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VAT Hiked In UK Emergency Budget

by Robert Lee,, London

23 June 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.

TAGS: individuals | capital gains tax (CGT) | tax | investment | small business | business | tax incentives | banking | employees | budget | corporation tax | United Kingdom | internet | small and medium-sized enterprises (SME) | multinationals | tax rates | inflation | individual income tax

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