This Budget was a real non-event. The long list of things that didn't happen are all good news. So when is the next one?
The Budget delivered by Mr Darling last week has received a muted reception. There are no ghastly surprises in the detail, and in summarising the technical content it could aptly be described as a true “non event”. This Budget was more important for what it did not include, than for what it did.
- The rate of VAT has been left alone – it was widely expected to rise to raise tax revenue towards reducing the deficit. There is still quite a strong view that this measure will come eventually, but government would quite rightly have been criticised if they had raised it again now, giving us two rises in less than 12 months. The disruption to businesses in re-pricing (yet again) would have been significant. And there are economic reasons why an increase before 31 December 2010 would be unattractive – inflation is running at around 3% now – mainly due to the VAT increase in January 2010. Another increase now would fuel inflation, potentially triggering a rise in interest rates, which would be very damaging just as businesses are starting to recover from the recession. So if we do get a rise, either January 2011 or 1 April 2011 would be a sensible date.
- The rate of capital gains tax was not increased – again, a change that was quite widely tipped. The concern about CGT rates is the temptation to shift from income into capital for those making enough to be caught by 50% tax. A differential rate of 32% makes this quite tempting. What was proposed, however, was to re-focus the transactions in securities rules to concentrate on close companies. These rules could potentially affect some taxpayers indulging in income / capital shifting as they test an income tax advantage associated with transactions in securities. We also have more to come on the extra DOTAS hallmarks, which could also affect avoidance behaviour in this area. So 50% taxpayers who legitimately generate a capital gain will still only be taxed at 18%, but those who seek to manipulate income into gains will (hopefully) be prevented.
- There was no attack on the retention of profits in close companies. I have held the view for some time that some of the 50% planning around incorporation could be neatly attacked by the re-introduction of some form of close company apportionment rule (for the younger members who were not around in the early 80’s and before – this taxes profits retained in the company over and above what was needed for growth, as at the time marginal income tax rates were much higher than the rate applying to retained profits – just like now!). Quite a significant chunk of tax could be raised by a deeming mechanism treating some or all of the retained profits in close companies as a “deemed dividend”. So a lucky escape there too.
So, three key measures there which didn’t happen and were pretty good news. However, there is more – there are a couple of other things which could also have been in the Budget which would have been bad news for us. The “dealing with agents – deliberate wrongdoing” legislation originally had a consultation close date of 3 March, which would have set it up for inclusion in the 2010 Finance Bill. Finalising comments and summarising them in the Budget would allow the legislation to be included in the first Finance Act of the year – which to be frank parliament is barely going to have time to read before being asked to approve the measures therein. So this disastrous legislation would have been implemented by the back door. As it was, the outcry on the detailed draft legislation prompted HMRC to extend the consultation to 28 April. This possibly leaves time for it to go in Finance (No 2) Bill 2010 after the election, but this Bill is likely to have a little more scrutiny than the first. Note that we shall get a second Finance Act whichever party wins the General election, as a number of measures in this Budget were flagged for introduction in “a Finance Bill early in the next Parliament” – which means this summer.
There was also no news on payrolling benefits, which has been hanging over us for a few years now. The proposals have been subject to a “road test” by some businesses in the last year, and it was expected that we would hear more news on this important proposal. If implemented it would result in the effective abolition of form P11D, and the requirement to tax benefits in kind through the payroll. Popular with very large businesses, the proposals would be near impossible for smaller employers to implement.
Even some of the changes we did get were a bit of a non event. The much trumpeted doubling of the Annual Investment Allowance (AIA) to £100,000 was quite widely welcomed, but the Red Book indicates clearly that this will have little impact in reality. When AIA was introduced, it was claimed that 97% in number of businesses would be able to write of all of their capital expenditure each year within the £50,000 limit. So the remaining 3% would be larger businesses then? So really only larger businesses will benefit from the increase. The cost is a measly £130 million against a predicted annual cost of AIA when introduced of about £1 billion, so take-up is not predicted to be wide. Contrast this with the cost of the 40% first year allowance just ending, which is around £1.9 billion in total.
All in all a fairly neutral Budget then, with lack of bad news probably being the key message. Our next Budget may be in June – but only if there is a change of government at the general election. If Mr Brown and Mr Darling return then another Budget is unlikely – Mr Darling has done everything he wanted to and we shall probably hear no more from them until PBR at the end of the year, when I suspect a rise in VAT will once again be hotly tipped. Round we go again!