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“We’re all in this together” – Riley Budget summary 2010 – Part 2!

23 June 2010 No Comment

The first thing that struck me about yesterday’s budget speech was the ties. The shimmery bluey-green of Osbourne’s effort and the blue and yellow of Cameron and Clegg. Wow, what a change from the normal dull red efforts that we have seen for the past 13 years. Perhaps the fashionista broom really does sweep clean. But how would the coalition policy broom do?

Well, what the Chancellor had to do was to persuade all of us that the epic reconstruction job that he has started on the UK economy was worthwhile and capable of careful, intelligent implementation. The buzz during the selling phase of the pre-election waffle was all about “sharing the proceeds of growth”, a phrase that David Cameron spouted on numerous occasions. Well, this budget was all about sharing the proceeds alright, not of growth, but of failure. And to put that problem into its proper context, the Chancellor said he would give it to us straight – there would be no stealth taxes, no hidden bombshells buried in the small-print, no double and triple counting for effect. Figures would not be fiddled for political impact. And largely he appears to have done just that. Stealth and perception have not been buried entirely (this is politics when all is said and done) and we will have to wait until 25 October to feel the bite of the axe in spending – and when it falls, it will be heavy.

So to the highlights excluding those mentioned in our last budget report which you can find here.

Corporate taxation

  • Main corporation tax rate to reduce from 28% by 1 per cent every year for four years to 24 per cent in 2014/15.
  • Small companies rate to be cut to 20 per cent from 1 April 2011.
  • Thresholds for small companies rate and main rate of corporation tax to remain unchanged at ┬ú300k and ┬ú1.5m
  • Taxation of Foreign profits, intellectual property and R&D to be reformed to make UK more business friendly.
  • Reduction in capital allowances from 20 per cent to 18 per cent on main pools, and from 10 per cent to eight per cent on special rate pools, from 1 April 2012.
  • Annual investment allowance reduced from ┬ú100,000 in 2010/11 to ┬ú25,000 from 1 April 2012. There will be transitional rules which, you’ve guessed it, will be available in “due course” – or to translate, when they’ve been written!
  • Introduction of a bank balance sheet levy, initially at 0.04 per cent from January 2011, increasing to 0.07 per cent. This is intended to encourage the banks to move to less risky funding profiles rather than to take less risk!
  • In case you’re interested, the main rate of corporation tax for companies with profits from oil extraction and oil rights in the UK and the UK Continental Shelf (ring fence profits) will remain at 30 per cent
  • Draft legislation has been released to clarify the treatment of certain dividends within UK companies. Hopefully, this will clear up some of the uncertainties including the treatment of dividends from reserves created after a reduction in company capital.

In terms of planning, it’s all about timing, and mainly on the purchase of capital assets. Utilising the higher allowances in the next two years is crucial if you are planning capital expenditure. Any expenditure over and above the ┬ú100k AIA should be planned within the same timescale to allow for the higher capital allowances available during that period. However, overall the reduction in CA’s isn’t as large as many were expecting and the timing allows a benefit from the reduction in CT rates and increased levels of allowances at the same time.

The government have again expressed their commitment to countering tax avoidance and have announced their intention to consider whether a “general anti-avoidance rule” should be implemented. This would have potentially wide-ranging implications for all types of tax planning.

Employment taxation

  • EmployersÔÇÖ NIC threshold to increase above inflation as previously announced.
  • Employer Funded Retirement Benefit Schemes (EFRBS) have been included in the HMRC crackdown on “perceived avoidance”. Surely not?
  • Up to ┬ú5,000 exemption from EmployerÔÇÖs NIC for each of first 10 people employed by new businesses located (broadly) outside South East.
  • Anti-avoidance legislation relating to the Er’s NIC change will be published but guess what, it hasn’t been written yet!

Indirect taxation

  • 20 per cent main VAT rate to be introduced on 4 January 2011, with continued exemptions for essential goods. This isn’t surprising given the amount that it raises (┬ú13bn pa) and the fact that George had nowhere else to go for it as the cupboard was bare!
  • Insurance premium tax rates to increase from 5 per cent to 6 per cent and from 17.5 per cent to 20 per cent.
  • You’ll no doubt all be pleased to know that the Landline Duty that was proposed in the 2009 Pre-Budget Report will not be introduced.

Income tax

  • Personal allowance to increase by ┬ú1,000 from 5 April 2011.
  • Higher rate tax threshold will be reduced so that higher rate and top rate taxpayers will not benefit from the increased personal allowance.

Capital gains tax (CGT)

  • Rate of CGT to increase to 28 per cent for higher rate and top rate income taxpayers (basic rate taxpayers rate to remain at 18 per cent) with no tapering based on length of ownership.
  • New CGT rate to be introduced for gains made from midnight.
  • Gains arising before 23 June will not be taken into account in determining the rate at which gains arising after 23 June are subject to tax.
  • HMRC will not rule out the 28% rate changing for 2011/12
  • EntrepreneursÔÇÖ relief will apply to first ┬ú5m of qualifying gains made from midnight and will continue to produce an effective tax on gains of 10% subject to the qualifying rules.
  • The Government will not be following through with the proposal to repeal the special tax rules relating to furnished holiday lettings. Instead they will consult to ensure the UK rules meet EU legal requirements. Any changes will be effective from April 2011

Pension issues

  • The Government has announced that it will end the requirement to use a pension fund to buy an annuity by age 75 with effect from 2011/12. Pending implementation of this announcement, registered pension scheme members attaining age 75 after 21 June 2010 will not be required to secure an income until age 77.
  • There will be a “step-back” from the higher rate tax relief restriction that was to be introduced on pension contributions from 2011/12. However, HMRC have stated their intention to raise the same amount through other means – the best guess is that this means restricting the level of overall contributions allowable.
  • Remember the QWPS or NEST comments from our last budget commentary? No thought not and it was only a couple of months back too!

Well, NEST is the new State sponsored Trust-based Defined Contribution pension scheme being established to provide an alternative to Qualifying Workplace Pension Schemes (QWPS) when Workplace Pension Reform introduces auto enrolment for pensions for all ÔÇ£eligible jobholdersÔÇØ, starting in October 2012. Bet you can’t wait! The requirements in terms of timing drop down with size of the business. Employers of 50 eligible jobholders, for example, must auto-enrol by July 2014, at the latest.

  • There is an increasing scale of compulsory minimum contributions (beginning at 1 per cent of earnings from the employer, and 1 per cent from employees in 2012), reaching the ÔÇ£steady stateÔÇØ minima of 3 per cent employer and 5 per cent (gross) employee in October 2017.

So that, as they say, is that. 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 countryÔÇÖs deficit. Certainly, there wasnÔÇÖt much to laugh about apart from the discomfort on the opposition benches and you have to feel sorry for them don’t you? You don’t?

Finally, Mr Osborne said the UK ÔÇÿwill not be joining the euro in this ParliamentÔÇÖ. This is not unexpected but George was also able to announce that he had therefore abolished the TreasuryÔÇÖs euro preparations unit. No doubt everyone will be relieved to know that ÔÇÿthe official concerned has been redeployed to more productive activitiesÔÇÖ. What those activities are we’ll no doubt never know!

Jon Stacey

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