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Emergency Budget 2010
 Overview
The purpose of this review is to update you on the specific budget changes affecting the small business, landlords and personal tax issues.
Key Points
 Capital Gains Tax to 28% for higher rate tax payers
VAT up to 20% from 4th January 2011
Corporation Tax down to 20%
Capital Allowances reduced
Personal Allowances up £1,000
Political Sketch
Well, move over Darling it's time for the Conservatives. Sorry, the Conservative/Lib Dem progressive alliance, as hammered home rather unsubtly with the green tie, flanked on the TV with a yellow and blue tie on either side.
George Osborne set out his stall - and I can hardly bring myself to type this – but it sounded encouraging. He promised to be “tough but fair”. And in a not too subtle dig at Darling and Brown, say what he had to say at the dispatch box rather than bury the bad news in the small print. In particular I am pleased to see the already announced Office of Budget Responsibility returning some credibility to the forecasts. No doubt two budgets in and his halo will have slipped, but at least the man has ambitions outside of obtaining donations for the Conservative party.
Prior to the budget the build up has been the traditional steady "drip, drip" of gloom to soften the blow of the inevitable tax rises by making it rather predictably slightly less painful on businesses than previously announced. 80% of the savings are to come from reduction in spending and only 20% from increases in taxation. The key points have been heavily trailed with VAT up in January to 20% as expected, CGT up a bit and sundry fiddling about. One interesting point was the cut in Corporation Tax rates, which again suggests favouring growth and not spending, a point Harriet Harman didn't seem to quite grasp in her rather bizarre rant, sorry I mean formal response to the house. I don't know if it was me, but even Darling who was perched behind her seemed to be doing his very best to stifle a laugh at her 'measured' comments.
Small Business
Corporation Taxes
Small company rate (profits under £300,000) falls from 21% to 20% from April 2011.
Large company rate falls from 28% to 27% from April 2011, and 1% per annum to 24% by 2014/15.
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Comment: The aim of this is to stimulate inward investment into the UK and make the UK a competitive place to be. I am sure most of my clients will be pleased with this move. A 1% reduction in Corporation Tax is equivalent to a 5% cash reduction in your tax bill, rather than the increase by the same amount Labour had proposed.
Capital Allowances
From April 2012 we have the following changes:
Annual Investment Allowance reduced to £25,000 from £100,000.
Writing down allowances reduced from 20% to 18%.
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Comment: Regular readers of this will know I tear my hair out at the tinkering in this area. It changes so often I can't think it can have much impact on day to day investment decisions.
Investment tip: If you are likely to invest large sums – get them in before April 2012.
VAT
VAT rises to 20% from 17.5% now on 4th January 2011.
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Comment: As widely expected, VAT is to go up in the New Year. There was no real increase in the scope of VAT. Look at the bright side if this affects your business, you must be good at it now, that's the third change in two years.
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Link to revised flat rates
Other Business Measures
National Insurance relief for startups.
Early stage plans for NI relief for new businesses on first 10 employees worth up to £5,000 per employee if located outside of London and the South East, for the first twelve months of their employment. The scheme is to run for three years.
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Comment: This all sounded rather sketchy. Not many new businesses employ 10 people inside the first year. I will be interested to see the details of the proposals which sounded like they are still being fleshed out. It sounds like one of those schemes that only a few people will actually be able to benefit from, and the rules are likely to be highly complex to prevent abuse.
Personal Tax
Taxes on Income
Personal allowance increased by £1,000 to £7,475 from April 2011.
Higher rate threshold to be reduced.
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Comment:
At first glance it seems to make sense to me to take 880,000 people out of the bottom rung of the tax system and then not give it back in benefits, so for that well done. But (there always seems to be a but!) the higher rate threshold is to be reduced (figure not given) so that higher rate tax payers do not gain, so this is likely to have unintended consequences.
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Moreover there is also the issue of NI contributions. I hope I am wrong, but employees NI thresholds do not seem to be going up in line with the personal allowance, meaning we are back (again) to the two tier system of NI and Income tax kicking in at different points. It's rather pointless to trumpet taking people out of the of the income tax system, when they still have to be in PAYE to pay their NI. Employers NI thresholds are to rise however. Fingers crossed intentions will be clearer by the Autumn statement.
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There is no mention of reducing the 1% increase in employers NI which was of course made into a big election issue. I imagine it's not quite so easy when you are in charge.
Taxes on Capital
No changes for basic rate tax payers – 18% flat rate.
Higher rate and “even higher” rate, 28% flat rate from midnight tonight.
