TAX NEWS - June 2010

UK Tax: Tax rises to dominate emergency Budget

LONDON (SHARECAST) - The coalition government's eagerly awaited emergency budget will be revealed on Tuesday.

Chancellor George Osborne has been talking tough since taking office, but now he will have to play his hand and analysts will speculate whether the decisions he makes can provide the economy with stability and move Britain forward.

Osborne has been vocal about making Britain competitive by cutting corporation tax so that big businesses find it worthwhile to come to the country. But much of the focus on Tuesday will be on what taxes will be raised.


Capital Gains Tax

The potential overhauling of the Capital Gains Tax (CGT) has taken up much space in the newspapers in recent weeks.

The government has already said it will seek ways of taxing non-business capital gains at rates similar or close to those applied to income "with generous exemptions for entrepreneurial business activities." This has led many to speculate that CGT could go up to 40%, or even 50%. Currently, CGT is charged at 18% after the first £10,100.

The government could impose differential tax rates depending on whether an asset has been owned for the short or long term, says professional services firm PricewaterhouseCoopers.

"It is likely that any new short-term rate, which could apply to assets held for less than two years, could take effect immediately from Budget Day. In its simplest form a long-term rate of circa 30% could be applied to assets held for more than two years, and is likely to be introduced in April 2011," it adds.

Grant Thornton suggests the emergency budget may also introduce changes to "Private Residence Relief" - which enables people to sell their only or main residence free of CGT. "It is expected that the new Chancellor will look to tighten up the definition of a 'main residence' and reduce the opportunities to allow those with more than one property to vary what counts as their main residence, it says.


Corporation Tax

The government said it would reform the corporate tax system and reduce headline rates by simplifying reliefs and allowances and tackling avoidance. "Our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries," said George Osborne in his first keynote speech as chancellor.

The Tories manifesto pledge is to reduce corporation tax from 28% to 25%. But accountants Grant Thornton say the government may not go ahead with this full cut straight away.

"A cut of this nature will make us more competitive against other OECD countries but we would still be nowhere near the top of the league for offering low corporation tax rates. Companies will however be concerned by what capital allowances or other reliefs and exemptions might be taken away to fund this cut," it says.


VAT

Expectations are that VAT will be hiked to 20% from 17.5%, though when this will happen is uncertain.

"The difficulty for the Government is that whilst a VAT rate rise would make inroads into the public sector borrowing deficit and send a clear message to the financial markets, it would also be inherently inflationary. The Chancellor may therefore decide to defer the increase, perhaps until early next year," says Grant Thornton.

PricewaterhouseCoopers says that retailers will need around six months notice to implement the change, which suggests any change to VAT will not be effective until April 2011.


Personal Tax

Personal allowance for income tax will be increased from April 2011. The government said the increase of personal allowance to £10,000 will be prioritised over other tax cuts, including cuts to Inheritance Tax.

Any changes to the current Inheritance Tax threshold of £325,000 is unlikely to be changed, though rules maybe tightened.

"We may see some restrictions to IHT. The current deemed domiciled rules bring a non-dom under the IHT net if they have been resident in the UK for the last 17 out of 20 years. This could be shortened to the last 7 out of 9 years to align it with the test that is used for the remittance basis charge," says Grant Thornton.

The 1% rise in national insurance contributions from next April for employees will go ahead but the jobs tax will be shelved.

The government may announce changes to the Tax Credit system, which could be capped at a set amount based on household income.


Pensions

The Government has agreed to restore the link between the basic state pension and earnings. It could also look at increasing the state retirement age for men and women and said it will simplify the rules and regulations.

"The Coalition Government could go further….it is also likely that the further pension reliefs will be take away from high income earners perhaps lowering the proposed threshold for tapering of higher rate relief, which is set at £150,000 of income and is due to apply from next April," says Grant Thornton.


Lifestyle taxes

The Chancellor could raise betting duty along with tax rises on alcohol and tobacco. The Telegraph reported on Thursday that the Treasury is considering repeating the 5% increase in alcohol duty imposed in the March Budget.

"Taxes on alcohol and tobacco are already expected to raise £18 billion in the current year. The Chancellor may not be able to resist increasing taxes on 'unhealthy' choices as part of the way for paying for ring-fenced spending on the NHS," says PricewaterhouseCoopers.

The government will reform the taxation of air travel by switching from a per-passenger to a per-plane duty.

"It is expected that receipts will increase from the current level of £2 billion. In the Liberal Democrats manifesto proposal it was estimated that receipts could go to £5 billion, but we suspect industry pressure will mitigate this, at least in the short-term to in the region of £3 billion to £3.5 billion," adds PricewaterhouseCoopers.


Banking

The new coalition has already announced that it will introduce a banking levy and has said "robust action" will be taken to tackle "unacceptable bonuses."

"Whilst a clampdown on bonuses will be seen by many as justified we do not think that tax should be imposed on individuals but on the industry as a whole in order to influence corporate behaviour away from a short term bonus culture," says Grant Thornton.


Non-doms

The Coalition Government has stated that it will review the taxation of non-doms.

"We don't expect any changes, but the coalition have signalled a review and both parties had measures in their manifestos to increase the burden for non-doms so there will be anxiety among those potentially affected, until the nature and scope of this review is clear," says PricewaterhouseCooper.