TAX NEWS - June 2010

British Tax: Economic rehabilitation is a long and painful road with future tax rises a possibility

This is certainly what passes for an interesting budget, and, in the words of the Chancellor, it's "tough but fair".

On a business and entrepreneurial front, there were serious attempts to improve the tax environment with a headline grabbing reduction in the top rate of Corporation Tax from 28 per cent to 24 per cent over four years.

There is also a proposed reduction in the small company rate from 21 per cent to 20 per cent from next year. This should be viewed as an attempt to shock British business back to life, but it remains to be seen whether it will be enough to revive the economy.

Although the cut in Corporation Tax is welcome, the surprise cut in the rate for small companies maintains the gap with the main rate that many business owners would like to see overturned.

Our research shows one in eight entrepreneurs would welcome a convergence of Corporation Tax to a single rate. It therefore remains to be seen how these measures will fit with the Chancellor's promise of lower rates, simpler rules and greater certainty for businesses.

There are more than 1,600 manufacturing businesses based in Staffordshire. Many of these will have mixed feelings on the changes to capital allowances, which reduce the rate at which businesses can claim tax relief for capital expenditure from 20 per cent to 18 per cent per annum.

The main pain from this change will be felt by all businesses which incur substantial capital expenditure and this seems like an unusual group to hit hardest.

They will be far less satisfied at this reduction, alongside a cut in the annual investment allowance from £100,000 to £25,000, which could be seen as overly harsh.

On a personal tax front, there were no changes to the tax rates announced by the previous government, although the increase in personal allowances by £1,000 from April 2011 will be of great benefit to lower and middle income taxpayers, who comprise a large proportion of the local workforce.

The much trailed increase in Capital Gains Tax (CGT) – when an asset is sold or given away – is also looking less Draconian than was initially suggested, with increased relief for entrepreneurs.

Things could have been far worse – the rise in CGT to 28 per cent from midnight is far less than the 40 to 50 per cent we had been led to believe, while the increase in Entrepreneurs' Relief to £5 million from tomorrow – allowing entrepreneurs to pay Capital Gains Tax at 10 per cent on the first £5 million lifetime gains rather than first £2 million profits – is fantastic news for small business owners.

Many people will be breathing a sigh of relief tonight, comforted by what might have been.

However, it's important entrepreneurs keep a sense of perspective. The Budget showed just how deep a hole the economy is in. It will be a long and painful road ahead, with future tax rises a real possibility to ensure the economy's rehabilitation.

Finally the inevitable increase in VAT to 20 per cent has been acknowledged. The rise in VAT will have caused many hearts to skip a beat.

However the delay in implementation until January 4 obviously gives us a chance to enjoy Christmas and make the most of the January sales.

Our research shows that two in five people will change their spending habits in response to an increase in VAT – it's likely even more will think twice about spending money on anything that isn't strictly necessary come January 4.

The Chancellor has taken great pride in his claims that the coalition Government would not bury anything in the small print. However, a review of Treasury documents shows the Government intends to consult about the introduction of a General Anti-Avoidance Rule, to stamp out tax avoidance, a point the Chancellor failed to mention.

The coalition previously suggested any such rules would only apply to business taxes, but a closer inspection shows the Treasury now plans for this to cover all taxes.

This would be a fundamental change to the UK tax system – it would have been far better for the Chancellor to be open about his plans rather than hiding them away in the small corners of his Budget briefcase.