Emergency Budget: Osborne provides clear direction

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and
six, result happiness. Annual income twenty pounds, annual expenditure twenty
pounds ought and six, result misery.” What would Wilkins Micawber have made of
an annual deficit not of six (old) pence but £155bn?
Faced with such a problem, the easy way out for the chancellor would have been
to impose large increases in taxes. He has not been seduced into doing that,
perhaps having been advised that there is a point at which high tax rates become
counterproductive as tending to encourage avoidance and other behavioural
On the contrary the budgetary gap will be closed mainly by reduction in
government expenditure, some of which are already proving very controversial.
But the rises in taxation (at least, in direct taxation) are relatively modest
and to that extent, the chancellor’s budget must be considered good for
Looking at specifics, the most high-profile change is a rise in VAT to 20% from
4 January 2011. However, thankfully, there is no suggestion of any change to the
treatment of zero- or reduced-rated supplies, nor to the cash or annual
accounting schemes.
So – an unwelcome change for consumers and for VAT-exempt businesses but for
others a mixed blessing – it may trigger a six-month mini-boom for retailers as
consumers bring forward big-ticket purchases but it may be followed by a
fall-back in demand as prices rise in the New Year.
The increase in CGT was heavily trailed and is nothing like as bad as it could
have been. At 28%, the rate is only slightly higher than the lowest non-business
rate (24%) which applied in the days of taper relief – which rate was earned
only after ten years’ ownership – and the unexpected increase to £5m in the
Entrepreneurs’ Relief lifetime limit sweetens the pill.
We suspect that the rate is carefully set at the level which maximises the tax
yield without killing the goose that lays the golden egg: thus avoiding the
mistake which the previous government is widely considered to have made with the
50% income tax rate.
Corporate tax rates come down, with the small companies’ rate dropping to 20%
from 1 April 2011 and the main rain dropping in stages to 24% by 1 April 2014.
To some extent this is balanced by reductions in the rate at which capital
allowances are due, with the main rate of writing-down allowance reduced to 18%
and annual investment allowance (which was increased only in May to £100,000)
slashed to £25,000. We may be Luddites, but it has always seemed to us odd that
in a time when unemployment is a live issue, tax law has provided an incentive
to buy labour-saving machinery but (via NICs) a positive disincentive to employ
people: the reduction in capital allowances and the increase in the employers
NIC threshold (of £21 per week above inflation) represents some small movement
in the other direction.
But perhaps the most refreshing aspect of the Budget is that after many years of
“smoke and mirrors” Budgets characterised by complexity and obfuscation, this is
a clear WYSIWYG statement. Whether you like what you see is another matter: the
view that a benefit claimant or a public servant will be taking on the Budget
will be very different from that which is taken by a businessman or –woman. We
live in interesting times.

David Whiscombe is a member of the UK200Group’s tax panel and a partner
at BKL tax in London

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