By Daniel Hunter
With just over two weeks to go before the Chancellor delivers his third, and possibly most challenging yet Budget, experts at Kingston Smith LLP offer their predictions for the Treasury’s measures to stimulate growth, fund these policies via increases in personal tax, and clampdown on avoidance.
Income Tax: It has been suggested that the Chancellor may introduce planned increases in the personal income tax allowance earlier than the due date of April 2015.
“Whilst we all agree that raising personal tax allowances to £10,000 is a good idea to help the lowest earners, it will, in reality, be eye-wateringly expensive," Andrew Shaw, head of Personal Tax at Kingston Smith, commented.
"To pay for this, the Chancellor is likely to claw back the abatement for higher rate taxpayers, bringing a sting in the tail for the squeezed middle.”
Stamp Duty Land Tax: Amidst renewed speculation surrounding the possible introduction of a mansion tax — possibly as a political quid pro quo for the abolition of the 50 per cent tax rate — discussion also continues around the potential creation of a higher rate of Stamp Duty Land Tax.
Andrew Shaw, head of Personal Tax at Kingston Smith, believes HM Revenue & Customs (HMRC) will be more determined than ever to close stamp duty loopholes and clamp down on avoidance.
“You would need to have nerves of steel to partake in a Stamp Duty avoidance scheme these days,” Shaw warns, “because HMRC will be sniffing around suspicious-looking property transactions like a bloodhound. Those participating in such schemes should be prepared to deal with an enquiry,” he said.
Pensions — tax-free cash: Recent press reports suggest that a restriction on pensions tax relief at 20% for higher rate taxpayers would save £7bn a year. Alternatives include lowering the annual limit from £50,000 or making the pension commencement lump sum taxable.
“If the Chancellor insists on making further changes to pension legislation, then lowering the annual allowance to £40,000 or even £30,000 would be the lesser of two evils, as this would impact on the higher earners whom the government is targeting," David Painter, Chartered Financial Planner at Kingston Smith Financial Advisers, commented.
"However, this action would somewhat undermine the actions of HMRC following six years of constant changes for pension legislation. Meanwhile, it would be grossly unfair for higher rate taxpayers to receive 20% tax relief on payments into a pension fund but have to pay tax at up to 50% when drawing the benefits — and such action could force some members to opt out due to additional tax charges, potentially resulting in lower retirement provision.”
SEIS: From 6 April, investors will be able to benefit from 50% tax relief on investments made in start-ups with Seed Enterprise Investment Scheme (SEIS) status. The scheme also offers exemption from capital gains tax on SEIS investments and the ability, currently for 2012/13 only, to ‘roll over’ gains on other assets into SEIS investments, thus effectively allowing the rolled over gain to be taken out of tax altogether.
Whilst the current draft legislation comes with various strings attached and caps income tax relief by reference to an annual investment limit at £100,000, Graham Morgan, corporate tax partner at Kingston Smith, believes investors may be in for a pleasant surprise in the coming Budget.
“With an increasing need for real incentives to support early stage businesses, we hope the Chancellor will up the ante on SEIS and increase the annual investment before the scheme kicks off in April,” he commented.
Corporation Tax: In last year’s Budget, the Chancellor pledged to reduce the headline rate of corporation tax, currently at 26%, in incremental stages to 23% by 2014. The Centre for Policy Studies has urged him to go further, slashing the rate to 20%, or even 10% in the longer term.
Proponents of cuts to corporation tax say that it not only attracts more businesses from overseas and encourages new ones to set up in the UK, but that it also boosts confidence and provides businesses with more revenue for investment and, crucially, job creation — which means even more profits and more revenues for the taxman.
“Such drastic cuts are unlikely given the parlous state of the public finances, but the Chancellor may give a nod towards further long-term reductions, perhaps accompanied by a realignment of the tax base to pay for them,” Graham Morgan, corporate tax partner at Kingston Smith, said.
Anti-avoidance: Announcements last week of the retrospective blocking of two tax avoidance schemes entered into by Barclays bank which would have cost the exchequer up to £500m in corporation tax, and growing support in Government for some form of General Anti-Avoidance Rule (GAARs) to stamp out aggressive tax avoidance schemes, illustrate the Treasury’s determination to act to reduce the tax lost to such arrangements.
