1. Question
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Comment
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How will the tax changes protect and incentivise those working part time or on low wages?
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“The principle of reducing marginal tax rates on lower paid workers should entice more individuals into the labour force. It would bring in additional tax receipts, whilst simultaneously reducing the relative incentives for individuals to rely on costly benefits. However, care must be taken that the cost of increasing the personal allowance is not balanced by tax increases. This would directly, or indirectly, damage the capacity of businesses to provide the employment opportunities required to achieve the benefits of this objective.” |
Personal Tax / Savings example
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Business Tax example
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The commitment of the Coalition to increase the personal allowance, with an ultimate aim of taking the first £10,000 of income out of income tax is welcome. This will provide an authentic incentive for many lower paid individuals to rejoin the workforce by significantly increasing their after-tax salary.
However, this is a very expensive measure as it reduces the income tax paid by almost all individuals and, accordingly, has a price tag of around £20 billion. It will, inevitably, have to be balanced by tax rises and the increased allowance will probably need to be phased in over the coming parliament. We consider that an initial increase to, say, £7,500 is more likely.
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The retention of the Conservative pledge to restrict the effective increase in employer’s national insurance to only 0.5% is positive. Although the mechanism which appears to be proposed will only compensate employers with lower paid employees and may not assist businesses based in London and the South East. Nevertheless, even the remaining 0.5% effective rise in the cost to employers is regrettable. If the Chancellor has sufficient funds generated by other measures, he should reduce employers’ national insurance by maintaining the existing (2010/11) rate of contributions at 12.8%. |
2. Question
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Comment
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Will the Budget measures represent a first step towards a simplified taxation system?
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“It would be all too easy for an incoming Government to view tax simplification as a worthwhile but not pressing technical exercise and defer any action until later budgets. This would be a serious mistake due to the magnitude of the fiscal and economic challenges and would represent a significant missed opportunity.” |
Personal Tax / Savings example
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Business Tax example
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There are many straightforward measures that could be taken that do not have significant net revenue-raising implications. For example, the different sets of ISA rules for cash and equity investments could be abolished with a single annual limit for investors to use as they consider most appropriate in the context of their own priorities. This would remove part of the “nanny state” suggesting that individuals should not keep too much long-term savings in the form of deposit accounts.
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A simple measure to remove an anomaly which has significant detrimental effects would be to replace the so-called slab system of stamp duty land tax rates. This is where even £1 over the threshold means that the top rate applies to the whole purchase price. In our view, this should be replaced by a banded rate system; this could easily be achieved on a tax neutral basis by modest realignment of rates and/or bands. |
3. Question
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Comment
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Where might the Chancellor bow to sectional and vested interests by continuing with reliefs that erode the scope for aggressive cuts in both business tax rates and personal tax rates in the future?
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“The Coalition Government has made a commitment to ‘reform’ the corporate tax system by simplifying reliefs and allowances, and by tackling avoidance, in order to reduce headline rates. This can only be achieved by standing up to the myriad of special interest groups which will plead that their sector is a special case for retaining (or even extending) particular, over-targeted and expensive tax reliefs resulting in unnecessarily high business and personal tax rates.” |
Personal Tax / Savings example
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Business Tax example
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| Venture Capital Trusts (VCT) and the Enterprise Initiative Scheme (EIS) provide a number of capital gains tax and income tax incentives to investors in unquoted trading companies. Abolishing these reliefs would undeniably simplify the tax system and save around £600 million each year in tax relief. However, this would, arguably, take away much needed support for the financing entrepreneurial activity, thereby illustrating the tension between the taxation objectives of the Coalition Government. Alternatively, the Chancellor could reform VCT & EIS to establish a simplified system for relief for new and growing businesses with a single set of qualifications and tax incentives. |
The system for Enhanced Capital Allowances (for so-called energy efficient plant and machinery) is only beneficial for companies with very substantial qualifying expenditure and the rules are complex (requiring a special purpose HMRC website) and costly to administer. There is little clear cut evidence that this use of the tax system promotes the intended consequences on an aggregate basis sufficiently to justify the administrative burden created. |
4. Question
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Comment
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Which indirect (stealth) taxes may be raised whilst attention will be focused upon the increased VAT rate?
