Tax and the 2010 General Election

Comparison of the main political parties' plans for Tax and Business

INTRODUCTION

The general election will be held on 6 May 2010.

This booklet summarises and reviews the declared policies of the three main political parties as they affect taxation and businesses, the objective being to inform clients, contacts and staff.

The Labour Government has pledged to halve the current annual deficit in four years and an important issue for the immediate future is how and when to reduce Government spending. However it seems inevitable that whichever party wins power there will have to be substantial tax rises in the term of the next Government and our key predictions are therefore:

• an increase in the 18% rate of CGT bearing in mind the increased differential with a 50% top rate of income tax;

• the 50% top rate to stay in place for the foreseeable future;

• VAT to go up and, bearing in mind that the European average is 19.8%, the UK rate could well increase to 20%;

• the crack-down on avoidance and evasion to continue.

1. GENERAL TAX POLICY

1.1. Conservatives

• Cut wasteful Whitehall spending rather than increase taxes.

• Create the most competitive tax system in G20 within five years, restoring simplicity, stability and predictability. Set out a five year road map for corporate tax reform to provide greater certainty and stability for business. Introduce an Office of Tax Simplification to suggest reforms to the tax system.

• Reduction in corporation tax rates to be funded by reductions in capital allowances and scrapping complex reliefs.

• Pay freeze for one year for public sector workers other than the one million lowest paid.

1.2. Labour

• Create an enterprise environment that gives active support to those who wish to start their own business.

• Make further progress in cutting the costs of regulation on growing businesses, especially the smallest, with a new goal to cut the cost of regulation by a further £6.5 billion by 2015 (£1.5 billion in unnecessary paperwork and record-keeping, and £5 billion in the wider regulatory costs that impact upon business).

• Take steps to cut the budget deficit with 60% of tax rises being paid for by the top 5 per cent of earners. Plan to halve the deficit in four years through fair tax increases, firm grip on public spending, strategies for growth and reduced spending on benefits.

• Increase all NI rates by 1% from 6/4/11. Considered to be fairer than increasing VAT.

• No increases in income tax rates in next Parliament and no extension of VAT to food, children's clothes, books, newspapers and public transport fares. Will maintain tax credits.

• Cap public sector pay rises at 1% for two years. Reforms to public sector pensions.

1.3. Liberal Democrats

• Rebalance the tax system by cutting taxes for people on low and middle incomes, paid for by cutting reliefs and closing tax loopholes that benefit the wealthiest and increasing taxes on aviation.

• Tackle tax avoidance and evasion.

• Achieve £14 billion of potential savings including scrapping the Child Trust Fund, regional development agencies and various defence procurements. Set a pay rise cap of £400 for public sector workers for two years, restrict tax credits, end Government payments into child trust funds, and introduce a banking levy.

2. INCOME TAX

2.1. Conservatives

• Charge a flat-rate levy on UK residents of foreign origin who are tax-domiciled offshore, to pay for increase in IHT nil rate band.

• Abolish income tax on all savings income for everyone on the basic rate of tax with top rate taxpayers continuing to pay the same as they currently do.

• Raise the tax allowance for pensioners by £2,000.

• Transferable personal allowance for married couples which will only benefit basic rate taxpayers.

• 50% top rate to stay as long as the public sector pay freeze is operational.

• Will restore tax reliefs previously available through the furnished holiday lettings regime.

2.2. Labour

• No increases in the basic, higher or top rates of income tax in next Parliament. The new 50% top rate to remain in place for the whole term of the next Parliament.

• Remove the furnished holiday lettings rules that treat such businesses as a trade rather than property businesses.

2.3. Liberal Democrats

• Raise the threshold at which people start paying income tax from current levels to £10,000, cutting the average working age person's income tax bill by £700 pa and cutting pensioners' income tax bills by £100 pa. These plans will mean that almost four million people on low incomes would no longer have to pay any income tax at all. This proposal has been costed at £16.7 billion, to be paid for by reforming CGT, restricting tax relief on pension contributions, the mansion tax, switching from Air Passenger Duty to a per plane tax and anti-avoidance measures.

