UK Budget Prompts Cool Response From Business

by Robert Lee, Tax-News.com, London

26 March 2010

Business has welcomed Chancellor Alistair Darling's decision to give additional to help to small businesses and entrepreneurs, but anxieties remain over the potential impact on the economy of pre-announced tax hikes and the government's forecasts on the deficit and economic growth.

"With the election just weeks away, this was a clever, political budget," commented Richard Lambert, Director-General of the Confederation of British industry (CBI). "There was more support for business than might have been expected, with a series of modest but helpful changes. The doubling of entrepreneurs' CGT (capital gains tax) relief will help investment in small businesses and the extra money for science places at university will be welcomed by industry."

"However, it is the big fiscal decisions over the next 12 months that will really determine the UK's economic future," Lambert cautioned.

The centrepiece of the 2010 budget was a GBP2.5bn package for small- and medium-sized businesses, funded primarily by better than expected receipts from the one-off tax on bankers’ bonuses. Darling confirmed that the 18% capital gains tax rate would not be increased as part of his measures and this would remain at the flat rate of 18%.

The lifetime limit for entrepreneurs’ relief will increase to GBP2m for disposals on or after April 6, 2010 meaning an effective CGT rate of only 10% on the first GBP2m of qualifying gains – providing an additional tax saving of GBP80,000.

As part of the small business package, the Annual Investment Allowance (AIA) for qualifying capital expenditure will be doubled to GBP100,000 from April 1, 2010.

"The doubling in capital gains tax relief for entrepreneurs is a really positive move," said Lambert. "It will encourage the long-term investment in growing a business that is at the heart of a healthy economy."

John Whiting of the Chartered Institute of Taxation said that the doubling of the AIA will not only stimulate investment, but also simplify the allowance system. However, he urged HM Revenue and Customs (HMRC) to ensure that its systems are geared up for an increases in claims for tax refunds by businesses.

“The doubling of the allowance is a good simplification measure, as well as encouraging capital investment," he observed. “But it will mean more businesses claiming tax loss reliefs and we just hope HMRC are gearing up to process those claims promptly. Slow tax repayments are a source of cost and frustration for many advisers and their clients."

Speculation was widespread before the budget that Darling would need to raise additional revenue by increasing rates of tax. But with a general election fast approaching, the Chancellor decided against such a move, much to the relief of business and personal taxpayers. There remains some concern, however, over the previously-announced plans to impose a new 50% top rate of tax from next month, and increase National Insurance by 1% from April 2010.

“The measure from the government that would individually have helped most businesses would be to cancel next April’s proposed increase in employer’s national insurance contributions," noted Lambert. "We did not expect this to be addressed in this budget, but hope the issue will be looked at soon.”

While the government has repeatedly assured that the impact of the 50% tax rate will be minimal because it will only affect the top 2% of taxpayers earning over GBP150,000 per year, concerns remain that it sends out all the wrong signals to international investors.

“From next month, the UK will rank second only to Italy in the G20 countries in terms of tax unattractiveness for a high earner," said Sean Drury, international mobility partner at PricewaterhouseCoopers. "The impact of the new rate on international mobility could accelerate when pay packets are first hit next month, particularly with other territories making efforts in the last 12 months to entice talented and highly-paid people with highly-attractive tax incentives.”

The CBI also remains unconvinced on the Chancellor's upbeat announcement regarding the public finances, with the government set to borrow GBP13bn less than expected in 2010/11, reducing the deficit to GBP165bn.

"Borrowing could have been reduced by GBP14.5bn had the government not loosened fiscal policy by GBP1.4bn through additional spending and tax cuts," argued Lambert. 

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