“Taxpayers can expect a continued assault on anti-avoidance in all its forms and further announcements are likely to be made in the Budget,” warns Graham Morgan, partner at Kingston Smith. “High profile companies that indulge in tax planning must now consider the reputational risk involved in participating in tax avoidance schemes — regardless of how effective their tax planning may be.”
Indexation Allowance: Since the abolition of taper relief in 2008 for non corporate taxpayers, which reduces the amount of tax paid the longer an asset is owned, questions have remained over the future of the Indexation Allowance for corporate taxpayers. Graham Morgan believes changes may be afoot as the Chancellor looks for a way to increase the tax base for corporate taxpayers to offset the promised reduction in headline rates.
“It is entirely possible that the indexation allowance may be sacrificed in the Budget on the altar of ‘tax simplification’, possibly compensated by another ‘rebasing’ to 2012,” he explains. “In the current climate and depressed property market, the Treasury has an ideal opportunity to implement another rebasing — which may or may not be optional for corporate taxpayers.”
Corporation tax and economic growth: With widespread acceptance that economic growth is totally dependent on private sector activity, the Chancellor will be looking for a way to balance out the effects of the planned reduction of the Annual Investment Allowance from £100,000 to £25,000 from April 2012.
With little room for manoeuvre on tax, Graham Morgan, corporate tax partner at Kingston Smith, believes the Chancellor could offer a limited window of accelerated allowances, perhaps with repayable tax credits, for targeted capital investment projects.
However, he warns: “The difficulty is that much of our capital equipment is imported, so at the ‘front end’ the beneficiaries may well be our trading partners overseas.” Morgan continues: “In the longer term, however, the increased economic activity should help to create employment.”
National Insurance Contributions: Graham Morgan also points out that, from a tax perspective, the most significant barrier to job creation is the 13.8% ‘tax on jobs’ — the employers’ National Insurance Contribution (NIC), from which eligible new businesses outside London, the South East and East of England have qualified for a holiday worth up to £5,000 for the first ten employees they hire in their first year of business, since the scheme started on 6 September 2010.
“The scheme has conspicuously failed in its objective, probably because of the bureaucracy surrounding its application,” he asserts. “Nevertheless, its motivation is clear — to reduce the tax cost of employment thereby encouraging would-be employers to ‘take the plunge’. We would welcome the suggestion of anything that looks like an incentive for employers — although such benefits could be outweighed by proposed increased pension contribution costs,” he warns, adding that he expects to hear more on this subject in the Budget — coupled with non-fiscal attempts to stimulate the labour market.
Real Time Information (RTI): HMRC currently envisage that all employers and pension providers will have joined the RTI system by October 2013, to improve the operation of PAYE, with a pilot commencing in April 2012. Tim Stovold, partner at Kingston Smith, hopes the Chancellor will announce that the RTI timetable will be pushed back.
“In continuing their plans to implement RTI across all UK businesses within the next 18 months, HMRC are demonstrating that they’re in denial about the widespread lack of awareness of their scheme among employers,” he explains. “Businesses simply won’t be ready for the major changes that RTI will involve; and recent performance issues in relation to the HMRC PAYE coding system show us that insufficient time is being set aside to trial a major new system that will affect all employers.”
What we don’t expect from the Budget
IR35 compliance: Following the recent tax scandal which has seen swathes of civil servants paid through private companies, rather than as individuals, to reduce their tax liabilities, it has been suggested that increased legislation is needed to prevent people using such devices to avoid PAYE and National Insurance.
Andrew Shaw, head of Personal Tax at Kingston Smith, explains why he does not expect the Chancellor to address this in the Budget: “This is not a Budget issue; it is a matter of the law being properly applied. IR35 is an adequate tax regime, but in these cases it seems that the law has been over-ridden and, as with any law, it can hold no power if it is not operated properly.”
VAT: Following two consecutive rises in the standard rate of VAT, bringing it up to 20% on 4 January 2011, no further changes are expected in the forthcoming Budget. Adrian Houstoun, VAT partner at Kingston Smith, explains why he thinks increasing VAT on zero or reduced (5%) rated goods and services is also unlikely.
“Whilst the government might be looking at zero-rated goods and services that they could move into the VAT basket, there is nothing on the shelves that looks attractive,” he explains. “To start charging VAT on children’s clothes, books or food would be too much of a political hot potato.”
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