Steven Mugglestone

The more I learn, the less I know

2010 budget summary and comment

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2010 budget summary and comment

The Conservative party manifesto stated that they would hold an Emergency Budget within 50 days of taking office and that a credible plan for deficit reduction would be top of their list.

The very first item on the coalition agreement was a restatement of this aim and a confirmation that there would be a move to accelerated debt reduction with spending cuts taking priority. To underline this point, it was agreed that £6bn of cuts would be found in the current financial year, 2010/11.

This may seem like tough talk, but against a background of the credit crisis engulfing sovereign states and the UK’s financial credibility under pressure, it was important to send out a strong message that the coalition’s priority was to bring the nation’s finances under control.

This has to be done as a balancing act to achieve fiscal consolidation without tipping the UK back into recession, possible deflation and rising unemployment.

Office for Budget Responsibility

The Emergency Budget was held only 41 days after signing the coalition agreement. In the meantime, the Chancellor had also made a number of announcements on tax and budget policy, including the establishment of the Office for Budget Responsibility (OBR) charged with independent vetting of the forecasts and assumptions, for example GDP growth, that underpin the Budget figures.

In advance of the Emergency Budget, the first report from the OBR was published on 14 June 2010. Its conclusions on the fiscal and economic forecast made for interesting reading. In summary, as compared to the Budget in March 2010, the OBR downgraded future growth estimates, reduced the expected current year budget deficit but revised upwards the underlying structural deficit.

The OBR set the scene for an austerity budget the like of which most of us have not seen before. The tough talk has now been translated into concrete action, with a range of public spending cuts and tax increases that will impact on everyone.

Key points from the Budget

The Chancellor was at pains to support business and offer a clear roadmap for business tax over the life of this Parliament. Corporation tax rates for both large and small companies will be reduced; the main rate from 28% to 24% over four years and the small companies’ rate to 20%. To compensate for these reductions in headline rates, capital allowances will be reduced slightly and the annual investment allowance cut back from £100,000 to £25,000.

Tax increases

Attention was focused on areas where taxes would be increased, with increases in the VAT rate to 20% and an increase in the CGT rate. VAT was increased to 20% but only from 4 January 2010, thereby giving consumers six months to make purchases at the old rate of 17.5%. In addition, anti-forestalling arrangements will seek to stop partly exempt businesses entering into arrangements avoid the effect of the increase in the VAT rate.

The rate of CGT was increased, given that the difference between the CGT rate (18%) and the top rate of income tax (50%) would be 32% this year. In the event, a new CGT rate was introduced of 28%. The new rate, however, only applies where total taxable gains and income are more that the upper limit of the income tax basic rate band; gains below that limit will be taxed at the 18% rate. This will add complexity to the CGT system.

Further complications to the 2010/11 tax calculations will arise because the new rate applies from part-way through the year, to disposals on or after 23 June 2010. There will be a need to act quickly to reduce leakage as taxpayers seek to convert income into capital.

Spending cuts

The Chancellor said that the consolidation will be achieved through 77% spending cuts and 23% tax increases.  This means that about £3 of savings would be found for every £1 of tax raised. There have been a number of far-reaching announcements that will impact on welfare benefits, with tax credits for the higher paid, housing benefit and disability living allowance being in the firing line.

In the autumn, at the next spending round it looks like departmental budgets will be cut by up to 25%.  The Chancellor made it clear that public sector pensions are unaffordable and up for review. The scale of the proposals was unprecedented, but it is believed that support for the disadvantaged and that the UK’s regions would continue.

Tax policy

The Government published a consultation document on formulating a new approach to tax policy-making.

The government proposes that there will be early and better consultation, that there will be improved analysis of the impact of changes, that legislation will be published in draft before it is included in a Finance Bill and that there will be greater Parliamentary scrutiny of tax legislation.

Tax avoidance clamp down

There continues to be aims and strategies to reduce tax evasion and counter tax avoidance.  A number of new anti-avoidance measures were announced and in addition further detailed consideration will be given to a general anti-avoidance rule (GAAR). A GAAR was proposed in 1998 but following consultation the idea was rejected, never to resurface. There must be a good chance that the time is right for a GAAR.

