Imperative for tax simplification missed says BDO

No magic solutions fiscal deficit

Stephen Herring, Senior Tax Partner at BDO, says of today’s Budget:  “No one will be surprised that the Chancellor has not come up with any magic solutions to the UK’s substantial fiscal deficit. This rises to £175billion in 2010/11 and only reduces to £173billion in 2011/12. There will be pain on both the public spending side and the tax side to reduce this to below £100billion by 2012/13.

“It was already evident following last years Budget that higher income groups were going to be expected to suffer significant tax hikes in the next few years. We now know the extent and methods which will be applied. Once the “totem” of the cross party agreement on a 40 per cent top rate of income tax had been broken by last year’s PBR increase to 45 per cent, no one will be surprised to see it raised again before even that increased rate has come into force. It has been increased again to 50 per cent for incomes over £150,000 with the personal allowances restriction coming during the same year i.e. 2010/11. This alone is a substantial tax increase which will not only affect the stereotypical investment banker but will apply to the top earning doctors, head teachers, judges and many managerial and professional executives. From 2011/12 these people face a halving of the relief they obtain for personal pension contributions and many will look even more enviously at the pension rights of public sector employees, government minister and MPs.

“So far as business is concerned, there will be widespread disappointment that the main rate of corporation tax is not to be reduced below 28 per cent. This will see the UK become an increasingly less favoured location for international businesses. UK companies with significant and profitable overseas subsidiaries will be relived to see that the improved tax treatment will be implemented by the Finance Bill 2009, but will have concerns about the related interest restrictions brought up by the proposed debt cap.

Small businesses will be disappointed that the Chancellor has not responded to calls to rescind the increase in the small company’s corporation tax rate to 21 per cent. It would not have cost much to reduce the rate to 20 per cent but they may be more optimistic about the improvements announced to the Business Payments Scheme which allows businesses to phase tax payments when they are in temporary financial difficulty.

Stephen concluded: “The Chancellor has said that a principal theme of his Budget is to protect jobs, but it is disappointing that more widespread measures such as temporarily reducing Employers National Insurance Contributions are not included. Similarly, few businesses will see this as a Budget simplifying taxation despite pressing imperative for UK tax simplification.”

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