This was one of the most eagerly awaited Budgets for years, with the political stakes likely to be very high.
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 21 March 2012 and on related Government announcements.
In common with the practice initiated last year, much of the content of this year’s Finance Bill was already in the public domain before the Chancellor got to his feet, draft legislation having been published back in December 2011. What’s more, with so much having been trailed and speculated upon in the national press over the past few weeks, one might have anticipated that the Budget itself would be devoid of any element of surprise. That said, it was one of the most eagerly awaited Budgets for years, with the political stakes likely to be very high. We were led to expect a ‘Robin Hood Budget’, which broadly is what we got, but there was something of interest for all taxpayers, to a greater or lesser extent.
The headlines will undoubtedly focus on the reduction in the top rate of income tax from 50% to 45% from April 2013, a move that the leader of the Opposition cited as pandering to the rich. However, in a recent Ernst & Young client survey, over 27% of the companies surveyed stated that the 50p tax regime was the biggest deterrent to growing their businesses in the UK. Given that an HMRC report found that the net revenue generated by the 50% rate was little more than would have been generated by a 45% rate, the Chancellor concluded that he could not ‘justify a rate that damages our economy and raises next to nothing’.
The additional 1% reduction in the main rate of corporation tax, giving a rate of 24% from next month (and reducing to 23% from April 2013 and 22% from April 2014), will also be welcomed by business. Combined with the announcement of the new 45% top rate of income tax, the Government’s focus on the international environment, which will encourage companies to locate, invest and employ here in the UK, reinforces the message that the UK is open for business. And if one adds to this the patent box regime and the new ‘above the line’ tax credit, to be introduced next year, one could arguably say that the UK’s tax regime is coming close to being best in class.
Whilst the Corporate Tax Roadmap has resulted in fewer Budget Day surprises for companies, those likely to be most concerned by the Chancellor’s announcements were the country’s workforce. However, for those on low and middle incomes, the Chancellor has made significant strides towards the £10,000 personal allowance, which is the long-term aim of the Coalition Government. He has pledged to raise the personal allowance by a further £1,100 from April 2013, such that individuals will be able to earn £9,205 before they pay any income tax at all. This is predicted to take 840,000 people out of the tax net altogether, but higher rate taxpayers will also benefit, albeit to a lesser extent. However, the Chancellor has still failed to address the anomalous 60% marginal rate that applies to those on incomes in excess of £100,000 as a consequence of the phasing out of the personal allowance, before the rate reverts once more to 40%.
The furore over the withdrawal of child benefit for higher rate taxpayers has resulted in a rethink, with a phased withdrawal being introduced for those on incomes in excess of £50,000. It will only be withdrawn in full for those on incomes in excess of £60,000. Whilst this does not address all of the concerns, it goes some way to alleviating the impact.
No major changes are planned to pension reliefs, but, from April 2013, anyone who was seeking to claim uncapped income tax reliefs of more than £50,000 will have their relief capped at 25% of their income, or £50,000 if that is greater. This is likely to have a significant impact on Gift Aid payments and claims for loss relief.
The raising of the rate of stamp duty land tax to 7% on residential properties costing over £2m was the headline in the morning newspapers and so came as no surprise. But the immediate imposition of a 15% rate on similar residential properties purchased by a corporate wrapper, with the prospect of an annual charge from April 2013 on such properties which are in corporate wrappers, had not been anticipated to quite that extent. Moreover, to ensure that wealthy non-residents don’t escape a charge, capital gains tax is to be levied on residential property held in overseas companies. And just in case people do not appreciate that the Government means business, the Chancellor raised the spectre of retrospective legislation if taxpayers try to find ways around these new rules.
And last but not least, the Chancellor has announced that the Government is to proceed with the enactment of a general anti-abuse rule (or GAAR), following the Aaronson report, although it will now be extended to include SDLT. It will be introduced in next year’s Finance Bill after a period of consultation but it will undoubtedly increase uncertainty for both companies and individuals alike.
We begin with the ITEM Club’s economic report, analysing the implications of the Chancellor’s proposals. The ITEM Club is sponsored by Ernst & Young.