The Chancellor of the Exchequer has at last delivered the bad news of the full extent of the spending cuts and tax rises that are needed to bring the fiscal deficit under control within the next five years, Paula Tallon gauges the impact for business.
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It could have been worse for business
Mr. Osborne stressed that this was an "unavoidable Budget" and once again emphasised that "we are all in this together". However, he wished to send a message that the UK is "open for business", so he favoured the private sector, looking to it to lead the country back into growth.
|How businesses and their owners avoided the worst of the unavoidable Budget|
|Proposal||Why is this not as bad as it might have been?|
|Increase in the standard rate of VAT to 20%.||
The increase is deferred until January 2011.
The problems some businesses experienced with a 1 January change date were acknowledged with a proposed effective date of 4 January.
There is no increase in the 5% rate of VAT, and no extension of VAT to any goods or services that are currently exempt or zero-rated.
|Reduced annual writing down allowances for capital expenditure - from 20% to 18% for the main rate, and from 10% to 8% for certain types of asset including some cars and integral features in buildings.||
The reductions are not as great as some had feared, and the change is deferred for two years.
|Increase in the rate of capital gains tax to 28% for disposals by higher rate taxpayers after 22 June 2010.||The new rate is not as high as some had feared, and the large increase in the entrepreneurs' relief lifetime limit from £2 million to £5 million will benefit many business owners.|
|New bank levy from January 2011.||The expected annual yield of around £2.5 billion is relatively low for the sector as a whole.|
There are even some positive measures
The government is very mindful of the need for the UK's corporation tax system to be internationally competitive. The phased reduction, starting in April 2011, in the corporation tax main rate from 28 percent to 24 percent, and the smaller reduction in the small companies rate to 20 percent, will help to reduce the movement of businesses away from the attractive inward investment, as well as encouraging domestic growth. However, this is partly funded by the reduction in capital allowances writing down rates from April 2012, which will affect some businesses more than others (see below).
On the national insurance front, the increase in the employer's weekly threshold from £110 to £131 from April 2011, and the three-year exemption worth up to £5,000 per employee for new businesses (broadly) outside the South East taking on up to 10 new employees, will help companies to retain and recruit staff.
There is an additional incentive to buy environmentally friendly vehicles, with the introduction of a 100 percent first year allowance for new zero-emission goods vehicles purchased between April 2010 and March 2015.
Some businesses will lose out
Businesses that are likely to lose out include:
- Exempt and partially-exempt businesses for whom the VAT increase will be a real cost. Retailers will also once again have to go through the expensive administrative process of changing prices, and may face reduced demand from customers if they pass on the full increase.
- Businesses that currently claim the full £100,000 Annual Investment Allowance, which will be reduced to only £25,000 from April 2012. This will be very disappointing for smaller and medium-sized businesses with high capital expenditure, especially as the limit was doubled from £50,000 to £100,000 only two months ago. In the short term, the key here will be to utilise the £100,000 allowance as fully as possible before it is reduced, which may mean accelerating some expenditure.
- Suppliers of goods and services to the public sector, who will be affected by cancelled or renegotiated contracts and more competitive tendering.
What about individuals?
- The £1,000 increase in the personal allowance will benefit basic-rate taxpayers and take some individuals out of the income tax net.
- The announcement that an alternative method of restricting pensions tax relief for high earners is welcome, as the system that is due to take effect in April 2011 would be an administrative nightmare for advisers, employers and employees. The proposed reduction in the annual allowance would be a much simpler way of effecting the restriction, and this may be acceptable provided that it results in a comparable restriction of relief for those affected.
- The proposed removal of the requirement to buy an annuity at no later than age 75 will also provide more flexibility for retired individuals.
- There will be a review of the taxation of non-domiciled individuals to assess whether the current rules can be changed to ensure that they "make a fair contribution to reducing the deficit". Given that "we are all in this together", another tax increase for such individuals may be on the cards.
Capital gains tax
- The retention of the 18 percent capital gains tax rate for basic rate taxpayers, and the retention of the current annual allowance of £10,100, will be welcomed by small investors, as will be the decision not to abolish the furnished holiday lettings rules, although it is proposed to change those rules to make it harder for properties to qualify.
- The large increase in the entrepreneurs' relief lifetime limit from £2 million to £5 million will be welcomed by those who decided not to realise a gain of up to that amount in advance of the Budget. Disappointingly, there is no indication so far of a change to the rules to enable employees with share holdings of less than 5 percent in their company to benefit from entrepreneurs' relief. Many such employees will see the applicable capital gains tax rate on the disposal of their shares rise from 18 percent to the new 28 percent. This is still an attractive rate compared to an income tax rate of 40 or 50 percent, but some employers will need to re-assess equity reward arrangements.
So who will bear most of the deficit reduction cost?
The great majority (77 percent) of the cost of reducing the deficit will be borne by:
- Public sector workers, through a two-year pay freeze and possible public service pension changes (although existing pension rights will be protected).
- Government departments, which on average will have spending cuts of 25 percent over the next four years.
- Recipients of various social benefits, including child, disability and housing benefits.
- Consumer sand end-users of goods and services - even those on low incomes - through the increase in the standard rate of VAT to 20 percent from 4 January 2011. Most households, and organisations that cannot fully recover VAT, will therefore feel the impact of this measure.
- As previously announced, employees and employers will pay an additional 1 percent in national insurance contributions where earnings are above the newly extended threshold.
The missing bits from Finance Act 2010
As expected, some of the proposed measures that were announced in the previous Budget report but were omitted from Finance Act 2010 have reappeared, including:
- Amendments to the Enterprise Management Incentives, Enterprise Investment Scheme and Venture Capital Trust scheme rules.
- Retrospective clarification that certain distributions of a capital nature are not prevented from falling within the distribution exemption regime.
- Amendments to the interest relief 'worldwide debt cap' legislation.
- The extension of the new penalty regime for late filing and late payment to indirect taxes.
Can this government deliver tax simplification?
It is well known that the tax legislation more than doubled in length and became more complex under the previous government. The new government yesterday made a commitment to simplify legislation, and also to create more stability in the tax system by making fewer piecemeal changes. The signs so far are encouraging, with the announcement of the establishment of an independent Office of Tax Simplification, and the proposal to change the very complex system for restricting pensions tax relief for high earners that is due to take effect next April.
The government has also stated that it will review small business tax, in particular the unpopular IR35 rules, and will release more details shortly.
However, simplification may come at a price - the government is to consider the introduction of a 'general anti-avoidance rule'. This could have wide reaching implications for all types of tax planning, rather than just the specific areas that are currently targeted.
It does appear that the Chancellor wished to take all necessary deficit reduction measures at the outset, and we can only hope that there will now be a period of relative stability in the tax system for both businesses and individuals. This would enable future planning to be carried out with more confidence than in the recent past, as we now begin to digest the detailed implications of this Budget, and seek to return to growth.
Paula Tallon is a partner of BDO LLP