Entrepreneur relief extended to first £5million of gains from £2million.
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Comment: We knew Capital Gains Tax was to go up, but not how he would do it. George Osbourne is known to like flat rate taxes, and so instead of going for a headline grabbing 40% rate with other tax reliefs behind it, he has chosen to stick with the current system (for once) and instead nudge up the rate. This doesn't however remove entirely the incentive for a 50% taxpayer (or a 40% one come to that) to try some tax alchemy and convert income to gains. This is still a live area with further changes expected. Quite how HMRC's computers will cope with a mid year change is also going to be intriguing.
Pensions Changes
Pension tax relief rules to be reviewed
The current ability to get tax relief for almost any payment into a pension scheme is to be reviewed and probably reduced to between £30,000 and £45,000.
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Comment: This neatly sidesteps some nasty (and in my opinion largely unworkable) rules brought in to tackle 50% taxpayers who might otherwise be paying large sums into their pension schemes to avoid paying the 50% rate of tax. However it also hits other tax payers who want to pay large one-off contributions. If you are planning large contributions, get them in before the end of the current tax year if you can.
Landlords
Furnished Holiday Lettings Relief
To cut a long story short, the special rules for furnished lettings are still in place, and covers worldwide properties.
There is to be a consultation about this, and new rules to be published in the Autumn.
Housing Benefit
Cuts in housing benefit
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Comment: This could well affect your properties if letting to tenants on benefits. It seemed to be targeting larger properties, but the introduction of cash limits per bedroom could mean very real reductions in income. Not my area, but if it's yours its worth looking at in detail.
Capital Gains Tax
As detailed above in the personal tax section, CGT is up for residetial landlords who will not qualify for the Entrepreneur's relief. This means you will be paying CGT at a rate of 28% for higher rate tax payers rather than 18%.
Other Points
Excise duties (booze, fags and petrol to me and you) -no changes.
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Comment: Interestingly there were comments about making road tax more stable, but this was out for review. The obvious thing to do is to charge a flat tax per litre, rather than the current system which exaggerates movements in crude oil prices. This is presumably what is being hinted at, and would be a sensible idea in my eyes.
Changes to indexation of allowances
Most benefits and allowances are currently indexed to the "RPI" or "Retail Prices Index". This is to be switched to the normally lower "CPI" or "Consumer Price Index". This is classic stealth tax which can have quite a large impact over time.
Outsourced debt colletion
HMRC are to used third party debt collection agents to collect outstanding tax.
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Comment: Look out for your kneecaps! Seriously, whilst on one hand it seems to make sense to use outsourced collections, on the other I know a lot of old debt has built up through penalties and determination notices on tax that never really existed in the first place, so quite how an external agency will deal with this fairly I don't know.
Benefits
We don't normally comment on the benefits system, but this was quite a major part of the budget. In brief:
Working families tax credit scaled back.
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Comment: Significant changes here, in particular the 'claw back' is much steeper as incomes rise, and the amount your income can change before the assessment changes is much reduced over the next two years. I wouldn't be surprised to see this system completely replaced during this parliament.
Child allowance frozen, health in pregnancy grant cut and children's trust funds phased out.
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Comment: Bye bye baby, goodbye.
Notes
This review is based on the Chancellor's speech and the available information on 22nd June 2010. This is before the full Finance Act is published which inevitably contains further details. This document will be updated as further key details come to light, but please remember this commentary does not constitute advice.
If you wish to link to this article, please feel free to do so. Any quotations should be less than one paragraph and fully credited unless otherwise agreed.
James Smith, ACA
22nd June 2010
4.30pm
Final comment. This is a truly horrible position for anyone to have to come into, balancing the very real need to raise revenues against the fear of pushing the economy into recession.
On balance this seems to be quite a pragmatic budget. From a revenue raising point of view he has loaded the income tax system with a lot more fiscal drag which should raise quite a bit of tax without raising headline rates. The change from RPI indexing to CPI, again is subtle but will have an impact. I also like the fact he didn't meddle again with capital gains tax, just changing the rate and not the whole system which is certainly encouraging. I remain rather bemused about the increase in the income tax threshold, but not the corresponding National Insurance one. In my opinion this is one area that badly needs to be reformed and it would be good for someone to just stand up and admit it's all just a tax on income. I am also less than impressed with the new NI exemption scheme which sounds like just the sort of scheme that amounts to very little. The much trumpeted finance guarantee scheme of Labours has helped all of 2,000 firms.
The real proof of course will come in the future borrowing figures and how much tinkering occurs in the next 2 or 3 years.
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