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VAT Hiked In UK Emergency Budget,
by Robert Lee, Tax-News.com, London
Wednesday, June 23, 2010
Chancellor of the Exchequer George Osborne told the House of Commons in his
emergency budget speech that a 2.5% increase in value-added tax
was "unavoidable" given the scale of the UK's fiscal problems, although
he delivered some good news for businesses and low income individuals in the
form of modest tax cuts.
From January 2011, the standard rate of VAT will rise from 17.5% to 20%, a
measure which will raise GBP13bn per year by the end of the current five-year
parliament. There will be no changes to reduced rates of VAT and all items which
are currently zero-rated or exempt from VAT will remain so during the life of
the parliament.
As expected, capital gains tax (CGT) will also rise, but the increase, to take effect
from midnight on June 22, is perhaps more modest than many investors had feared
in the run up to the budget announcement. Under the changes, designed to target
avoidance by the well-off, taxpayers who currently pay the basic rate of income
tax (20%) will continue to pay CGT at the current rate of 18%. Higher rate taxpayers,
however, will pay tax on capital gains at 28%. Osborne confirmed that capital
gains from entrepreneurial activity would pay a reduced rate of CGT, at a rate
of 10% on the first GBP5m, but the Chancellor resisted calls from within his
own party for some form of taper relief, arguing that such a measure would add
complexity to the tax system. The capital gains tax allowance will remain at
GBP10,100 this year, and rise in line with inflation thereafter.
Another revenue-raising measure announced by Osborne was a bank levy on banks'
balance sheets from January 2011, estimated to raise GBP2bn per year.
As set out in the coalition government agreement, Osborne announced new tax
measures designed to support business and enterprise, the most significant of
which was his decision to cut the rate of corporate tax by 4% to 24% in 1% increments
over the course of the next four years. In addition, the small business rate
of corporate tax will be cut from 21% to 20%. Osborne argues that these cuts
will make the UK one of the most tax competitive countries in the G7, although
he proposes to pay for the rate cut by scaling back the main and special capital
allowances from April 2012.
To encourage businesses to set up in economically depressed parts of the UK
outside of the south-east of England, the government plans to introduce a three-year
National Insurance contribution holiday for new businesses. There will also
be increases to the Enterprise Finance Guarantee and the creation of a new Enterprise
Capital Fund.
Personal income tax rates have been left on hold - including the controversial
50% top rate for those earning GBP150,000 per year or more - but the government
will increase the threshold at which income tax begins to be paid by GBP1,000
to GBP7,475 in April 2011. This move will take approximately 880,000 low-paid
workers out of the income tax altogether. The key Liberal Democrat coalition
partner pledge to raise the annual tax allowance to GBP10,000 remains an aspiration,
although Osborne has not committed the government to achieving this goal.
Osborne gave some cheer to smokers and drinkers by freezing rates of duty on
tobacco and alcohol. He also left petrol duty on hold and announced plans to
explore a fuel rebate system for those in rural areas who are dependant on motor
vehicles. The telephone landline levy proposed by the previous government to
fund an upgrade to the UK's broadband infrastructure has been scrapped, with
the project now to be funded by an under-spend in the digital television and
radio switchover scheme and private investment.
Osborne has set out an ambitious plan to lower the government's budget deficit
from GBP149.5bn, or 10.1% of GDP this year, to just 1.1% of GDP by 2015/16,
but savage cuts in public spending, rather than tax rises, will be the main
weapon to achieve this. In fact, Osborne said that the fiscal adjustment is
made up of 77% spending cuts to 23% in tax increases. As a result, there will
be substantial cuts in the budgets of government departments and agencies, a
two-year public sector pay freeze for all but the lowest-paid public sector
workers and almost GBP30bn in additional savings from public sector current
expenditure.
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