UK: If It Counts, It’s Covered - Deloitte’s Full Budget Report Commentary

Last Updated: 25 March 2010
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

Experts' Opinions

Immediate reactions

Sally Grimwood

Key measures of interest to everyone

  • Although widely billed to be a political knock-around, in truth the 2010 Budget was as much about delivering a message to the financial markets -that there is a steady hand on the tiller.
  • The forecast for public sector net borrowing for the current year has been reduced by £11bn (from £178bn at the PBR to £167bn). This brings the UK's net debt to 54% of GDP, which is actually better than France, Germany or the US.

The Chancellor also forecasts that the deficit will be more than halved over the next four years, flowing from a combination of tax increases (predominantly from highly paid individuals) and efficiency savings.

  • In absolute terms, the Budget measures are dwarfed by those announced in the PBR (the PBR forecast to raise £8.5bn over three years, compared to the Budget's giveaway of £560m over the same period). Modest tax increases will fund equally modest giveaways.
  • The key announcement was a one-off £2.5bn package designed to promote small businesses, made up of a large number of measures which together amount to a welcome warming of the environment for entrepreneurs (unhelpfully it looks very much like each measure will have its own definition of "small"), including:
    • The "Time To Pay" scheme has been phenomenally successful as a recession-beating measure. £5bn of tax is currently being deferred by 160,000 businesses employing 1.4 million people. It will be extended for the whole of the next parliament.
    • Business rates are the third biggest cost for small businesses (after salaries and rents, if you're interested); rates are being cut for one year from October 2010 and 345,000 businesses will not pay rates at all.
    • The 100% deduction for capital expenditure is doubling to £100k.
    • Entrepreneurs selling their businesses will benefit from a doubling in the limit for the 10% capital gains tax rate (from £1m to £2m). There will also be no increase to main capital gains tax rate of 18%.

The key measures for corporates

  • Great news for computer gaming, a really important industry in which the UK leads the world. Canada introduced tax breaks for computer gaming in the hope of enticing activity, and it is great to see that the UK will be creating its own reliefs.
  • Still no substantive update on the patent box, despite wide speculation that a wider consultation would be forthcoming. However, it got a specific plug in the Chancellor's speech so is still clearly flavour of the month.
  • There do not seem to be new anti-avoidance measures for corporates over and above those previously announced.

The key measures for VAT and Indirect

  • There are a number of small measures, but nothing of any obvious wide consequence.

The key measures for individuals

  • The main disappointment for individuals is that all of the measures announced in the PBR continue to stand:
    • Income tax will increase to 50% for those earning more than £150k from April 2010.
    • 1p increase in NIC from April 2011.
    • Higher rate relief for pension contributions will kick in from April 2011 and the widely criticised anti-forestalling legislation is, of course, already in place. Interestingly, the Impact Assessment states that 50% of people facing restrictions live in London and the South East, 55% work in financial services, and 90% are male.
  • Growth shares are an increasingly popular way of rewarding employees. They basically involve shares whose value are low at the outset and whose subsequent increase in value is subject to CGT at 18% rather than income tax. There will be consultation in summer 2010 over their future.
  • However, first time buyers will be pleased that stamp duty has been abolished for two years for house purchases of up to £250k. This will be funded by a new 5% stamp duty rate for property purchases worth more than £1m.
  • New legislation is to be included in Finance Bill 2010 concerning transactions in securities for individuals, and will apply to tax 'advantages' arising on or after Budget day. The new legislation will continue to counter the income tax advantage arising from certain transactions, but is to be limited to transactions involving close companies. All the same, it is surprising to see that the anti-avoidance will raise £170m in the current year, given the consultation on transactions in securities was badged as simplification.

The entrepreneurial view

Vijay Thakrar, tax partner

The Chancellor seems to accept the view that Small and Medium Enterprises (SMEs) are a key driver for helping to generate economic recovery, as evidenced by announcements such as the following:

  • The doubling of Capital Gains Tax (CGT) "entrepreneurial relief" to £2m from 6 April 2010, effectively providing entrepreneurs with a 10% CGT rate on the first £2m of gain when selling their businesses.
  • The doubling of the Annual Investment Allowance (100% relief) to £100,000 for plant/machinery used in a business from April 2010.

Whilst these are welcome measures, entrepreneurs will still be dismayed by other areas that need urgent attention if we really want to have an SME led recovery. Examples include:

  • The significant regulatory burdens on businesses – smaller businesses simply do not have the resources to cope with ever-increasing regulation such as administering the government's various tax credit schemes.
  • The significant Inheritance Tax Liabilities that can arise when entrepreneurs seek to pass on their hard earned (and taxed) wealth to their families – made worse by the announcement that the thresholds will be frozen for the next four years.
  • The significant reduction in recent years of schemes that allow entrepreneurs to raise equity risk capital, e.g. under the Enterprise Investment Scheme or Venture Capital Trust Scheme.