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“In essence, there are two classic forms of stealth tax: increases in low profile taxes; and failing to increase rates and allowances in line with inflation. Both forms of stealth tax can be anticipated, although the lion’s share of tax rises will need to come from income tax, national insurance or VAT. Only these three taxes could sufficiently raise the aggregate amount of tax to make a substantial impact in the context of the £150 billion plus fiscal deficit.” |
Personal Tax / Savings example
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Business Tax example
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| An increase in some duties is likely. Raising fuel, tobacco and alcohol duties could bring in an additional £2 to 3 billion. However, the scope for more swingeing duty rises is limited, as further rises might even be counterproductive. They could lead to reduced levels of duty if prices reach a tipping point where reduced consumption and, to an extent, smuggling, actually lead to reduced duty revenues. |
BDO predicted in September 2009 that any incoming government might seek to raise Insurance Premium Tax, which could raise a surprisingly large sum of £2 billion if the rate was increased by 4 %. We stand by this prediction.
We also predicted at the same time that the rate of VAT would increase to 20% if a Conservative Government was elected. We stand by this prediction despite both the inclusion of the Liberal Democrats in the Coalition Government and the silence on VAT despite it being the ‘elephant in the room’.
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5. Question
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Comment
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To what extent will the foundations have been laid for tax cuts in 4/5 years’ time before the next Election but after the fiscal deficit has been slashed?
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“When this Emergency Budget is recalled in five, 10 or 20 years time, the acid test of its efficacy will be whether it has set out a robust framework of spending reductions and, unavoidable targeted tax increases which enabled the economy to be rebalanced towards private sector led growth, underpinned by a simpler, flatter taxation system with lower marginal tax rates.” |
Personal Tax / Savings example
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Business Tax example
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| The rise in the top rate of income tax to 50% cannot make a substantial contribution towards closing the fiscal deficit. HM Treasury’s own figures show it is expected to raise less than £3 billion. In our view, this will be outweighed by the damage to the competitive position as talented entrepreneurial individuals will be deterred from coming to and staying in the UK. A commitment to reducing this rate as soon as possible would be widely welcomed. |
In our view, the key strategic fiscal priority is to substantially reduce the headline rate of corporation tax in order that the UK regains its former status as having one of the most attractive corporate tax environments in the EU and the G20. To achieve this aim, an initial reduction of the corporation rate, to say 25%, must be followed by a phased reduction to 20% or lower by the end of this Parliament. |
6. Question
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Comment
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What percentage of the total tax take does HMG consider should come from corporation tax and other taxes which fall principally upon the business sector?
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“The Lib Con Coalition Agreement makes it clear that they will consider proceeding with the increase in the employers’ national insurance threshold as part of a programme of taxation reform “to make it more competitive, simpler, greener and fairer”. It is hoped that the Government has recognised that the headline rate of corporation tax is increasingly uncompetitive when compared to our near European neighbours.” |
Personal Tax / Savings example
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Business Tax example
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| The personal sector bears the largest segment of taxation and, whilst some taxes such as VAT and National Insurance are to some extent also borne by the business sector, we estimate the personal sector will suffer approximately 75% of the last Budget’s forecast tax collections by HMRC 2010-11, totalling about £400 billion. |
The Chancellor has already made it clear that in the Emergency Budget he will set out a five year road map for a reform of corporation tax which will include lower rates and a simpler system. However, we anticipate that any reduction in rates will be balanced to some extent by reduced allowances. Businesses should also brace themselves for further tax avoidance measures but, hopefully, these will only attack artificial / contrived tax avoidance schemes rather than genuine commercial transactions. Moreover, it is imperative that anti-avoidance legislation is designed in such a way as to meet the Chancellor’s objective of attracting multinational businesses to the UK. |
7. Question
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Comment
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To what extent will the total tax take be re-focused towards indirect taxes upon consumption and away from taxes upon income and profits?
