UK budget summary of measures

The UK Chancellor of the Exchequer delivered his first buget speech this afternoon.  The main points relating to business and taxation are:

  1.  The standard corporation tax rate to be reduced by 1 % each year for the next 4 years resulting in a reduction from 28% to 24%.  The small companies rate is being reduced to 20% reversing the previous governments committment to increase it to 22%.
  2. Capital allowances for plant and machinery is to be reduced from 20% per annum to 18% per annum; and 10% to 8% for longer life assets.  The total amount allowable does not change but is given over a longer period.
  3. The threshold at which employers start paying national insurance will increase by £21 per week.
  4.  Provisions to help businesses include an extension of the enterprise finance guarantee scheme; an exemption from employer national insurance of up to £5k for the first 10 employees hired for new businesses.  There will also be a consultation paper issued on the rebalancing of the Northern Ireland economy.
  5. The standard rate of VAT will increase to 20% from 4 January 2011.
  6. There will be no further increases in duty as announced in the March budget.  However, this will be under review until the Autumn.
  7. As widely anticipated changes have been made to capital gains tax.  Higher rate tax payers will be charged 28% on gains from midnight tonight.  Lower rate tax payers will continue to be charged 18% on gains. Indexation allowances or taper relief will not be introduced.
  8. Entreprenuers relief is to be increased to £5m.
  9. Income tax rates remain unchanged.  The tax-free allowance will be increased by £1,000.  The standard rate cut-off will be frozen until 2013.

There are some welcome provisions in this budget for businesses.  The reduction in corporation tax was anticipated, however, it may not be enough for businesses in Northern Ireland whose closest neighbour has a standard corporation tax rate of 12.5%.  Having said that, many commentators predicated a reduction in capital allowances which didn’t happen (although in real terms the value of capital allowances will be reduced by spreading them over a longer period).

The hike in the VAT rate to 20% should reduce the price differential between retail goods in Northern Ireland and the Republic of Ireland.  The difference in the Irish and UK VAT rates will be reduced from 6 percentage points in December 2009 to just 1 percentage point when the new UK rate is introduced in January 2011 (assuming the Irish Government does not make any changes to the VAT rate in its December budget).  This may signal the end of the mass shopping exodus to Northern border towns by Southern consumers, something that will surely be welcomed by Southern retailers, but not so by their Northern counter parts.

While the Chancellor claimed to be attempting to simplfy the UK taxation regime he doesn’t appear to have done so with capital gains tax.  His objective was to bring the CGT rate closer to the income tax rate to prevent the situation where rich people are “paying less tax than their cleaners”.  I think the introduction of a 2 tier system will be difficult to operate in practice.  For example what year is the basis year for determining whether the tax payer was a higher rate payer?  The year in whcih the gain arises or the last complete tax year? What if someone was paid a once-off bonus that pushed them into the higher rate band for that year only?  Not to mention the tax planning and avoidance opportunities for ensuring as much income as possible is treated as capital gains to ensure the tax payer pays income tax, and therefore CGT, at the lower rate.

Leave A Response

* Denotes Required Field