubt hopes the rate reductions will stem the flow of companies relocating abroad, although some firms may find  their effective rate of tax increases due to the reduction in the rates of capital allowances and the reduced annual investment allowance.

Conversely, proprietors of smaller businesses may consider the advantages of incorporation to shelter profits at the reduced 20% rate.

One measure not mentioned in the Budget speech, and one that small business may have been planning to use, was that the managed payments scheme whereby tax payments can be paid by instalments before and after the normal due date is to be deferred.

There were winners and losers in specific industries. The advantageous tax rules for furnished holiday lettings (FHLs) are to be retained, but the planned relief for the video games industry is scrapped.

With regard to FHLs, there is certainty for a year at least, in that the Chancellor is reinstating the previous tax rules, which were to have been abolished. However, the Government plans to consult over the summer on a proposal to ensure the tax rules meet EU legal requirements by changing the eligibility thresholds and restricting loss reliefs. Changes will take effect from April 2011.

Welcoming the announcement, John Whiting, Chartered Institute of Taxation tax policy director, said the consultation ‘will enable the sector and tax advisers to make proposals to ease the burden of businesses that lose the protection of the furnished holiday lettings rules’.

In addition to the main changes discussed above, the Budget documents include a paragraph to the effect that the Government is committed to reviewing IR35 and small business tax. This is welcome news, and the further details promised are anticipated eagerly.

Further measures of interest to business announced in the Budget report are consultations on: a reform of the controlled foreign company rules, a move to a more territorial basis for taxing the profits of foreign branches, the taxation of intellectual property, research and development tax credits, and the proposals of the Dyson Review.

VAT

In another measure that had been widely anticipated, the standard rate of VAT was increased to 20% from 4 January 2011, the first working day of the new year. Independent VAT expert Neil Warren commented:

‘The procedures, e.g. for anti-forestalling legislation, are similar from when we went from 15% to 17.5% at the beginning of this year. The threshold is again £100,000 and will not be an issue if a customer can claim input tax or if a transaction is normal commercial practice, e.g. a quarterly rental invoice raised in advance.

‘The other main issues with the rate change are as follows.

* It is worthwhile for businesses to buy their new motor cars before 4 January, because the input tax block that applies on motor cars will mean an extra cost with the rate change.

* Commercial property bought by exempt or partly exempt businesses should ideally be completed before the January date, otherwise a further cost will be relevant through the input tax restrictions for these businesses.

* I am a bit concerned about the impact of the rate increases on charities and other organisations where they have received grant offers based on a 17.5% VAT cost, but where the project will be carried out next year. Perhaps grant providers might offer a bit of flexibility with an additional grant to cover the VAT increase?

‘On the positive side, there are plenty of items where VAT is not charged because of zero-rating and exemption.’

Bankers

Still blamed by most for sparking off the worst recession in decades, bankers did not come off unscathed in the Budget. In a joint statement with France and Germany, the Chancellor announced a bank levy aimed at encouraging banks ‘to move to less risky funding profiles’.

The levy will not be deductible for corporation tax, and there will be anti-avoidance provisions.

In the UK it will apply to UK banks and building societies, as well as to certain UK subsidiaries and branches of non-UK banks, based on banks’ balance sheets to take effect from 1 January 2011.

Not surprisingly, this levy was met with initial concern.

PricewaterhouseCoopers’ Peter Maybrey wondered if it will have ‘an adverse impact on the competitiveness of the UK as a financial services centre – in particular if the UK imposes the levy in advance of other major territories such as the US’.

He felt that defining which institutions will be subject to the charge could give rise to problems, saying the experience with the bank payroll tax showed that ‘defining what is a “bank” and “banking type activities” is not straightforward’.

So much for that

Well, that completes our initial review, but we know you’d like to know more about our fable. A man had four sons. Let’s call them George, Gordon, Alistair and Vince.

He told them all to look at a tree that was a great distance away and then tell him what they had seen. They each went in a different season and gathered together when the last son had returned.

George went in winter and said the tree was ugly, bent and twisted, but Gordon said that it was covered with green buds and looked full of promise. Alistair disagreed. It was beautiful, he said, and full of fragrant blossom. On the contrary, said Vince, it was laden with fruit.

Their father explained that each son was right, but they had each only seen one season in the tree’s life. Like a tree, you cannot judge a person or a Budget by one season.

The essence of the person or the fiscal measures and the pleasure, joy, and love that come from them can only be measured at the end, when all the seasons have run their course ... leading us back to the moral at the start of this review.

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Issue Extract

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Issue: 4260 / Categories: Comment & Analysis , banking , Budget 2010 , Budget summary , Chartered Institute of Taxation , George Osborne , NAPF , National Association of Pension Funds , Business , Capital Gains , Companies , Employees , Income Tax , Investments , VAT