1.1 Introduction
The Chancellor made a number of announcements in the Budget Report which will affect the Tourism, Hospitality & Leisure industry. The majority of these announcements will benefit the industry, from employers benefiting from reduced headline corporate tax rates, to employees benefiting from increased personal allowances. However, the increase in VAT may see suppliers reassessing their pricing structures.
For detailed coverage and comment on the Budget visit Deloitte's dedicated website at www.ukbudget.com.
1.2 Corporation Tax
1.2.1 Corporation Tax Rates
The main rate of corporation tax will reduce from 28% to 24% over the next four years. A 1% reduction will be implemented each year from 1 April 2011.
The expected increase in the small companies' corporation tax rate will not take place. Rather, the small companies' rate will decrease from 21% to 20% with effect from 1 April 2011
1.2.2 Capital Allowances
The rate of writing-down allowance for main pool plant and machinery expenditure is to decrease from 20% per annum to 18% per annum, and the rate of writing-down allowance for special rate pool plant and machinery expenditure is to decrease from 10% per annum to 8% per annum.
The current limit on the Annual Investment Allowance (AIA) will also reduce from £100,000 to £25,000.
These changes will take effect from April 2012. Overall, the combined impact of the rate reduction and the reduced capital allowances is a cut in the total tax take, of over £1.3 billion by 2014-15.
To the extent possible, businesses may choose to accelerate capital expenditure projects and focus on maximising the identification of qualifying expenditure to benefit from both a current higher rate of writing-down allowance as well as offset against a current higher rate of corporation tax.
Despite the THL industry being capital intensive, we expect that with the reduction in the rates of corporation tax there will be an overall cash benefit to the industry.
1.2.3 Capital Distributions
As expected, the Government is to introduce legislation to clarify the treatment of distributions of a capital nature received by UK companies. Distributions of a capital nature will not be prevented from falling within the exemption regime introduced in the last Finance Acts solely by virtue of having the nature of capital.
The Government will legislate for this measure in a Finance Bill, which is expected shortly after the summer recess. The changes will apply retrospectively where appropriate, subject to an opt-out to ensure that the retrospective application of the new legislation does not increase tax liabilities.
1.2.4 Worldwide Debt Cap
The worldwide debt cap rules were introduced in 2009 to limit UK corporation tax deductions for interest costs of large groups to no more than the finance cost borne by the worldwide group as a whole. The Pre-Budget Report 2009 proposed several changes to address anomalies in the debt cap rules and further amendments were announced in the March Budget 2010. Today's publication repeats these previous announcements.
1.3 VAT
As had been widely expected, the Chancellor announced an increase in the standard rate of VAT to 20%. The VAT increase will increase the cost base of partly exempt businesses, such as casinos and others in the betting and gaming sector, as it will increase the amount of irrecoverable VAT they incur. The increased cost could in turn impact on their margins. The change is deferred until 4 January 2011, which shows some sensibility to many businesses that operate over the New Year period. The reduced (5%) rate remains unchanged. As happened last year, when the return of the rate to 17.5% was known well in advance, anti-forestalling provisions are to be included in the Finance Bill (No2) 2010, to prevent the 17.5% rate applying to certain supplies of goods and service that actually take place after the 20% rate comes into force. HMRC have published a detailed guide for VAT registered businesses to the new rate. As a result of the increase in the VAT rate, some of the percentages applicable under the VAT flat rate scheme will be changed. The Chancellor confirmed that there is to be no change to the VAT base, so goods and services that currently qualify for zero-rating and exemption will remain zero-rated or exempt. As the end users in the THL industry are often individuals, it will be interesting to see how the industry assesses their pricing structures, and whether in the short term margins are eroded.
The rates of Insurance Premium Tax will also increase – from 5% to 6% and from 17½% to 20%.
1.4 Low Paid Workers
Given the need for flexible and part time workers, both employers and employees in the Tourism, Hospitality & Leisure (THL) sector will benefit from the Chancellor's announcements on National Insurance Contributions (NIC) and the Income Tax Personal Allowance. As discussed in our Hospitality 2015 report, high employee turnover continues to plague the industry, so it will be interesting to see the impact these announcements have.
