THE DAYS OF the chancellor pulling rabbits out of the red box look to be at an end. The publishing of the Finance Bill in December 2010 and the multitude of consultations coming from it suggests that there is little about this Budget that will come as a surprise. But even with this government’s commitment to a consultative approach, it would be politically inadvisable not to produce some kind of treat – to either the public or the headline writers – on the day itself.
It is unlikely there will be anything as meaty as what we already know will happen at the beginning of April: corporation tax is to be reduced to 27%; the small profits rate of corporation tax is to be reduced to 20%; the rates of employee and employer National Insurance contributions (NIC) will rise by 1%, with class 1 and class 4 being increased to 12% and 9% respectively, mitigated by a rise in the threshold at which it begins to be paid; an increase in the income tax personal allowance to £7,475; a decrease in the threshold at which higher tax is paid from £37,400 to £35,000; and a huge decrease in the pensions annual allowance from £255,000 to £50,000.
But what are the candidates for Budget day announcements? Chancellor George Osborne has been badging this as the “growth” budget, to help small businesses. How he plans to do this will be interesting with very little funds available. A low cost measure that looks likely to happen, says Deloitte’s tax partner Bill Dodwell, is more enterprise zones, incorporating lower business rates, enhanced capital allowances and easier planning. If chosen in the right areas, such as near universities, this will help small and medium businesses grow through better use of research and the talent available. This would be an answer to the debate over a separate rate of corporation tax in Northern Ireland, says Dodwell, which itself would be “mad”.
Another relatively simple way of helping small businesses would be an improvement in the entrepreneur’s relief, which was highlighted by the Office of Tax Simplification’s report into small businesses’ relief. Currently, individuals miss out, says Smith & Williamson tax partner Richard Mannion. To qualify for the 10% rate of CGT – as opposed to the usual 28% – on sale of company shares, individuals who own 5% of the total shares must have been an employee or office holder (director, company secretary or similar) for the year prior to sale. Mannion adds that he is “hopeful” that a proper review of entrepreneurs’ relief will be announced . This could involve removing the stipulation that the individual must work at the company, something that will aid “business angels”, those investors that put money into various small enterprises, says Dodwell.
It is likely that small UK businesses that sell low cost consumer goods will be boosted by changes to the VAT consignment relief. Currently, companies that import goods worth £18 and less from overseas get reliefs from VAT. Grant Thornton estimates that this costs the Exchequer £130m a year. Perhaps more importantly, this affects small UK based producers, who are at a disadvantage – the bigger companies send their goods offshore to import them back into the UK. Osborne will most likely reduce the threshold from £18 to £10 – an abolition would make it impossible for customs staff to enforce.
Moving offshore, it would be no surprise to see a consultation on non-domiciled individuals. This could involve the introduction of a residency test. Residency is currently defined by case law rather than statute. A test is “long overdue”, says George Bull, tax partner at Baker Tilly.
Non-doms might be affected by changes other than their definition. At the moment, after seven years in the UK, non-doms have to choose whether to pay £30k or pay tax on their worldwide earnings. However, this regime is “not working terribly well,” says Bull. “My own view is that it will be right to scrap the regime as it is doing more harm than good and there is no evidence that it is raising taxes.” But this is highly unlikely for political reasons rather than economic ones.
Because of non-doms’ status as an easy political target, another possible reform is preventing them from using the principle residence exemption. Like UK-domiciled individuals, non-doms do not need to pay capital gains tax on the selling of their main home – as non-doms are not eligible to vote in the UK, removing this would cost little political capital. Tim Lyford, head of corporate tax at Smith & Williamson, said it would be an “easy” political decision and noted that British people who own property in France are liable to pay a local tax on the gain when they sell and in addition they may be liable to pay an annual wealth tax. But Bull says such a measure would not “seem fair nor relevant”. Non-doms tend not to sell their houses, so this would raise little revenue but could risk alienating a group that is useful for the economy, he adds.
But there has been lots of talk about reform to the principle private residence relief. This relief has attracted bad press thanks to the MPs expenses scandal, which brought the issue of “flipping” into the public consciousness – that is, changing the principal residence to get relief from capital gains tax. Currently, individuals selling any residence that has been their primary home get three years exemption from capital gains tax when they sell the property. This gave people who moved house three years’ grace to sell their properties. However, as in the case of certain MPs, some people – such as builders – have moved into a home that isn’t their primary residence for a short period so they can use this relief. It is likely that the government will announce reducing this exemption to two years. However, Dodwell claims that “this is not a big deal” as it is simply tinkering with the system and this change will mean little to the Exchequer.
There is almost certainly going to be a response to the Office of Tax Simplification reports into tax reliefs and small businesses. This could be as minor as platitudes thanking the OTS for its work. But it would not be a surprise to see a timetable outlining a possible review on the recommendations – specifically a merger of income tax and National Insurance. Osborne is unlikely to choose what direction to take on IR35, but again a review is likely. There will also be announcements regarding the abolition of minor reliefs, so makers of black beer had better get selling before Wednesday.
The most likely outcome is that this will not be a groundbreaking Budget day. There should be enough to keep the headline writers working until late on 23 March – but tax specialists will not be hit by huge overnight changes.
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