The Conservative-Liberal Democrat government’s emergency Budget, set for 22 June, is likely to herald several tax changes.
Areas where there will be major announcements include capital gains tax, inheritance tax, corporation tax and national insurance contributions.
A number of the government’s plans have already been set out in previous statements, but there are still several details yet to be clarified.
One thing, though, is certain: tax planning will become ever more important. Planning, too, to make the most of what promises to be difficult economic times ahead.
Below is a brief summary of the most likely changes to arrive with the Budget. If you would like expert, professional advice and help on how best to manage the new tax and business landscape, please don’t hesitate to contact us.
The economy
There will be an accelerated reduction in the budget deficit, with £6 billion coming this year (although the commitment contains a proviso that the level of the cuts will be subject to advice from the Treasury and the Bank of England).
The Office for Budget Responsibility (OBR), set up by the coalition government to provide independent economic forecasts, has predicted that rate at which the UK economy is likely to expand will be lower than previously estimated.
According to the OBR, economic growth for 2011 will be 2.6 per cent, down from the 3 per cent to 3.5 per cent anticipated by the previous government.
However, public borrowing is likely to remain at £155 billion for 2011, the OBR report said, some £20 billion less than first forecast. Total net borrowing over the next five years is expected to be £23 billion less than predicted in the last administration’s March Budget.
The OBR said that the public deficit will fall to 10.5 per cent of GDP in the 2010-11 financial year, down from the 11.1 per cent estimated by Labour. Overall net government debt, which represents total government borrowing, should slip back to 62.2 per cent of GDP in 2010-11, compared with the previous estimate of 63.6 per cent.
The structural deficit, which is that segment of the deficit not immediately reduced by economic growth, is predicted to increase from the previous forecast of 7.3 per cent of GDP in 2010-11 to 8 per cent, the OBR said.
The new figures, however, will only apply up until the emergency Budget of 22 June since any government action that will be announced then has not so far been factored in.
A full spending review is to be held in the autumn, following a consultative process involving all tiers of government and the private sector.
The coalition has ruled out joining the euro for the duration of the next Parliament.
Tax
Income tax
The personal allowance for income tax is to be increased, the first stage of which is to take effect from April 2011. There is to be a long-term policy of raising the threshold to £10,000, graduated across a number of years.
Inheritance tax
This will take precedence over Conservative plans to raise the inheritance tax threshold to £1 million from its present £325,000. Liberal Democrat proposals for a ‘mansion tax’ on properties worth £2 million or more is to be scrapped.
National insurance contributions
The National Insurance Contribution Bill, introduced in the Queen’s Speech, restated the government’s intention to reverse Labour’s plans for a 1 per cent rise in NICs due to come into effect in April 2011.
The Bill will mean that employers will not face a rise in the contributions they must pay. Although employees will still see their contributions go up, the money raised will be used to pay for a staged increase in the income tax personal allowance threshold, the long-term aim being to lift it to £10,000.
The government said that under the full changes most people would be “better off relative to the previous government’s plan, and relative to no changes, all low and middle income employees would pay less tax and NICs overall, and employees on the main rate earning under £20,000 would pay less NICs”.
In effect, that may mean that NICs for those earning more than £20,000 but less than £45,000 will increase but will be balanced by the rise in the income tax personal allowance.
Married allowances
Another Conservative manifesto commitment to introduce transferable tax allowances for married couples stays in place, although Liberal Democrat MPs will be allowed to abstain in the Commons vote on the measure.
Capital gains tax
At present, CGT is only payable on gains over £10,100 in any tax year, chargeable at a rate of 18 per cent.
A Treasury document released to coincide with the Queen’s Speech reiterated the government’s commitment to raise capital gains tax on non-business assets. It stated: “Capital gains on non-business assets will be taxed at rates closer to those applied to income tax.”
However, the statement adopted a slight shift in semantic tone compared with previous announcements, which had used “similar” rather than “closer” to indicate the measure of any increase in CGT, suggesting it may be as high as 40 per cent, a 22 per cent jump from its current level.
One interpretation is that the Chancellor may now choose to raise the CGT rate to a level below the 40 per cent income tax rate, or to re-introduce a tapering system that would reduce the amount of tax payable on assets according to the length of time they have been held (the longer, the lower the rate of the tax charge). Tapering would effectively be a tax on short-term speculation rather than longer-term investment.
The government may also opt to clarify what is defined as a business asset, perhaps to cover shares held by employees as a way of protecting business investors. Another possibility may be to extend lifetime entrepreneurs’ relief.