Conclusion

The Budget has started to address the problem of reducing the UK’s debt mountain and restoring our fiscal credibility while fostering a return to growth. The danger is that if it has gone too far and that the UK could be plunged back into recession and the jobless total could soar. It remains to be seen if the UK will be resilient enough to take such treatment.

Budget Tax Outline and Facts and Figures

VAT

Change to the standard rate of VAT

  • The standard rate of VAT will increase to 20 per cent on 4 January 2011.
  • Zero rated supplies (such as basic foodstuffs, children’s clothing and books), exempt supplies, (such as education and health) and supplies subject to VAT at the reduced 5 per cent rate, (such as domestic fuel and power) are not affected by this change.
  • There are no changes to the Cash Accounting or Annual Accounting Scheme.

VAT Flat Rate Scheme

  • As a consequence of the increase in the standard rate of VAT to 20 per cent, the Flat Rate Scheme sector flat rates will be recalculated to reflect the increase.
  • Some of the thresholds applicable to the scheme will be revised to reflect the increase in the standard rate of VAT.

Insurance Premium Tax

Insurance Premium Tax – Increase in the standard and higher rates

  • The standard rate of Insurance Premium Tax will be increased to 6 per cent, and the higher rate will be increased to 20 per cent
  • These increases come into effect on 4 January 2011 and will apply to premiums received under taxable insurance contracts on or after that date

Corporation Tax

Corporation Tax Rates

  • Legislation will be introduced to cut the main rate of Corporation Tax to 27 per cent for the Financial Year commencing 1 April 2011
  • There will be further cuts in the main rate in future years: 26 per cent in 2012/13, 25 per cent in 2013/14, 24 per cent in 2014/15
  • The small profits rate of Corporation Tax for Financial Year 2011/12 will be 20 per cent. This will be legislated in Finance Bill 2011.

Corporation Tax Reform

  • The Government will set out a more detailed programme for reform in the autumn.

Capital Gains Tax

Capital Gains Tax – Rates and Entrepreneurs’ Relief

  • From 23 June 2010, Capital Gains Tax will rise from 18 per cent to 28 per cent for those liable to Income Tax at the higher and additional rates
  • Gains qualifying for Entrepreneurs’ Relief will be taxed at a rate of 10 per cent and the lifetime limit of gains qualifying for Entrepreneurs’ Relief will be raised to £5 million (from the previous figure of £2 million)

Other Taxes, Levies and Allowances

Bank Levy

  • The Government will introduce a levy based on banks’ balance sheets from 1 January 2011

Landline Duty

  • The 50p duty on landlines (local loops) announced in the Pre-Budget Report 2009 will not proceed.

Capital Allowances – Plant and Machinery Rates will be reduced

  • From 20 per cent to 18 per cent per annum for expenditure in the main rate pool
  • From 10 per cent to 8 per cent per annum for expenditure in the special rate pool
  • These rate changes will take effect from April 2012

Annual Investment Allowance – Changes to allowance

  • The maximum amount of the Annual Investment Allowance will be reduced from £100,000 to £25,000 a year with effect from April 2012. Details of the transitional provisions will be published in good time before the reduction takes effect

Furnished Holiday Lettings – Changes

  • The Government will publish a public consultation over the summer about plans to change the tax treatment of furnished holiday lettings from April 2011.

Compliance Measures

  • HMRC Review of Powers: Late filing and late payment penalties
  • Legislation will be introduced in the autumn that will bring VAT, Insurance Premium Tax, Aggregates Levy, Climate Change Levy, Landfill Tax and Excise Duties within the late filing and late payment penalty regimes. This will complete the legislative programme started in Finance Act 2009.

HMRC Review of Powers: Financial security for PAYE/NICs

  • HMRC will consult later this year to look at the proposal to introduce powers to require a financial security from employers who have a history of serious non-compliance, in terms of paying late, or not paying their PAYE Income Tax and National Insurance Contributions.

www.mcgregorscorporate.co.uk

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Written by Steven Mugglestone

June 24, 2010 at 9:46 am

Posted in Helping Business, Tax

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