• Close tax loopholes and cut reliefs that benefit the wealthiest.

• Restrict tax relief on pension contributions to the basic rate, so that those on high incomes do not benefit disproportionately.

• Reform the system of taxing non-domiciled individuals so that after seven years they will become subject to UK tax on all offshore income.

3. NATIONAL INSURANCE CONTRIBUTIONS

3.1. Conservatives

• Any new business started in the first two years of a Conservative Government to pay no Employer National Insurance on the first ten employees it hired during its first year.

• Would reduce the impact of the proposed 1% National Insurance rise in April 2011 by increasing the employee's earnings threshold (before they start to pay National Insurance) by £24 per week and the upper earnings limit (after which the upper NI rate is due – currently 1% but 2% from April 2011) by £29 per week. The earnings threshold before employers' contributions commence will also be increased by £21 per week. This is initially projected to cost £5.6 billion, falling to £4.3 billion as wages rise. [The PBR08 document indicated the 0.5% increase in NI rates would raise £5.39 billion in 2011/12, while PBR09 indicated the further 0.5% increase in NI rate would raise an additional £4.64 billion. Thus the Conservative's latest position on the NI increase would reduce the revenue raised from this measure from just over £10 billion to £4.43 billion, to be funded by £12 billion a year efficiency saving measures to be implemented across Whitehall.]

3.2. Labour

• All NIC rates to increase by 1% with effect from 6 April 2011.

3.3. Liberal Democrats

• Combat leakage of National Insurance contributions by changing the taxation of benefits-in-kind, such as private health insurance, leading to a fairer basis of pay.

• Reverse the proposed increase in NIC as soon as resources allow.

4. CORPORATION TAX

4.1. Conservatives

• Headline rate of Corporation Tax to be reduced from 28p to 25p as a first step to lower business taxes, funded by a reduction in complex allowances.

• Small companies' rate of Corporation Tax to be cut from 21p to 20p, paid for by removing complex new investment allowances.

• Research and development tax credits to be improved and refocused on hi-tech companies, small businesses and new start-ups.

• Set out a five year road map for corporate tax reform to provide greater certainty and stability for business.

• Simplify the Controlled Foreign company rules.

• Consult on a territorial corporate tax system that only taxes profits generated in UK.

• Create an attractive tax environment for intellectual property.

4.2. Labour

• Have maintained the 21p small company rate for the corporation tax year beginning 1 April 2010.

• Will provide incentives for companies to invest through research and development tax credits.

• Protect and increase capital allowances that help key sectors such as manufacturing.

• Develop the patent-box (a lower rate of corporate tax to encourage UK based innovation).

• Have a stated aim to "make the UK the best country in the G20 in which to set up and run a business, and become one of the most attractive places in the world to invest".

4.3. Liberal Democrats

• Cut the rate of corporation tax to be funded through the removal of complex reliefs.

• Allow small businesses to choose to be taxed on cash flow. This would aid growing businesses who make accounting profits but reinvest their cash flow.

• Reform research and development tax credits to ensure that resources are targeted to encourage innovation.

• Introduce a new general anti-avoidance provision for corporation tax, to stop companies structuring their business in a particular way to reduce their tax bill.

5. VAT

5.1. Introduction

None of the parties has a firm commitment on VAT policy. The view that VAT would be a strong contender for tax rises, whichever party wins the election, is partly based on data showing that Britain has one of the lowest VAT rates in Europe. Official documents have revealed that the Treasury considered announcing a VAT increase to 18.5 per cent in 2011-12 in the 2008 pre-Budget report (per FT 22 March 2010).

