PKF Predicts UK Budget Measures

by Amanda Banks, Tax-News.com, London

17 June 2010

With the emergency Budget due on Tuesday, June 22, Lisa Macpherson, National Director of Tax at PKF accountants & business advisers has outlined her predictions of what measures will be announced by UK Chancellor, George Osborne.

“The coalition government has made it clear since taking office that there will be an increase in the rate of capital gains tax (CGT) to bring it more in line with income tax rates, although it has promised that reliefs for business assets will be retained. What is unknown is whether the new rate will take effect from Budget day, be back-dated to 6 April 2010 or take effect from 6 April 2011.”

“Retrospective tax legislation is rare and back-dating the increase would be a very controversial move. However, if we are to see a CGT increase on non-business assets, delaying it until April 2011 could give a short term boost to tax revenues this year but could prove expensive in the long term. There is also likely to be some form of taper relief for gains realised on non-business assets that have been held for long periods, but exactly what form this will take is what all our clients want to know,” Macpherson said.

“The infamous ‘jobs tax’ – the previous Government’s proposed 1% increase in employers’ NIC from April 2011 – will go ahead but the impact on employers will be mitigated by raising the threshold at which they start to pay NIC on each employee’s salary. The proposed GBP21 per week increase in the threshold means that employers will save up to GBP150 per employee compared to the full 1% increase,” she predicted.

“The Conservatives made a manifesto commitment to reduce the main rate of corporation tax to 25% and the small companies’ rate to 20%. The Liberal Democrats had similar proposals on making the headline rate of tax more competitive internationally so it seems likely that some reduction will be announced,” Macpherson surmised, adding: “The corporation tax cuts are expected to be funded by cuts to the current matrix of capital allowances. If the £100,000 annual investment allowance is abolished, many small businesses will have to re-think their investment plans. In most instances, they will lose more than they gain from the 1% cut in the small companies’ rate and may not benefit from the cut in the main rate of corporation tax for many years – if ever,” she warned.

“The system of tax relief for pension contributions has been in upheaval since 2009 with a range of complex measures designed to reduce the rate and amount of relief given to individuals on high incomes.“

Lisa Mavpherson observed: “In the interests of simplification and saving revenue, it is possible that the Government will repeal the complex rules that are due to take effect from 2011/12 onwards. The pensions industry and many others are suggesting cutting the annual limit for qualifying contributions, from the current GBP255,000 level to perhaps GBP50,000. At this lower level, giving tax relief at the individual’s highest rate, even if that is 50%, would cost the Government less than giving only basic rate relief on a contribution of GBP255,000.”

Lastly, McPherson noted that there has been considerable speculation over a potential increase in the rate of VAT. “The standard rates of VAT across the EU range from 15% to 25%, with most falling in a 19% to 21% range – so the UK’s current rate of 17.5% is on the low side.”

“Raising the rate to 20% would see UK rates neatly aligned with the rest of the EU, raise much needed revenue and send out a message that the government is serious about tackling the deficit.”

“[However], such an immediate increase in VAT to 20% (or more) would add to inflationary pressures in the economy, so it is possible that such an increase will be phased in over several years,” she concluded.

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