UK: Budget Predictions

Last Updated: 19 March 2013
Article by Richard Mannion

Richard Mannion, national tax director at Smith & Williamson, considers what is most likely to come up in the 2013 Budget.

"I don't see any scope in the March Budget for lowering personal tax rates or increasing personal allowances, over and above what has already been promised.

Remember that giving away just £100 each to 30m taxpayers would cost the country £3bn and the message is that we can't afford a give-away of that magnitude."

Personal allowance

We already know that the 2013/4 allowance will be £9,440 (a big increase of £1,335). The stated aim is to get the personal allowance to £10,000 by 2015 and so the question is whether the Chancellor announces that the 2014/5 allowance will be £10,000 or more so that he can claim that the target was met a year early (the most likely outcome) or whether we move to the target over two tax years.

The purpose of the increase in personal allowance is to take those with lower incomes out of the tax net altogether and so it is likely that the increase will be taken away from those on "higher incomes" by adjusting the higher rate threshold.

We know that the Prime Minister is keen to introduce a relief for all married couples, but his Coalition partners are likely to block this for the time-being.  My fear is that any relief would be cosmetic and worth little in practice and consequently it would not justify further complicating an over-complex system.

The Office of Tax Simplification (OTS) has suggested that the existing married couple's allowance (only available to people born before 6 April 1935) should be "drastically simplified with a removal of the current system of income abatements and changing the 10 per cent rate system to a flat-rate payment."

Income Tax rate, including the proposed 10% rate

We already know that the top rate of income tax is going to go down from 50% to 45% with effect from 6 April 2013 and I don't see much scope for changes (up or down) in the other income tax rates.

The Labour party has said it would bring in a 10% rate. A suggested £1,000 band has been mentioned which would mean a maximum tax saving of £100. However the fear is that we would end up with a complicated formula to ensure that only those with lower incomes got the benefit in which case it would add yet another layer of complexity.

We do of course already have a 10% starting rate which very few people seem to be aware of. The OTS has recently recommended its removal (PDF) "as awareness and claim levels are so low that it is ineffective in incentivising savings".

National insurance contributions

If there are to be any hikes in personal taxes, NIC is the most likely target in my view. It is a huge money-earner for the Government and because NIC doesn't have the word "tax" in the title people seem more tolerant of such increases than a rise in basic rate income tax.

CGT

We had a major upheaval in CGT in 2010, followed by significant increase in the entrepreneurs' relief, and I wasn't expecting more changes this time around.

However I thought the call by Liam Fox for a temporary reduction in CGT was very interesting. Are his views influential as a former cabinet minister or was he just flying a kite? CGT does not produce much tax anyway so a temporary suspension would not cost a huge amount in lost revenue.

IHT

I am expecting an announcement that the nil rate band will be frozen at £325,000 until 2019.

IHT is a very emotive tax, but the reality is that relatively few estates are liable to pay it and it is a tax that can be circumvented quite legitimately by the simple means of giving assets away and then surviving seven years.

Outside bet

I would not be surprised if we do end up with some sort of "mansion tax", more likely in the shape of new bands for council tax.

Generally: Bearing in mind the concerns about the lack of growth in the economy, I would expect more efforts to kick-start the economy and these might include an extension to the Seed Enterprise Investment scheme or a new initiative along those lines. The acid test her is whether any such new ideas can be made to work on the ground or whether HMRC and HM Treasury stifle them in case they might become misused for tax avoidance.

A selection of fiscal ideas to support business and the economy are outlined below:

Corporation tax rates

We have already been told that the main corporation tax rate will fall to 21% from April 2014.

Incentives for innovation: patent box, R&D

Patent box. Finance Act 2012 set out the special reduced rate of 10% corporation tax for qualifying patent income and this regime will be phased in from April 2013.  This proposed regime is attracting significant interest.

R&D. December 2012 saw draft legislation for a new method of giving research and development tax relief to large companies (an 'above the line' credit), which should raise the profile of this relief in those organisations and will enable for the first time a large company in a loss making position to surrender the relief for a tax repayment. 

Enhanced deductions for the creative sector. The draft legislation issued in December also outlined a new relief for the creative sector (high end television, animation and video games production), giving up to 100% enhanced deduction for qualifying costs.  March 2013 should see a more complete and final version of these measures. 

Taking the tax incentives for innovation as a whole,  in addition to initiatives being taken to increase the attractiveness of the UK as a location for raising finance for this sector, the UK's business environment regime for the technology and innovation sector is significantly enhanced.

Aligning UK tax law with EU law

Draft legislation proposes improving the alignment of the UK system with EU principles.  Full alignment would facilitate the functioning of business and cross border activity within the EU. 

Share schemes and employee incentives for privately owned companies

Proposed new rules should increase the ability of privately owned companies to introduce share incentive arrangements for employees from April 2013 and simplify the administration of employee share incentive arrangements.

These proposals are in addition to the proposed new employee share which can be made available in exchange for employees limiting their employment rights. 

Anti-avoidance

The introduction of a general anti-abuse rule (GAAR) in 2013 should be in place from around July 2013. 

Generally: There has been much talk about the tax paid by global corporations in UK. However it would be unlikely for UK to change its rules unilaterally bearing in mind that those corporations could easily choose to relocate their businesses elsewhere. So notwithstanding the recent rhetoric I do not expect UK to go it alone. It would be more sensible for UK to push OECD and the international community for a common approach.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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