By Lea Pachta

With the country expected to go to the polls in early May, Chancellor Alistair Darling will need time to get the Finance Bill — enacting pre-Budget and Budget measures — onto the statute book before Parliament is dissolved ahead of the General Election. With this in mind the Budget on 24th March is expected to be little more than a short series of announcements, with a more comprehensive Budget expected post-election — irrespective of which political party gains power.

Non-domiciliaries and residency:

It is as yet unclear how much revenue the £30,000 remittance charge has brought in. Therefore, it is unlikely that non-doms will be targeted in the March Budget. “Following the most recent Gaines-Cooper ruling — when the Court of Appeal decided that entrepreneur Gaines-Cooper was liable to pay UK tax despite spending less than 91 days in the country each year — after the election the Government may announce the introduction of a statutory residence test to take effect from 6th April 2011,” says Andrew. They may even go a step further and tax on the basis of citizenship regardless of where an individual is based. “This would be taking a leaf out of the US’s book, taxing on worldwide income, subject to double taxation treaties,” says Andrew. “But such a radical measure would no doubt have to be introduced after the election.”


The disparity between CGT and income tax rates means the Chancellor may raise CGT from 18% to 25%, possibly with a corresponding extension to Entrepreneur’s Relief (from £1m to £2m). “CGT doesn’t tend to affect the traditional Labour voter so increasing the rate is unlikely to be too damaging,” says Chris Lane, partner and head of entrepreneurial businesses at Kingston Smith LLP. “Moreover, there is the school of thought that those fortunate enough to be making financial gains in these difficult times should be helping to put the economy back on the road to recovery.”

Income tax and National Insurance:

The Government could be tempted to reduce the tax threshold for 50% taxpayers from £150,000 to £130,000. “The £130,000 threshold would align with the threshold announced in relation to the revised anti-forestalling pension measures in the pre-Budget report, so could be justified by the Chancellor as a simplification measure,” explains Tim Stovold, a partner at Kingston Smith LLP. “However, relatively few voters are affected by the 50p tax rate and with the recent Gaines-Cooper ruling potentially putting a halt to City executives leaving the country, the Government might opt to leave well enough alone.”


A continuing assault on tax avoidance in all its forms is expected in the March Budget. “Promoters of tax-avoidance schemes are required to disclose them to HMRC, giving the tax authorities an early opportunity to identify and shut down those schemes that they think might work,” explains Graham Morgan, a partner at Kingston Smith LLP. “Businesses also need to be aware that tax laws with retrospective effect are no longer regarded as constitutionally unacceptable, as evidenced by the Treasury’s recent announcement on tax rules to be included in the Finance Bill concerning manufactured dividends, and affecting arrangements dating back to 2007. A clear statement on how and when retrospective legislation will be used is much needed, but unlikely to be announced anytime soon.”

Corporation tax:

Plans to raise the small companies’ rate by 1% to 22% were shelved in the last two pre-Budget reports due to the economic situation. “The Government can’t afford to lower the headline rate of corporation tax, which has remained at 28% since 2008. However, with the Tories widely trailing plans to reduce it to enhance the attractiveness of the UK to international business, Alistair Darling may seize this opportunity to steal the Tories’ thunder and make a similar announcement, probably adjusting reliefs to pay for the change” says Graham. “Incentivising measures that win headlines but don’t cost the Treasury much, for example, ‘green’ capital allowances are also anticipated.”


The Government is expected to announce various VAT measures after the election. Adrian Houstoun, VAT partner at Kingston Smith LLP, says: “The Government will not wish to upset voters by raising VAT rates now. However, it is likely that the main rate of VAT will increase from 17.5% to 20% later in the year, with the possibility of a 5% rate on books and foods. VAT on books has always been unpopular, with some labelling it a ‘tax on education’. But with the public finances in a parlous state, tough measures may now be necessary.”

The European Court of Justice recently asked the Netherlands to define its interpretation of ‘employee entertainment’ in relation to recovering VAT on employee entertainment. “With this in mind the Government may announce plans to review the UK’s definition of the term later on in the year,” says Adrian.

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