Outline - Conservative/Liberal Democrat tax plans

From the material I've seen, Budget proposals next month will be based around the following tax matters that were published in the Conservative-Lib Dem coalition agreement:

  • The parties agree that the personal allowance for income tax should be increased in order to help lower and middle income earners. The first Budget will announce a substantial increase in the personal allowance from April 2011, with the benefits focused on those with lower and middle incomes.
  • The increased personal allowance will be funded with the money that would have been used to pay for the increase in Employee National Insurance thresholds proposed by the Conservatives, as well as revenues from increases in Capital Gains Tax rates for non-business assets described below. "We also agree to a longer term policy objective of further increasing the personal allowance to £10,000, making further real terms steps each year towards this objective," the parties said and this will take priority over other tax cuts, including cuts to Inheritance Tax.
  • The parties agree that a switch should be made to a per-plane, rather than per-passenger duty; a proportion of any increased revenues over time will be used to help fund increases in the personal allowance.
  • The parties will seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.
  • Tackling tax avoidance is essential for the new government, and that all efforts will be made to do so, including detailed development of Liberal Democrat proposals.

Simon Sweetman provided a good starting point in his commentary article on what's in store for Budget #2. With £6bn to save this year, there has to be an overall increase in tax, in spite of the joint statement's vow to concentrate on cuts not tax increases. Yet even with the emergency Budget, most tax changes will have to come in from April 2011, Simon suggested.

Here are the other dead-certs he highlighted:

  • The rate of CGT on non-business assets will go up from 18% to something nearer 40%.
  • The increase in the IHT nil-rate band won’t happen.
  • Employees’ NIC will go up, but not employers’ NIC.
  • The personal allowance will increase in the general direction of £10,000.
  • It is likely that the main rate of CT will be cut (possibly with the abolition of the small companies’ rate and of the annual investment allowance to pay for it).
  • VAT will go up to 20% - this will bring in lots of dosh and can be done immediately.

The whys and hows and budgetary impact will certainly be worth further investigation, and our idea is to explore each of the main proposals in separate threads. In addition, there are a few other points of interest, such as what will happen to Child Trust contributions (which both parties want to end), and the Tories' pre-election promise to create an Office of Tax Simplification to review small company taxation and IR35. Will they be able to put something in place in time for the second 2010 Budget?

Are there any other likely Budget measures that I have missed?

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RebeccaBenneyworth's picture

Coalition Budget – what is possible?

RebeccaBenneyworth | | Permalink

With Budget day now announced as 22 June, we have a wealth of speculation – and some hard facts about what is likely to be in store for us. However, some of the commentary already shows a poor understanding of the tax system and what can and cannot be done part way through the tax year. This post presents a summary of the key announcements the government has made about tax and spending, and will link to some related topics that will look at how specific proposals might be achieved on a technical front.

The official agreement
There is a document (downloadable PDF) setting out the agreement reached between the parties on the formation of the government. This sets the policy framework for everything the government does in the next year or so, and can therefore be relied upon to give us some clear information about tax and spending priorities. It includes the following information :

General tax and spending policy

  • Deficit reduction: the agreement states that there will be “a significantly accelerated reduction in structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes.”
  • Modest cuts of £6bn to non front line services can be made within 2010-11 subject to advice from the Treasury and the Bank of England on their feasibility and advisability.

Personal tax

  • Reductions can be made to the Child Trust Fund and tax credits for higher earners
  • Personal allowance should be increased to help lower and middle income earners – a substantial increase to be implemented in April 2011with the benefits focused on those with lower and middle incomes. Long term policy agreement that the personal allowance should be £10,000, with steps taken to achieve this each year
  • Paid for by abolishing the increase in the NIC threshold for employees and additional CGT revenue
  • Increase in personal allowances takes priority over other tax cuts, including cuts to Inheritance Tax
  • Transferable tax allowances for married couples to be implemented as per the Conservative manifesto, with Liberal Democrat MP’s abstaining on this measure
  • Gains on non business capital assets to be taxed at rates similar or close to those applying to income, with generous exemptions for entrepreneurial business activities
  • Tackling tax avoidance is essential, and the Liberal Democrat proposals on this will be taken forward (note that the manifesto is a little short on detail on this topic).