Policy Exchange, viewed as one of Tory leader David Cameron's favourite think-tanks, said modelling and academic research showed the idea established in the 1970s and 1980s that VAT was less damaging than income tax was no longer valid. "We found that, contrary to what is widely assumed amongst journalists and politicians, increasing VAT would be more damaging to economic growth than increases in the basic rate of income tax," the report concluded. This effect was so clear that politicians should consider restructuring taxes by raising the basic rate of income tax and cutting VAT, it said (per FT 22 March 2010).

5.2. Conservatives

5.3. Labour

• No extension of VAT to food, children's clothes, books, newspapers and public transport fares.

5.4. Liberal Democrats

• Do not propose to raise VAT (Nick Clegg 8/4/10)

6. CAPITAL GAINS TAX

6.1. Conservatives

• The Conservatives have said they are in "listening mode" about whether future reforms to CGT would make sense (FT 15 March 2010).

6.2. Labour

• To encourage entrepreneurship Labour has doubled the value of capital gains that can be made under Entrepreneurs' Relief for lifetime gains to £2m (giving an effective CGT rate of 10% on such gains). This will cover cumulative gains and the new limit came into force on 6 April 2010.

• Mr Darling acknowledged that the Treasury will, at some point, have to close the gap between the 18% flat rate of CGT and the new top rate of income tax of 50%, which he knows is being used by the wealthy to cut their tax bills (FT 15 March 2010).

6.3. Liberal Democrats

• Align capital gains tax to income tax rates to prevent people from having an incentive to present their income as capital to pay a lower rate of taxation. Will reduce the annual exemption of capital gains tax, from £10,100 to £2,000, to stop this allowance being used for tax planning.

• Those who use second homes as speculative investments to pay income tax rates rather than the CGT rate.

• Introduce a levy of 1% on the value of properties worth over £2m.

7. INHERITANCE TAX

7.1. Conservatives

• Raise the Inheritance Tax (IHT) threshold to £1 million.

7.2. Labour

• Maintain the IHT nil rate band at £325,000 until 2014/15.

7.3. Liberal Democrats

• Have indicated that they are not in favour of raising the nil rate threshold.

8. TAX CREDITS AND CHILD TRUST FUNDS

8.1. Conservatives

• Stop new spending on Child Trust Funds for better-off families. However, disabled children and the poorest one third of families to continue receiving both new Child Trust Funds at birth and top-up payments.

• Stop paying Child Tax Credits to those earning over £50,000.

• Reform administration of the tax credits system.

8.2. Labour

• Will maintain tax credits.

• Additional support through tax credits will be targeted at children, with additional support through the child element of the Child Tax Credit of £4 per week for families with children aged 1 and 2 years old from April 2012 (Toddler tax credit). From April 2010, there will be additional annual payments of £100 into the Child Trust Fund accounts of disabled children. Severely disabled children will receive £200.

8.3. Liberal Democrats

• Scrap the "Child Trust Funds" or restrict tax credits.

9. BUSINESS

9.1. Conservatives

• Any new business started in the first two years of a Conservative Government to pay no Employer National Insurance on the first ten employees it hires during its first year. The tax break will encourage new entrepreneurs and is predicted to generate around 60,000 additional jobs over two years.

• Want to reform the system of taxing the self-employed (Mark Prisk quoted in the Sunday Telegraph).

• Will review IR35 (Mark Prisk quoted in Daily Telegraph).

9.2. Labour

• Cut business rates for eligible small businesses occupying properties with rateable values of up to £6,000 to nil for one year from October, with reductions for those occupying properties with rateable values of up to £12,000.

• Support small businesses. Continue the Time to Pay scheme for deferring payment of tax.

• Make further progress in cutting the costs of regulation on growing businesses, especially the smallest. with a new goal to cut the cost of regulation by a further £6.5 billion by 2015 (£1.5 billion in unnecessary paperwork and record-keeping, and £5 billion in the wider regulatory costs that impact upon business).

• Retain the Annual Investment Allowance of £100,000 for the next Parliament and index-link the allowance.

9.3. Liberal Democrats

• Cut red tape to ease the burden on smaller businesses.

• Cut business rates for smaller businesses and base rates on site values, rather than total rental value, which penalises businesses that invest in improving their premises.