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“It would be a massive surprise if there was no announcement of a significant VAT uplift on Budget Day. On current projections VAT is anticipated to bring in £78 billion for 2010-11 and a rise to 20% could add up to a further £11 billion. Given that the Chancellor is unlikely to have an opportunity to raise VAT again this parliament, he may be tempted to raise the rate even higher with a promise to reduce it once the deficit is under control.” |
Personal Tax / Savings example
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Business Tax example
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| Individual taxpayers are projected to contribute over £140 billion in income tax in 2010-11. The promised raising of personal allowances will have a substantial impact upon tax collection as it could cost up to £20 billion per annum when fully implemented. Accordingly, we anticipate that taxation collections will be rebalanced by the forecast rise in VAT to 20%, together with a broadening of its base, and a mixture of duties and other indirect taxes such as Insurance Premium Tax. |
It is often forgotten that many businesses will also be affected by the anticipated VAT rise as many are unable to obtain a full recovery of their VAT. Banks, insurance companies and certain healthcare businesses are likely to be the main losers in this change as most have very limited scope to recover this. |
8. Question
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Comment
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Does HMG consider the tax take from CGT and IHT should rise in comparison to the GNP, track the GNP or fall in comparison to the GNP?
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“We would like to see a clear policy established for this Parliament to enable businesses and individuals to plan with some certainty the future tax consequences of their investment transactions and family arrangements.” |
Personal Tax / Savings example
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Business Tax example
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| CGT and IHT are forecast to collect less than 1% of Government receipts in 2010-11, £2.7 billion and £2.3 billion respectively. Under the Coalition Agreement there is a commitment to raise CGT for non-business capital gains and a hint that there may be cuts to IHT in later Budgets. In our opinion, the CGT system must not become unduly complex. The longer-term rate for all investments should be capped at no more than 25%, the reliefs for qualifying business assets should be improved and broadened and the fixed annual CGT exemption should not be significantly reduced. If these criteria are not met, the Government can be rightly criticised for introducing unnecessary complexity and confiscatory taxation. |
Business owners will, hopefully, be reassured by recent pronouncements vis a vis protecting from the higher rates of CGT on the disposal of businesses. Similarly and again based on current indications from the Government, there are unlikely to be any additional restrictions in the reliefs available to owners of family businesses under the IHT rules. |
9. Question
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Comment
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To what extent do the tax measures make a significant contribution to reducing the fiscal deficit?
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“The Chancellor is caught on the horns of a dilemma with the promise of various tax cuts contained in the Coalition Agreement needing to be offset by larger tax rises to help plug the gap in the Government’s finances. So we predict that targeted tax cuts will be introduced from 2011 but only in small steps as the economy improves.” |
Personal Tax / Savings example
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Business Tax example
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| We would be surprised if personal allowances were to rise by more than £1,250 for 2011/12 in this Budget. The Coalition Government has promised to raise personal allowances over the Parliamentary term, so there will need to be significant rises in other taxes (and probably elimination of most higher rate reliefs) to ensure that tax changes to be announced in the Budget will make any contribution to reducing the fiscal deficit. |
Businesses must fear, despite the promises of lower tax rates, that these changes will be more than offset by reductions in allowances and new green taxes. If the main rate of corporation tax comes down to 25%, small businesses may fear that the existing differential in the small companies’ rate might be eroded (or even removed in the medium-term) as part of the simplification measures. |
10. Question
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Comment
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How will the Emergency Budget ensure that Britain's competitive position for global businesses been protected, and, indeed, enhanced?
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“Reducing the fiscal deficit must be the number one priority for the Coalition Government, but it is hoped that the Emergency Budget will be an opportunity to introduce a number of broad business-friendly measures that will help to boost the business economy to deliver the economic growth that is ultimately necessary to fund the Government’s ongoing commitments to essential frontline services and key initiatives” |
Personal Tax / Savings example
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Business Tax example
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| The UK remains overall a relatively attractive place to locate and this has until recently included comparatively low levels of personal taxation as compared to most of our major competitors. There is little doubt that the introduction of the 50% income tax rate, the restrictive pension’s regime, the removal of personal allowances for entrepreneurs and key executives and the overly complex non-domicile regime has damaged this reputation. |
Above all, businesses making cross-border location decisions focus, from a taxation perspective, upon the headline corporate tax rate and the employers’ national insurance contribution rate. When compared to the rest of Europe, the UK corporate tax rate is out of sync. We anticipate that the Chancellor will recognise this and set out a series of measures that are designed to make the UK appear much more competitive. In addition to the headline tax rate, we anticipate that there will be a simplified regime for multinational businesses designed to encourage trading businesses to locate their headquarters in the UK. |
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