Whilst the 1% increase in employer National Insurance rates will go ahead from April 2011, a concurrent increase in the threshold for employer National Insurance Contributions by £21 a week above inflation, will result in an estimated additional 650,000 employees for whom employers will not pay National Insurance Contributions. Many of these individuals will be employed in the THL sector. NIC paid by an employer in relation to employees earning up to £21,000 pa will be lower or the same as the amount payable currently.
Further, new businesses outside of London, the south-east and east of England are set to be exempt from up to £5,000 of employers National Insurance Contributions for each of the first 10 employees they hire. This will be cheered by many new start ups, but is likely to attract some negative attention from those businesses in the excluded areas. The measures are expected to be in place by September but new businesses setting up now should also benefit.
Lower paid workers will themselves benefit from the increase in the income tax personal allowance by £1,000 to £7,475 in 2011/12.
1.5 Air Transport
1.5.1 Air Passenger Duty
As announced in the Pre-Budget Report in 2008, legislation will be introduced to increase the rates of air passenger duty from 1 November 2010. Airlines, travel agents and air passengers (including those who have already booked to travel on or after 1 November 2010) will be affected.
The Government plans to consult on a move to a 'per plane' measure, which is thought likely to increase the overall duty levels.
1.5.2 Change of Zero-Rating of "Qualifying Aircraft"
For supplies made on or after 1 January 2011, the definition of an aircraft that can be supplied at the zero rate will change from one based on weight and usage to one based on the status of the customer (effectively commercial airlines operating primarily on international routes). This measure was previously announced in the March Budget and aligns UK domestic law with EU law.
1.6 Furnished Holiday Lettings
The previously announced proposals to repeal the special tax rules for furnished holiday lettings will not be implemented. The government will instead consult over the coming months with a view to ensuring that tax concessions are compliant with EU legislation by changing the eligibility thresholds and restricting the use of loss relief. Changes will take effect from April 2011.
These measures will apply across the European Economic Area, though the majority of investment to be in the UK. This is welcome news for owners of holiday homes and should provide a timely boost to the UK tourism industry.
1.7 Alcohol Duties
The Coalition Government appears to have recognised that the Licensed Retail industry has suffered following increases in alcohol duty in recent budgets, with no increase in alcohol duty announced, although the general VAT increase from 4 January 2011 is expected to push up the price of a pint by at least 6p. In a surprising move, the Chancellor also announced the reversal of the 10% above inflation increase in cider duty that was put forward by his predecessor three months ago.
Interestingly, he confirmed that the Coalition Government will review alcohol duties this Autumn, with a focus on products that are perceived to be part of the "binge drinking" problem. Following on from the Government's previous statement that it would look at banning the sale of alcohol at below cost, the UK brewing industry in particular will be hoping for favourable changes in beer duty, given beer's position as a relatively low alcohol product. This could be good news for responsible pub goers.
1.8 Impact on entrepreneurs
Legislation will be introduced to introduce a new 28% rate of capital gains tax (CGT) which will apply to certain taxpayers. The new measures will apply to disposals on and after 23 June 2010.
In addition, the lifetime limit on gains qualifying for entrepreneurs' relief will increase to £5 million. Entrepreneurs' relief results in qualifying gains up to the lifetime limit being taxed at a rate of 10%.
Whilst a raise in the rate of CGT for higher rate taxpayers was expected, it has not been aligned with the rate of income tax as first anticipated. The increase in the lifetime limit on gains qualifying for entrepreneurs' relief from £2 million to £5 million will no doubt come as welcome news for many entrepreneurs who have established businesses in the THL industry.
The Budget announcement held some further interesting initiatives for the entrepreneurial business community, namely that the enterprise finance guarantee (EFG) scheme will be extended. The EFG scheme plays a key role in providing lending to small businesses that wouldn't normally be able to access traditional forms of finance. Therefore, the Chancellor's move to increase the EFG scheme by £200 million to support additional lending of up to £700 million until 31 March 2011 is one that is likely to help a number of fast growing and entrepreneurial THL businesses.
1.9 Long cigarettes
An anti-avoidance measure is being introduced which will increase the duty on "long" cigarettes (those over 8cm, excluding any filter) by treating them as two – or even more – cigarettes.
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