A look back at what the Chancellor described as "the unavoidable Budget".
Much of George Osborne's first Budget was aimed at convincing the credit ratings agencies and the bond market that it was a credible fiscal deficit reduction programme that would stand up to global comparison. However, there were a number of practical measures to consider.
VAT to increase to 20%
The biggest Budget headline was the decision to increase VAT to 20% from January 2011. VAT has a number of advantages for the Treasury – it brings in large amounts of money quickly and it is collected at source by businesses who essentially do all the hard work. Although the postponement of the increase until the New Year provides time for inflation to drop from its current above-target level, the higher rate may make it difficult for the Bank of England to keep inflation within its 2% target.
Mr Osborne announced a five-year roadmap for corporation tax aiming to improve the country's competitiveness globally to show the UK is "open for business". The reduction in headline corporation tax rates will be paid for by changes to the capital allowances regime, which will come in over the next couple of years. It means that relief can still be obtained but more slowly than before.
There will be a levy on banks' balance sheets from next January, with further consultation to come on a financial activities tax.
The income tax personal allowance has been increased by £1,000 to £7,475, with the promise that it will rise to £10,000 over time. This is good news for many taxpayers, but of no interest to those with higher incomes whose personal allowances have been withdrawn.
Capital gains tax and entrepreneurs' relief
There was no precedent for changing capital gains tax (CGT) rates part way through a tax year, so it was a surprise that the increase for higher rate taxpayers from 18% to 28% took place from midnight on Budget day. Some gains attach to tax years rather than a date of disposal and special rules were needed to cope with those. It was a relief to see that there was no change in the CGT annual exemption for 2010/11 and the Budget Report indicated that this will be index-linked going forward. However, the FAQs posted on Budget day on the HMRC website suggested that there are no guarantees about CGT rates for future years.
The increase in the limit of lifetime gains on which entrepreneurs' relief is available, from the first £2m to £5m, will be a welcome boost to entrepreneurial activities. However it was disappointing that the scope of the relief was not widened. At present it is necessary to be an officer or employee and own 5% of the shares for the year up to disposal. The officer/employee test can catch out those who are planning their exit from the company in stages and the second test excludes many employees, particularly where an outside investor is brought in to the company.
Tax policy-making reform
For many years there have been concerns about the process for introducing new tax legislation and many examples of poorly targeted, badly drafted legislation rushed through the House of Commons without any real scrutiny. With that background it was pleasing to see that there is to be a consultation on a new approach to tax policy-making.
General anti-avoidance rule?
The introduction of a general antiavoidance rule (GAAR) is a possibility. We got close to having a GAAR in 1999, but the proposal foundered at the last minute due to the inability of the Revenue to resource a clearance system. Today, HMRC has even fewer staff, so it remains to be seen whether the GAAR will happen this time around.
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