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.
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 per
cent to 24 per cent, and the smaller reduction in the small companies rate to
20 per cent, will help to reduce the movement of businesses away from the UK
and attract 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 per cent
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
cos
·
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?
Income tax
·
The
£1,000 increase in the personal allowance will benefit basic-rate taxpayers and
take some individuals out of the income tax ne
·
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 per cent 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 Budge
So
who will bear most of the deficit reduction cost?
The great majority (77 per cent) 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 per cent over the
next four years.
·
Recipients
of various social benefits, including child, disability and housing benefits.
·
Consumers
and end-users of goods and services - even those on low incomes - through the
increase in the standard rate of VAT to 20 per cent 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 per cent
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
governmen
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.
Conclusion
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
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