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The Chancellor’s Autumn Statement 2011

1 December 2011 No Comment

Last week┬áThe Economist said that the Chancellor had made it clear that he does not regard The Autumn Statement “as a ÔÇ£fiscal eventÔÇØ where spending and tax changes are announced; that will be saved for the budget in March. But it is a political set-piece all the same. So the chancellor will try to knit together a variety of small, fairly cheap policy strands, such as measures to help small businesses with credit, into a coherent growth strategy. Given the unfolding catastrophe on BritainÔÇÖs doorstep, it is likely to look threadbare.”
Well, George delivered the 2011 Autumn Statement and guess what, it does. He hasn’t really wavered from the path he set out last year despite the dramatic change in economic circumstances in the UK and European economies. In true KISS style, he made no adjustment to overall spending and borrowing, saying ÔÇ£people know that promises of quick fixes and more spending this country canÔÇÖt afford, at times like this, are like the promises of a quack doctor selling a miracle cureÔÇØ. Too true, but sometimes it might be useful to at least float something that looks like a duck to encourage a positive attitude!

What he did announce were initiatives to drive private sector growth and further restrain the cost of the public sector in response to the OBRÔÇÖs forecasts. In contrast, as expected, there were few tax announcements.

But don’t go away because there were a few important surprises, which are highlighted here.

Corporate tax system

There was, as usual, much “guff” about the GovernmentÔÇÖs commitment to develop the most competitive corporate tax regime in the G20 (jam some time in the future), much trailing of next yearÔÇÖs reduction in the mainstream rate to 25% (jam tomorrow) and the draft foreign profits legislation to be released in early December (jam next week!).

He also announced that 100% capital allowances would be available for plant and machinery investment incurred between April 2012 and March 2017 in six English Enterprise Zones:┬áBlack Country,┬áHumber,┬áNorth Eastern,┬áSheffield,┬áTees Valley,┬áLiverpool but, as you will all have noticed, nothing in the South West. Apparently, discussions between the Government and the devolved administrations may lead to enhanced capital allowances becoming available in other UK Enterprise Zones….don’t hold your breath.

Large companies also get an opportunity to argue their position for R&D tax credit extension as a consultation will commence at Budget 2012 to introduce an ÔÇÿabove the lineÔÇÖ tax credit to encourage research and development activity. This is intended to enhance the measures announced in Budget 2011 to “increase the generosity and accessibility of R&D tax credits for┬áSMEs”. No details have been announced at this stage.

Perhaps surprisingly, relatively little new corporate tax anti-avoidance legislation was announced. Measures mainly concentrated on “manufactured overseas dividends” which cannot be used to obtain repayment or set off of income tax not paid over to┬áHMRC┬áand clarification of the amount of tax relief given to employers making asset-backed pension contributions to registered pension schemes.

Bank Levy

The Chancellor confirmed his opposition to the European proposals for a Financial Transactions Tax, referring to it as a tax on pension funds rather than a tax on bankers. Did I hear anyone mention the abolition of ACT?

He also basically admitted that the Treasury had “misunderstood” the structure of the UK banking market as they had expected foreign banks operating in the UK to raise capital in the UK. They don’t. Therefore tax collections from the Bank Levy are falling short of the targeted ┬ú2.5bn pa. The effective full rate of the Bank Levy from 1 January 2012 has therefore been increased from 0.078% to 0.088%, raising an additional c. ┬ú0.3bn pa.

Income tax and capital gains tax

From April 2012, in a further significant improvement to the Enterprise Investment Scheme, 50% income tax relief will be provided in qualifying new start ups of up to ┬ú100,000, regardless of the investorÔÇÖs marginal rate of income tax.

This new Seed Enterprise Investment Scheme (SEIS┬á- note the new acronym) may be more “major headline” than “major new tax incentive”, however, as individual companies are restricted to a cumulative investment limit of ┬ú150,000 (what will this be net of the due diligence costs I wonder?) and the budgeted cost is a mere ┬ú50m in year one. It is also subject to state aid approval as usual from Europe.

A capital gains tax holiday will be offered for investments made to the SEIS. This will provide for CGT exemption on gains realised on disposal of an asset in 2012/13 and invested through SEIS in the same tax year, giving overall tax relief of up to 78%.

There will also be consultations on relaxing connected person rules for the Enterprise Investment Scheme and anti-avoidance to prevent its general abuse. The £1m investment limit per company for Venture Capital Trusts will be removed to reduce the administrative burden of the scheme.

The above measures will largely be paid for by a freezing of the CGT annual exemption of £10,600 for 2012/13. Yup, many benefits go up by over 5% (due to the rate of inflation in September 2011) but the exemption is frozen.

Credit easing

It’s fairly obvious to most businesses that the “adverse credit conditions” in the euro area are having a knock-on effect for small and mid-size businesses borrowing from the clearing banks. In order to try and provide further support the Government is launching a range of support schemes which they reckon are worth up to ┬ú21 billion. There are two main schemes intended to improve the flow of credit to businesses.

The┬áNational Loan Guarantee Scheme┬áprovides funds of up to ┬ú20 billion of guarantees for bank funding over two years. This is intended to permit banks to offer lower cost lending to smaller businesses. This lending is subject to state aid approval. If you think that it sounds like the Small Firms Loan Guarantee Scheme or the Enterprise Finance Guarantee you’d be right – but surely we need another acronym to change our perception…..SFLGS,┬áEFG┬ánow┬áNLGS. I know, I know… there were many more before too but you get the message!

The second scheme is the Business Finance Partnership which will administer the remaining £1 billion of the credit easing funds being made available. This is to be available to invest in SMEs and mid-sized companies in the UK through non-bank lenders. Initially, these funds will be targeted toward co-investment with the private sector with loan funds that lend directly to mid-sized businesses.

In conclusion

We were expecting very little in the way of new announcements, and we were not disappointed. Nothing was said on the 50% rate of income tax or reliefs generally. There was an extension of business rate relief for small businesses until April 2013 and a ┬ú50 cut in water bills for families in the┬ásouth-west of England. And of course the headline grabbing suspension of the fuel duty increase which was due in January. The 3p rise planned for August 2012 will still stay. Perhaps he’s saving that little gem for the March 2012 budget.

A significant amount of draft legislation is due to be released on Tuesday 6 December – if there’s anything startling we’ll let you know once we’ve read it. Bet you don’t envy us that foray into the sparkling narrative from the Treasury!

If you would like to discuss anything you’ve read about the Autumn Statement or other issues, please give us a call. We’d love to hear from you.


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