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Emergency Budget: What can Osborne do?

19th May 2010
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With some press reports suggesting that chancellor George Osborne may announce his plans to increase the Capital Gains Tax in a speech to the CBI this evening, Rebecca Benneyworth sets out the technical parameters for some of the new government’s planned measures.

Some of the commentary around the government’s plans for the emergency Budget on 22 June demonstrates a poor understanding of the tax system and what can and cannot be done part way through the tax year. This article draws on more detailed observations in our new Budget discussion group to examine how specific proposals might be achieved on a technical front.

The official agreement
The Conservative-Liberal Democrat coalition agreement sets the policy framework for everything the government wants to do in the next year and gives some clear information about tax and spending priorities.

On the Budget deficit, 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”. As the Chancellor announced on Monday, the coalition will follow through on the Conservative commitment to trim £6bn from non-front line services during 2010-11.

But what about the specific tax proposals? Here are some of the options:

  • Personal allowances – An increase in personal allowances will take over other tax cuts, including cuts to Inheritance Tax. A substantial increase in the allowance will be implemented in April 2011 with the benefits focused on those with lower and middle incomes. Any increase in the personal allowance would need to be offset by reductions in the higher and additional rate thresholds to prevent high earning taxpayers from benefiting. This move will reduce the cost of the measure significantly. Changes will be made from April next year – the announcement does not contemplate any changes before then, which would be technically impossible in any event. The mechanics and mathematics are discussed in more detail in a Budget discussion group post, Personal allowances – focusing on lower and middle earners.
  • Capital Gains Tax – this has been one of the areas identified to help pay for the higher personal allowances. The Times and other commentators have suggested that the increase in the rate of capital gains tax could be implemented ahead in the Budget on 22 June, or even before that date. This would be a notable, but unlikely feat as the rate of CGT is set for a tax year at a time. Changing the applicable rate mid-year would cause all sorts of problems, with extra rules needed to create separate chargeable periods in each portion of the tax year, as if the year were in fact two fiscal years. This would then present major programming issues for HMRC, as the Self Assessment online system needs to be updated to cope with Capital Gains Tax computations for taxpayers filing online. The treatment of losses in year and brought forwards would need to be legislated for and the whole issue would be a complex mess.

    Given that the proposal seeks to tax gains at similar rates to income, or rates close to this it is possible that gains pre-Budget could be taxed at the current rate of 18%, with gains after the Budget being taxed under completely separate rules reflecting income tax rates. One possibility that would be relatively simple to implement for the current year would be to include post-Budget gains as a multiple – so all gains arising on or after 22 June might be taxed as if they were 2x the actual gain. This would increase CGT on those gains to 36% in a fairly simple way, to be followed by a rate which mimics income tax for the next tax year. Anyone contemplating a disposal of a non-business asset would be wise to push ahead with the disposal as soon as possible – remembering that the date that contracts become unconditional is the date of the disposal for CGT purposes. A formal binding contract for sale with completion set slightly later and proceeds payable later still would be an effective way to crystallise disposals at the current rate of 18%.

    For business assets, the coalition agreement gives a clear steer that Entrepreneur’s Relief would be suitably adjusted to retain an effective rate of 10%. More detail is available in the Budget discussion group post, Capital Gains Tax increase from Budget day?

  • Corporation Tax - Although convention says that Corporation Tax rates only change from 1 April, the Conservatives could fulfil their manifesto promise to reduce both the main and small company rates. Changing the rate mid-year is entirely possible. Because corporation tax works to specific dates, apportioning a chargeable period to alternative dates would not be complex to legislate. The cost of reducing the small company rate may be modest, but as Gordon Brown found a few years ago, tinkering with this rate could see increased pressure from small businesses to incorporate to save tax.

    A reduction in the full rate of corporation tax is desirable to retain international competitiveness – it is not wise for our rate to drift too far out of line with our EU partners. While the change may be an economic necessity at some point, it may not happen as part of the Emergency Budget.

  • NIC rates and thresholds - The coalition agreement states that the parties agree to “stopping Labour’s proposed jobs tax.” It also indicates that the rise in the NIC threshold for employees will not happen, but that the threshold for employers will increase as planned – leading to a differential starting point for NIC for employees and employers. There is no indication as to the intention on the increased rate for employees.
  • Annual Investment Allowance - The Conservative manifesto made it clear that some of the cost of reducing Corporation tax would be met by the abolition of the Annual Investment Allowance, but that other changes to capital allowances were also contemplated. There is no mention of AIA 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.
  • Green deal for energy efficient investment - The current Enhanced Capital Allowances (ECA) scheme provides 100% tax relief on energy efficient and environmentally beneficial plant and machinery, with a payable tax credit of 19% claimable by companies investing in approved technologies whose allowances mean that the company incurs a tax loss for the period. It is difficult to imagine how this successful scheme might be improved upon but this is a specific commitment, so it is likely to mean more allowances for environmentally beneficial investments.
  • Air passenger duty – Will 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.
  • Banking levy  - a likely measure to be introduced in the Budget, with a detailed agreement on implementation to follow.
  • SME credit - 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.
  • Holiday letting rules - 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.

For further Budget briefings, debate and discussion, see:

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