March 23rd is the first real opportunity for the Chancellor George Osborne to set out his approach for fiscal reform during this Parliament. He is now free from the overwhelming imperative to reduce the fiscal deficit by lowering public expenditure and increasing taxation, required at the time of last year’s Emergency Budget.
The Coalition Government has now had sufficient time to consider the outlook for the economy and the country’s public finances to enable it to consider which tax reforms are their priorities and are feasible, in the context of rising inflation and continuing fiscal constraints. Nevertheless, no Chancellor wishes to let a Budget go by without leaving his mark upon the tax system.
Here is what I believe the 2011 Budget will hold for individual tax payers and investors and for businesses:
I can confidently predict that the personal allowance will be raised again, perhaps by a further £1,000 to £8,475 for 2012/13. The pledge that no one will pay income tax until they earn £10,000 is the central personal tax policy within the Coalition Agreement and failure to deliver authentic progress could unravel the Coalition.
The Chancellor's dilemma is how to fund this very costly pledge. Another reduction in the threshold at which higher rate tax kicks in would be a further blow to the 'squeezed middle'. A 40% tax rate applied to individuals earning less than twice average earnings is increasingly punitive and therefore unsustainable.
The Chancellor has a difficult dilemma balancing the tax treatment of non-domiciles. He is torn between the pressure from the Lib-Dem Coalition partners to restrict the benefits to 'non-doms' and the imperative to maintain and, indeed, increase the attractiveness of the UK as a location for entrepreneurs and key business executives. My prediction, given the legacy of cumbersome and obscure rules from the previous government, is that we won’t see any fundamental reform, which will be deferred under the cover of an ongoing review agreed by the Coalition partners.
Whilst it’s unlikely to be announced, I would like to see the introduction of an exemption from higher rate income tax for small amounts of interest income. This would be popular with the public generally, as we are in an era of very poor savings returns on cash deposits. Additionally it should also reduce administrative costs for both the taxpayer and HMRC, as a result of reduced numbers of income tax returns needing to be filed, fewer alterations to PAYE coding notices being necessary and an opportunity to remove the anomalous and poorly understood 10% savings rate.
The Chancellor is also expected to confirm on Budget Day that the Finance Bill 2011 will include legislation to reduce the main corporation tax rate to 27% from 1 April 2011 and to 26% from 1 April 2012 (and the small companies’ rate from 1 April 2011 to 20%). It is also likely that the Chancellor will announce various measures to reduce the benefit of capital allowances from 2012/13 by restricting the writing down allowance to 18%, thereby lengthening the period over which the relief is given.
The Government may consider it appropriate to re-introduce some form of capital allowance to encourage industry or capital investment in particular geographic regions most in need of an economic boost. The old Enterprise Zone Allowance (EZA) regime, that allowed businesses to claim a 100% allowance on expenditure on certain types of building in an enterprise zone, ceases in April 2011 and the Government may consider it an opportune moment to announce a replacement initiative.
I think it is unlikely that the Government will tinker with the VAT Standard Rate, after raising it to 20% on January 4 2011, and that there will be at least a full year's bedding-in period during which the Treasury will monitor the increase effect on inflation and RPI.
However, the increased popularity of digital and downloadable newspapers and magazines presents a revenue raising opportunity, and we expect to see either this or a future Chancellor address the anomaly that sees printed publications currently zero-rated, while downloads are charged at the standard rate of 20%. The Chancellor may decide though that it would be politically advantageous to keep the media on side, so may attempt to argue to bring downloads into the zero-rate bracket.
I expect that most of the measures in the Budget will have been widely anticipated and many have already been pre-announced. However, I would be very surprised if the Chancellor does not take advantage of his first spring Budget to surprise the public with some favourable (but affordable) tax reforms which start to publically demonstrate his priorities and provide some light at the end of a very long dark tunnel, as the UK public finances are brought back onto a sustainable basis after the credit quake.