UK: A Pre-Election Budget - Deloitte Outlines Its Expectations For The Chancellor's 2010 Budget

Last Updated: 22 March 2010
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017
  • No change to CGT yet, instead expect a sharper HMRC focus on policing the boundaries;
  • Tax Disclosure arrangements extended to cover income to capital arrangements;
  • No announcements for a VAT rise before the election;
  • High-level consultation on the patent box to be announced.

Alistair Darling delivers his third Budget on 24 March. He can hardly be described as a lucky Chancellor; his appointment in summer 2007 meant that he has been responsible for steering the UK economy through the most difficult post-war period.

Bill Dodwell, head of tax policy at Deloitte, considers what tax measures we might expect at a time dominated by the economy and pressure on the public finances:

There has been huge speculation that the Chancellor will increase the rate of capital gains tax (CGT), from 18% to something much closer to the new 50% top rate of income tax. Everyone has noticed the 32% rate difference. Our view is that the rate will remain unaltered. Over the last five years, the number of CGT taxpayers has fluctuated between 195,000-260,000 - significantly fewer than the 350,000 expected to pay the 50% rate. However, CGT is a transaction tax, paid infrequently by a much larger population. Many occasional CGT payers will find their income tax rates unchanged.

Instead, we expect HMRC will focus on policing the boundaries. There isn't a simple alchemy to turn investments from income to capital; if there were, many would already be doing so. There is already significant anti-avoidance and we expect that the Tax Disclosure arrangements (where tax scheme promoters must notify HMRC when a new idea is developed) will be extended to cover 'income to capital' arrangements.

The other major area to consider is VAT. Some think tanks have argued that zero rates on food, housing, public transport and other areas should be abolished. Our view is that this analysis is superficial and no Chancellor would consider such important changes, which would adversely affect the lower paid. Evidence of household consumption expenditure demonstrates that lower income families spend more than half their budget on zero or lower-rated items. As the fiasco over the abolition of the 10% income tax rate showed, it is not possible to reach everyone in this group with an increase in tax credits or benefits.

The political timetable also suggests that an increase in the standard rate of VAT will not take place before the election - but we expect any Chancellor to consider an increase as part of a plan to reduce the deficit. Pre-announced rises may also have the short-term impact of bringing forward consumer spending. A rough rule of thumb suggests that a 1% increase in VAT raises over £4 billion and costs someone on average earnings about a pound a week.

Amid the political focus, we mustn't forget that the Budget is a key date for the Treasury and HMRC to deliver changes to the tax system.

We expect the Treasury to release a high-level consultation on the patent box - the plan whereby royalties from UK and European patents would be taxed at just 10%, instead of at the normal corporation tax rate. This is part of aiding the UK's research and development and wider scientific and technological skill base. We welcome this proposal.

A key beneficiary will be the UK's world class pharmaceutical sector, but it will be important for other areas to seize the opportunity afforded to locate additional activities here and increase the number of patents registered.

Other areas to look out for will be:

  • Extensions to the existing Tax Disclosure regime, whereby promoters of innovative tax planning need to disclose it at an early stage to HMRC.
    Reform to the 'transactions in securities' legislation - which taxes individuals on certain capital receipts as income. We expect the legislation to be made clearer and focused on family and employee-owned companies.
  • Finalisation of the over-hedging and under-hedging legislation. The proposals will make it harder for companies to hedge some balance sheet foreign currency exposures tax effectively.
  • Further changes to HMRC powers, including requiring offshore account holders to notify HMRC when an account is opened; changes to the system of interest rates when tax is overpaid or underpaid and extending the range of taxes and duties covered by the new, wider, powers regime.
  • Whether the Treasury accepts the wide-spread criticism of its proposals to limit pension deductions - and brings forward an alternative proposal.

Don't forget the pre-announced tax increases and changes:

  • The 50% tax rate commences on 6 April;
  • Personal allowances are withdrawn for those with income above £100,000;
  • Fuel duty increases by 1p per litre above indexation on 1 April;
  • Landfill tax rises by £8 per tonne;
  • The furnished holiday letting rules are abolished from 6 April, so that owners will no longer be able to set losses against other income;
  • Fuel benefit increases, for those who receive fuel for personal motoring. For vans, there's a 10% increase to £550 and for cars the multiplier rises from £16,900 to £18,000;
  • The inheritance tax threshold is frozen, at £325,000 instead of increasing as originally planned;
  • The Community Infrastructure levy commences on 6 April 2010. It's a mechanism that allows local authorities to levy charges on new property developments, to finance local infrastructure.

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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