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AIA

David Cameron reveals all

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23rd Nov 2009
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The Tory leader has laid out when the second Budget will be next year and some of what it will contain if a new Conservative government comes to power.

David Cameron announced 2010’s second Budget of the year before Mr Darling has had chance to deliver the pre Budget report – let alone the 2010 Budget. He did add that the general election next year would be a hard fought battle, but he promised a Budget within 50 days of being elected if the Conservative party win the general election (which must be held before June).

Cameron also had hard policy news for viewers of BBC One's Andrew Marr show on Sunday morning. In something of a coup, Marr managed to draw from the Tory party leader a specific statement on various elements of economic and tax policy.

Key tax promises
So what tax promises did Mr Cameron commit to? During his interview he stated that the main rate of corporation tax would be immediately reduced to 25%, which would be funded by “abolishing some reliefs”. He also touched on the Conservative party’s plan to give an NIC holiday as a job creation scheme. Clearly a Budget would have to cover many other areas of both expenditure and taxation, and my recollection of the precise policy regarding NIC was dim so I did a bit of research to wonder what the future might hold under a new government – if that is the will of the electorate.

I established quite quickly that the Conservative party would not only reduce the main rate of corporation tax to 25% but that it would also reduce the small company rate to 20% again – although timing for any changes other than those announced on Sunday would be speculative. This surprised me in part, as I have believed for some time that a single rate of 25% would serve us well, eliminating the complexities of the associated company rules when calculating tax liabilities, and also adequately countering tax motivated incorporation. So what 'reliefs' might be abolished?

How will this be funded?
Casting my eye over the Conservative party plans for the economy, it is not clear how this would be funded directly from the tax system, and indeed the cost is quite difficult to establish. Reducing the rate from 30% to 28% was costed in 2007 at around £2.8 billion on an indexed base, which was paid for by the reduction of capital allowances from 25% to 20%. Reducing this further would probably cost around £4 billion in a good year – not at present as corporation tax receipts are negligible, but clearly the cost would rise as the economy recovers.

The yield from the increase in the small company rate is also difficult to measure, particularly as the 2007 predictions cannot be relied upon – the last of the rise has yet to be enacted. However, from the Red Book for 2009 we can establish that the cost of the small company rate as a whole is £4.5 billion, which would not actually rise if both rates were reduced in tandem as it is measured against the alternative full rate.

However, abolishing the small company rate would present the opportunity to eliminate that cost – this would be a very useful saving, but the Conservative party clearly want the support of small businesses. I scanned my red book for indications of what reliefs might add up to between three and four billion and I could not come up with very many. The Conservative party’s Executive Summary promises that 'reduction of complex reliefs' would pay for it.

Abolishing the Annual Investment Allowance would be a good bet but this would only raise around £1.5 billion – it is interesting to see however that this cost has risen from the original predictions in 2007 of around £800 million. Well AIA would go a long way towards the cost if you also consider the impact on tax credits – so that would be my first choice. Beyond that, abolishing indexation allowance for companies (I am surprised that it has survived this long – just rebase and be done with it!) would be a sensible option but it is impossible to cost it on current published figures.

Further study of the Tory party’s plans indicates that I may be on the right track – page 17 indicates that a 'reduction in capital allowances' would be implemented, as well as “scrapping complex reliefs introduced by Gordon Brown”... so not indexation then. So a few ideas there of what might or might not work, but are there any other tax commitments already made?

A quick review of the executive summary of the document Reconstruction – plan for a strong economy published by the Conservative party reveals one other significant promise – increasing the stamp duty land tax threshold to £250,000 to support first time buyers. It also re-iterates the promise made some time ago to raise the IHT threshold to £1 million, which would be a significant cost.

It certainly offers food for thought; if we do get a change in government at some point next year then it is likely we will see quite a number of major tax changes, as well as a promise to commence a programme of radical simplification of tax and to change the way complex tax law is made. I await developments with interest!
 

Replies (5)

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By Simon Sweetman
23rd Nov 2009 14:48

AIA

Oh Rebecca !

The AIA is one of the best pieces of simplification for small business in years, so let's hope we don't have to go back to calculating capital allowances for the 2.5 million smallest businesses.

And massive simplification ?  Every party in living memory has promised that, and working with the Admin Burdens Board has shown me just how difficult it is.

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By User deleted
23rd Nov 2009 16:41

Tax savings if AIAs are abolished

I thought that AIAs only brought time differences to tax collection (deferment rather than saving).

Do I miss a point here or does the honourable lady suggest doing away with all form of capital allowances as well as raising the corporate tax rates on smaller profits to 25%? If so, this lethal combination is bound to get the UK economy forging back to work again!

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
23rd Nov 2009 23:24

Of course

I agree that in theory capital allowances should be a cash flow benefit only but anyone who practised through the early 1980's will know that in effect the 100% allowances available at the time became a permanent deferment of tax rather than merely a timing difference based on continued investment. (Witness the games with deferred tax at the time)

In any event, the way that the Red Book is put together is based on annual cash flows, so that a one year delay is shown as a cost in that year. However, it would probably be true to say that abolishing AIA may well yield the sort of sums I have quoted year on year because of the continued investment described above. Not all businesses will invest every year but we might imagine one quarter of the economy investing every four years on average, for example.

I wouldn't like anyone to think that I think that this or indeed any other proposals put forward by parties is a good idea, my object was to observe what parties are saying and thus draw conclusions from it that might be useful to practitioners in giving advice to clients. Such as this year might be the right time to invest in equipment as AIA may not survive. I picked on AIA because it was really the only component of capital allowances that I could see that could in any way fit the cost. I agree with Simon - it was a brilliant simplification but may yet prove an expensive luxury.

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By User deleted
27th Nov 2009 11:27

I wouldn't be surprised ........

Increasing the small company tax rate to 25% is nicely targetted at (by definition) small businesses only. Abolishing AIA has a massively disproportional cost to small businesses. Big businesses on the other hand are the ones who would benefit from cutting the main corporation tax rate.

The overall impact therefore would be transferring the tax burden away from large corporations and onto the shoulders of small family-owned businesses.

Who has the most chance of creating jobs and rebuilding the economy? Small businesses. Who contributes most to the Tory coffers? Big businesses.

Furthermore, regardless of the particularly damaging impact on small businesses, if the reduction in the tax rate is to be paid for by abolishing capital allowances or AIA, the tax burden will be shifted onto the shoulders of businesses investing in expansion and capital purchases, and away from those not investing.

I realise the author isn't advocating these policies. She is merely pointing out the sort of ill thought through policies the Tories may well opt for.

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By pauljohnston
07th Mar 2010 16:11

Small Business Corp Tax

It should be made clear that this is in respect of Limited Companies Only.  For the rest of there is a tax rate of 20% or 40% and now 50% plus NIC of 8% upto the upper threshold then 1% thereafter.

Perhaps therefore a Corp Tax Rate of 24% across the board would make it a more level playaing fiekd.

However perhaps a business profit tax would be much fairer to cover all business income upto say £250k.

 

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