Kingston Smith LLP, the top 20 UK accountancy firm, provides its Budget predictions ahead of the Chancellor’s speech on 23rd March.
London, 10th March 2011 – Relief that the public finances recorded a surplus in January for the first time in more than two years was short-lived when officials warned that this was down to an income tax boost with the situation likely to deteriorate before the start of the new financial year. With this in mind, this year’s Budget is likely to offer little let up, as efforts to cut the UK’s eye-watering budget deficit and boost the economic recovery continue to take centre-stage.
IHT: Tory plans to increase the inheritance tax (IHT) threshold from £325,000 to £1m were shelved last year as part of the coalition negotiation agreements. Andrew Shaw, a partner at top 20 UK accountancy firm Kingston Smith LLP, says: “It is expected that the threshold of £325,000 will remain frozen until at least 2014/15 but no commitments have been made on the rate of IHT so we may see a super tax rate of 50% on estates of more than £1m.
“A more radical proposal is a US-style system where all gifts during a person’s lifetime are considered on death but with a higher threshold. However, such a system would be highly controversial and is unlikely to be introduced.”
SDLT: In last March’s Budget, Labour sought to stimulate the housing market by removing Stamp Duty Land Tax (SDLT) for first-time buyers on properties worth £250,000 or less, which is due to continue until 24 March 2012. Andrew says: “Failing to extend this measure could be seen as another nail in the coffin for a slowing property market that will be further hit when interest rates start to rise.” Meanwhile, a new 5% rate of SDLT on residential properties over £1m, proposed in last year’s Labour Budget, will come into effect from 6 April 2011.
Domicile: Individuals resident in the UK for seven out of the previous nine tax years can use the remittance basis of tax and pay an annual levy of £30,000 or choose to be taxed on their worldwide income and capital gains. “Only 5,400 individuals paid the £30,000 charge in 2008/09, which is thought to be below what was expected. This could be either because they have decided to leave the UK to avoid the charge or because they simply have not made sufficient non-UK gains or earned income during a difficult couple of years to generate investment returns,” says Tim Stovold, a partner at Kingston Smith LLP. “To generate more revenue the government may decide to reduce from seven to three the number of years that an individual is resident in the UK for tax purposes or apply the levy to anyone claiming the remittance basis irrespective of the duration of their stay in the UK and/or raise the remittance charge to £50,000.”
Principal Private Residence: The 2009 MPs expenses scandal – and specifically, the process of MPs ‘flipping’ their principal residence to reduce their capital gains tax (CGT) bill on a subsequent sale – was deeply unpopular with the UK electorate. The government may use this Budget to abolish the practice altogether in an effort to win back voter confidence.
Capital gains tax: Last year the government increased the rate of CGT from 18% to 28% for higher-rate taxpayers. Entrepreneur’s Relief also rose from £1m to £2m in March under the Labour government and, later, from £2m to £5m under the new coalition government. “It’s unlikely that there will be further changes to the CGT rate in the March Budget,” said Chris Lane, partner and Head of Entrepreneurial Businesses at Kingston Smith LLP. “Instead, we now need a bedding-down period that will give individuals a chance to get used to the recent changes.”
Income tax: Recent press reports suggest that the government may lower the threshold at which the 50% income tax rate comes into effect, as it looks to boost the Treasury’s coffers. Andrew says: “Lowering the threshold at which the 50p tax rate comes into effect from £150,000 to £100,000 will undoubtedly hurt the nation’s highest earners. But hardest hit will be those earning between £100,000 and £115,000, who will face an effective tax rate of 75% due to the withdrawal of personal allowances.”
National Insurance: Last September the government announced the introduction of a new regional National Insurance Contributions (NICs) holiday for new businesses set up outside London, the South East and East of England. Under the scheme, which will run for three years, eligible businesses qualify for a holiday worth up to £5,000 for up to the first ten employees they hire in their first year of business. This means a maximum saving of up to £50,000 on their NI payments. “Statistics show that take-up of the scheme has been poor,” says Tim. “This suggests that the government will either bury the scheme and make no mention of it in the Budget announcement or extend it to the whole of the UK, which is unlikely given the potential cost.”
Enterprise Zones: An Enterprise Zone is an area of land in an economically disadvantaged area designated by the government as such for a period of ten years. Some have proven to be a successful way of regenerating disadvantaged areas, notably London’s Docklands. Chris says: “Enterprise Zones are intended to encourage regeneration in deprived areas of the UK by offering enhanced tax reliefs to businesses that construct or acquire new commercial premises in those areas. We would welcome the decision to extend the scheme for a year or more and to open it up to other geographical areas.”
Anti-avoidance: In December, HMRC published draft legislation aimed at closing down certain tax-planning arrangements for employee bonuses, termed ‘disguised remuneration’. Concerns have been raised that some normal employee share scheme and bonus arrangements with no tax-avoidance elements may be caught under this legislation. HMRC has also announced plans to look at SDLT avoidance schemes using sub-sale arrangements. Graham Morgan, a partner at Kingston Smith LLP, says: “HMRC is engaged in a continuing assault on tax avoidance in all its forms and more announcements are likely to be made in the Budget. Cracking down on contrived and artificial tax avoidance has been a preoccupation of this, and the previous government, and tax policy in this area has been increasingly successful in discouraging this activity among businesses and wealthy individuals.
“Most commentators would agree that this is a good thing, but the uncertainty it presents for UK business at an already challenging time is, at the very least, unhelpful. Invariably, it will also be a factor for multinational businesses and the internationally mobile when deciding where to locate.”
Tax simplification:The Office of Tax Simplification has published its findings on 155 reliefs, allowances or exemptions that are anachronistic, unnecessarily complex, or have outlived their usefulness. It remains to be seen to what extent the proposals in the report will be incorporated in the Budget.
VAT: The VAT rate rose from 15% to 17.5% on 1 January 2010 and from 17.5% to 20% on 4 January 2011. “We would be disappointed to see any further changes to VAT given the two recent rises. Such a situation is unlikely and would be tantamount to political suicide,” says Adrian Houstoun, VAT partner at Kingston Smith LLP.
Banks: Last month, Chancellor George Osborne announced plans to increase the levy on banks from £800m to £2.5bn. Tim says: “Banks remain a popular target for people generally, but this earlier statement means that further tax hits are unlikely to be announced in the Budget.”