So while the news in some areas was welcomed (or not as bad as feared!), there are still a number of areas to work on.

More bad news for employers

Matt Ellis, tax partner

Aside from measures already announced – the introduction of the 50% tax rate from 6 April, restriction of higher rate tax relief on pension contributions and 1% increases in National Insurance (NI) from April 2011 – today's Budget announced a raft of measures to counter planning designed to mitigate some of these changes. As a result the options available for employers to deliver tax-efficient remuneration to their employees could narrow considerably in the future.

In his Budget statement, Alistair Darling signalled specific focus in three key areas – "Geared growth" share arrangements, Employee Benefit Trusts and alternative pension structures. Consultation on these areas will take place during summer 2010 with new legislation expected in April 2011.

Unsurprisingly, if the tax costs for employment go up, employers are keener to find ways to mitigate them. The Chancellor clearly believes this is what is happening and today's announcement shows that it will be harder and harder for employers to implement tax efficient remuneration arrangements in the future.

Further, following consultation the Government has also rejected requests to change the way it should implement pension tax relief restrictions. The announcements from last year's Budget and the Pre-Budget Report will be retained, and the Treasury today published how it proposes in Finance Act 2010 to deal with the restriction of pensions tax relief from April 2011. Legislation up to then is already enacted.

From 2011/12 relief will be tapered down from 50% to 20% as gross income increases from £150,000 to £180,000. The stepped taper will be 1 % of relief for every £1,000 of gross income. Individuals with incomes over £180,000 will receive 20% – the same as a basic rate tax payer. For money purchase schemes this will be relatively easy to calculate. For defined benefit schemes the proposal is that age-related factors will be used which incorporate the impact of an individual's age and the pension scheme normal retirement age. Pension schemes will need to confirm to scheme members the deemed value of benefit each year.

In our view this is a missed opportunity to simplify the original announcements which have caused significant confusion for individuals and the industry. Taxation implications for high earners of final salary schemes will be complicated and, as a whole, may discourage formal pension saving.

Still postponing the inevitable

Roger Bootle

Key measures of interest to everyone

  • This was a clever budget which made the most of very difficult circumstances. The Chancellor largely avoided the temptation to bribe the voters with their own money. There was a package of tax cuts and spending increases amounting to about £2.8bn in 2010-11, but these were partly offset by various tax rises, leaving only a modest giveaway of £1.4bn.
  • Moreover, the Chancellor was able to forecast stronger than expected tax receipts and lower unemployment. Consequently, he reduced his forecasts for public borrowing by more than had been widely expected. Over the six year forecast period, borrowing will now be a cumulative £55bn lower than predicted in last year's Pre-Budget Report.
  • This represents a victory for the Chancellor over the Prime Minister who, by all accounts, would have wanted to spend the receipts on various pre-election goodies. It also means that the Budget was a favourable surprise for fixed interest rate markets, and for all those at home and abroad who are worried about the UK's debt position.
  • But in truth the improvements are very marginal and the key factors which will determine what happens to the borrowing requirement in practice remain a serious concern. The first of these is the pace of economic recovery. The Chancellor downgraded his forecast for growth next year by 0.25%, but at 3-3.5% it remains heroically high.
  • And for the following years he made no adjustment at all to the forecast of 3.25-3.75%, which has long seemed to us to be extremely optimistic. Consumers are in no position to be increasing their spending and companies are unlikely to be keen to increase their investment. Lower sterling should help net exports in time but recent signs have not been encouraging and the Treasury seems to be very optimistic in forecasting that exports will increase by around 3% in 2010 and 4.25% in 2011.
  • Second, one of the leading factors which concerns foreign investors in the UK is the government's exposure to the banking sector through its various holdings and guarantees. Although recent banking results have been better, the uncertainties over the worth of the government's holdings, and the extent of its liabilities should things go wrong, are enormous. A further downturn in the economy, recognition of the true state of commercial property portfolios and/or further weakness in residential house prices could see the government's true net asset position looking a lot worse.
  • Third, the government has still put to flesh on the bones of its plans to cut government spending. In the absence of such detail the markets have little reason to find the government's numbers plausible.
  • So this was an exercise in shadow-boxing. To be fair, it was done well. But we all know that the real budget will come after the looming election, and that this will involve much more pain – whoever wins.

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