The present individual annual allowance for tax-free capital gains is £10,100. This may be lowered, although it would have an impact on taxpayers who only make moderate profits from their assets.
Older investors – perhaps those aged 65 and over – may be granted a CGT concession so that they can use the ownership of a second home to help finance their retirements.
Corporation tax
Plans by the government to reduce the higher rate of corporation tax could be phased in over a period of years.
Lord Sassoon, the Treasury’s commercial secretary, said in a House of Lords speech that the government is committed to lower, simpler and more predictable taxes.
However, Lord Sassoon added that the emergency Budget would be setting out a five-year plan for the reduction and reform of business tax, suggesting that the proposed cut in corporation tax from 28 per cent to 25 per cent would be staggered over the lifetime of the current Parliament.
The Chancellor committed the government to a reduction on corporation tax in a speech he made to the CBI last month.
It is estimated that a 3 per cent cut in the headline tax would involve an annual loss to the Treasury of some £4.5 billion. The Chancellor may recoup some of the fall in revenue by abolishing or streamlining the tax reliefs currently available to businesses.
No statement has yet been made on whether there will be a corresponding cut in small company corporation tax.
VAT
Speculation is rife that the Chancellor will give serious consideration to some sort of graduated VAT increase, perhaps to as much as 20 per cent (the current level is 17.5 per cent, 2.5 per cent below the European average).
On the plus side, a rise in VAT has immediacy in producing regular revenue. The downside for the government is that any increase could dampen consumer spending or fuel inflation.
Were the increases to be phased in over a period of time, however, they may encourage consumers to bring their spending forward to avoid the higher charge promised in later years. A hike in VAT may reflect a growing move towards indirect taxation which shifts the tax emphasis away from income and capital and towards spending.
A rise in VAT to 20 per cent would generate an extra £11.25 billion of government income per year.
Other tax measures
A switch to per-plane rather than per-passenger duty should be implemented.
The two parties have agreed to reduce the availability of child trust funds and tax credits for higher earners, those households, perhaps, on more than £50,000 a year.
A banking levy is also to be introduced.
Business
The government is to focus on improving the flow of credit to smaller firms. This will include the possibility of establishing a loan guarantee scheme to replace the Enterprise Finance Guarantee programme and the use of net lending targets for nationalised banks.
Some backdated demands for business rates will be cancelled.
In his first major speech as Business Secretary, Vince Cable committed the government to taking a tougher line on parts of the banking system that have “not served enterprise in this country as well as they could”.
Mr Cable promised to “redouble our efforts to ensure that bank lending agreements from banks that have benefited from taxpayer subsidy are being honoured – especially for SMEs”.
He set out three possible routes to improving the present squeeze on lending: separating retail and investment banking, resolving the question of a levy on the banks to reflect the fact the taxpayer is providing insurance, and ensuring that banks’ lending agreements are being kept.
Pensions
The default retirement age is likely to be phased out, and a review will be held to establish the dates at which the state pension retirement age begins to rise to 66. There is a commitment that, in the case of men, this will not be before 2016 and, in the case of women, not before 2020.
Rules requiring mandatory annuitisation at 75 are to be dropped. At the moment, people who establish a pension savings fund must use the money to purchase an annuity, or an annual income for life, when they reach the age of 75, preventing them from passing on the capital to their heirs.
The link between the basic state pension and earnings will be restored from April 2011 with a guarantee that pensions are raised by the higher of earnings, prices or 2.5 per cent, as proposed by the Liberal Democrats.
Thus far, the government has not offered a policy on pensions tax relief. The Liberal Democrats had been in support of abolishing all higher tax rate relief, capping relief at the basic rate of income tax.
Employment
All existing welfare-to-work programmes are to end and are to be replaced by a single welfare-to-work programme.
Those Jobseekers’ Allowance claimants who must deal with the most significant barriers to work will be referred to new welfare-to-work scheme at once rather than after 12 months. In the case of those Jobseekers’ Allowance claimants aged under 25, they will be referred to the programme after six months.
The EU
There will be no further transfer of sovereignty or powers to the EU over the course of the next Parliament.
The government will work to make sure that the application of the Working Time Directive in the UK is limited.
Any future European treaty that involves the transfer of power will be subject to a referendum.
The environment
A green investment bank will be set up.
The government is to press ahead with a high-speed rail network but will reject plans for additional runways at Gatwick and Stansted.
A national planning statement will be drawn up to allow a process for replacing existing nuclear power stations with new ones, although Liberal Democrat MPs will be allowed to abstain on any vote on the plans.
