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Budget 2011 - EY - United Kingdom

The Chancellor was on his feet for almost an hour to promote his plan for growth.

This Budget Alert is based on the Budget Speech presented to the House of Commons by the Chancellor of the Exchequer, the Rt Hon George Osborne, on Wednesday 23 March 2011 and on related Government announcements.

In some respects, this year’s Budget was unlike any of its predecessors. Committed as it is to restoring the UK tax system’s reputation for predictability, stability and simplicity, the Government published draft clauses for inclusion in the Finance Bill 2011, along with explanatory notes, back in December 2010. One of the aims was to allow more time for pre-legislative scrutiny in the hope that the quality of the resultant legislation would be improved. Taken together with the Corporation Tax Roadmap, which appeared in November last year and which set out the Government’s broad direction of travel over the next five years, this increased show of transparency is designed to provide business with greater certainty. Indeed, in a recent EY survey of tax departments ahead of the Budget, almost half of the 85 respondents cited ongoing changes to the tax system as being the biggest deterrent to growing their business in the UK. So, with so much already in the public domain, one might have been forgiven for thinking that everything was already done and dusted and that the Chancellor’s scope for manoeuvre was limited in the extreme.

The reality was that the Chancellor was on his feet for almost an hour to promote his plan for growth. In presenting a fiscally neutral Budget, he set out four economic ambitions, namely that Britain should have the most competitive tax system in the G20 (no longer restricted to corporate tax), be the best place in Europe to start, finance and grow a business, be a more balanced economy, by encouraging exports and investment, and have a more educated workforce that is the most flexible in Europe.

On the revenue-raising side, he hit the oil and gas companies hard, by increasing the supplementary charge on profits from 20% to 32% with immediate effect. This came as a big surprise and will raise £2bn of additional revenue. He continued to focus attention on the banks by increasing the Bank Levy from 1 January 2012, and raised a further £1bn over the life of the Parliament by changing the underlying indexation basis for direct taxes from the Retail Prices Index to the Consumer Prices Index from April 2012. As expected, the Government continues to target tax avoidance.

His give-aways were many and varied. The previously announced 1% reduction in the main rate of corporation tax to 27% from 1 April 2011 was trumped by a surprising 2% reduction to 26%, with further 1% reductions to follow in each of the succeeding three years. This will result in a rate of 23% from April 2014. The extended period of consultation is clearly paying dividends as several changes have been made to much of the draft legislation, including amendments to the interim controlled foreign companies rules and the taxation of foreign branches. The raising of the £30,000 annual charge on non-doms to £50,000 from April 2012 after 12 years of living in the UK was less severe than some had feared, while the news that the complex tax remittance rules will be suspended where such remittances are used to fund investment in British business is a welcome bonus. The increase in the rate of tax relief for investors under the Enterprise Investment Scheme (EIS) from 20% to 30% with effect from 6 April 2011 and the change to the size of company which will qualify for EIS are both designed to stimulate investment in private enterprise. The doubling of entrepreneurs’ relief from £5m to £10m from 6 April 2011 will be appreciated by successful entrepreneurs and the news that the 50% income tax rate is a temporary measure signals that the UK should be viewed as a low tax, high enterprise regime.

The Chancellor paid credit to the work of the Office of Tax Simplification and has abolished no fewer than 43 reliefs no longer considered necessary, among them the millennium Gift Aid system which will not be needed for another 989 years. This, at a stroke, removes over 100 pages from the statute book and begins the work of simplification. He also announced that he is to consult on another of their recommendations, namely the merging of National Insurance and income tax. The aim is not to increase taxes but to simplify them, although the Chancellor is under no illusions as to the size of the task ahead and recognises that this will take several years to achieve.

With some exceptions, this Budget is likely to be seen as a move in the right direction, signalling to the world that Britain is open for business.

We begin with the ITEM Club’s economic report, analysing the implications of the Chancellor’s proposals. The ITEM Club is sponsored by EY.




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