Businesses

  • The “protection of jobs by stopping Labour’s proposed jobs tax”
  • A “green deal for energy efficient investment”
  • Increase in NIC threshold for employers will be implemented to reduce impact of the jobs tax
  • Air passenger duty to be switched to a per plane duty rather than a per passenger duty. A proportion of increased revenue from this source to be used to fund increased personal allowances.
  • A banking levy will be introduced, a detailed agreement on implementation will be sought.
  • An acceptable flow of credit to viable SMEs will be a core priority, which may involve a major loan guarantee scheme and the use of net lending targets for the nationalised banks.

Pensions

  • Restore the earnings link for state pensions from April 2011, with pensions raised by the higher of earnings, prices or 2.5% each year.
  • The rules requiring compulsory annuitisation of pensions at 75 will be abolished

Other commitments
The Conservative party had previously committed to reducing both the main rate of corporation tax to 25% and the small company rate to 20%, paid for by the abolition of the Annual Investment allowance and changes to some other unspecified capital allowances. This is not mentioned in the agreement, and given that the increase in personal allowances is to take priority over other tax cuts it is possible that this will not now happen. However, as this change was always intended to be self financing, it is possible that the importance of these changes to stimulate business may see them pushed through in any event.

There remains a question over the furnished holiday letting changes. Proposals to abolish the special reliefs on furnished holiday letting activities were included in the Finance Bill 2010, and then dropped when the general election was announced to allow the Bill to be passed through Parliament quickly. The Conservatives were against the removal of the reliefs, but it remains to be seen whether this is seen as a priority, particularly in view of the anticipated cost of increasing personal allowances, which has been estimated at £17 billion a year if implemented in full.

Other tax administration changes ready to be included in the second Finance Bill will no doubt be on the table, but it is possible that the Budget itself will include little by way of announcement on these topics.

The detail
Further posts will cover the detail of what is possible mid tax year:

[posted on Rebecca's behalf by John Stokdyk]

John Stokdyk's picture

George Osborne's speech to the CBI annual dinner

John Stokdyk | | Permalink

As reported on our news pages, George Osborne expanded on his plans for the 22 June to the audience at the CBI dinner last night. While still shying away from specifics (convention has it that he announces measures to MPs first), here are the relevant bits of the speech where he confirmed most of the points that were set out in the coalition agreement:

"I believe we have an opportunity to boost our economy and improve our society with radical tax reform.... The tax system has become hugely complex over the last thirteen years. Since 1997, the tax legislation handbook has more than doubled in length. It is now over 11,000 pages long. This spider-web of tax rules is holding back people who want to set up businesses...

"Our corporate tax rates are increasingly uncompetitive. A World Economic Forum report ranks the UK 84th out of 133 countries in terms of the competitiveness of the tax system. I want corporate tax reform to be a priority for this government, and I can confirm that the final coalition agreement that we will publish tomorrow will commit us to lower and simpler corporate tax rates.

"Let me give you advance notice of what it will say. 'We will reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates'.

"At the Budget I want to set out a 5 year road map for a big reform of corporation tax. As well as lower rates and a simpler system, I want to reform the complex Controlled Foreign Companies rules that have driven businesses overseas..."

"Reforming corporation tax is not the only goal. I want Britain to be the easiest place in the world to start a business. I want to do everything we can to support small companies. And I want to help new businesses by abolishing employer's national insurance contributions on the first ten jobs they create...

"But as well as a making the tax system more competitive, we need to make it fairer... This is why at the Budget I will be announcing a substantial increase in the personal income tax allowance. And our longer term goal is to raise the allowance to £10,000, with real terms steps in that direction every year. It will send a message that if you put the effort in, you get a job and earn yourself an income, you will keep more of your money.

"I also believe that the same principle must apply to those who invest in new businesses and create jobs. So while we will increase the rates of capital gains tax for non-business assets, there will be generous relief for entrepreneurial investment in businesses, as made clear in the coalition agreement."

Source: Speech by the Chancellor at the CBI annual dinner

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