• Make it easier to contract with government so that smaller firms are not disadvantaged.

• Encourage the creation of Local Enterprise Funds to connect local private investors with local entrepreneurs.

• Reform Regional Development Agencies to devolve power to local authorities and focus support on where it is most needed.

• Overhaul competition powers to reduce the power of monopoly organisations both nationally and locally and to encourage innovative businesses to thrive.

10. STAMP DUTY

10.1. Conservatives

• Take nine out of ten first time buyers out of Stamp Duty altogether.

10.2. Labour

• Reduced the rate of SDLT for first time buyers for properties with a value up to £250,000 to nil for two years.

• Raise the rate of SDLT on residential properties to 5% for properties with a value exceeding £1m.

10.3. Liberal Democrats

• Make sure wealthy individuals and businesses cannot avoid paying stamp duty land tax, as they do at present by setting up an offshore structure.

11. GREEN TAXES

11.1. Conservatives

• Transform our electricity networks with 'smart grid' and 'smart meter' technology that automatically matches supply and demand, allowing a huge increase in renewable power.

• Create a decentralised energy revolution by introducing a system of feed-in tariffs to encourage micro-generation of electricity.

• Expand offshore wind and marine power and provide government backing for a network of large-scale Marine Energy Parks.

• Accelerate the demonstration of carbon capture and storage technology, in which Britain should have a leading position but is being overtaken by other countries that lack the skills, research, industrial and geographical advantages that we enjoy.

• Give energy companies incentives to build a national recharging network for electric cars.

• Give every household an entitlement of up to £6,500 worth of energy efficiency investments, financed by energy providers and paid for from part of the resulting savings in energy bills.

• Increase the proportion of tax revenues accounted for by environmental taxes, but any additional revenues from new green taxes that are principally designed to change behaviour will be used to reduce the burden of taxation elsewhere.

• Reform the ineffectual Climate Change Levy so that it is more closely linked to carbon emissions in order to provide the right incentives for investment in low carbon technologies.

11.2. Labour

• As firms invest in insulating people's homes, renewable energy and nuclear power, and in new technologies such as electric vehicles, we will create around 400,000 new green jobs by 2015 – making 1.2 million British jobs in the environmental and low carbon sectors in all.

• The Labour party intends to opt nitrous oxide gases from nitric acid production into the EU Emission Trading System from 2011.

• From 1 April 2011 the climate change levy (CCL) discount available to energy intensive sectors participating in the climate change agreements (CCA) scheme will reduce from 80% to 65% across all taxable commodities. CCL rates will increase in line with inflation in 2011-12.

• On 1 April 2010, the main fuel duty rate will increase by one penny per litre. It will then rise by a further one penny per litre on 1 October 2010 and by 0.76 pence per litre on 1 January 2011. Fuel duty will rise by one penny per litre in real terms in April 2014.

11.3. Liberal Democrats

• Replace air passenger duty with a per-plane tax, thereby taxing air freight and also providing an incentive for airlines to fill seats and discourage them from running empty flights.

• Introduce a levy on domestic flights to discourage travellers from choosing air travel over land for journeys which would take less than six hours by rail.

• Require energy companies to simplify the complicated tangle of different tariffs. Roll out smart meters to all households within five years and insulate all of Britain's homes to a decent standard within 10 years.

• With respect to rural communities, provide more homes for local people by increasing councils' powers over second homes and promoting schemes for affordable homes.

• Deliver broadband coverage and quality in rural areas.

• Invest up to £400 million in refurbishing shipyards in the North of England and Scotland so that they can manufacture offshore wind turbines and other marine renewable energy equipment.

• Launching an 'Eco Cash-Back' scheme, for one year only, which will contribute £400 towards the installation of double glazing, replacement of an old boiler, or installation of micro-generation.

• Investing £140 million in a bus scrappage scheme.

• Begin a ten-year programme of home insulation, offering a home energy improvement package of up to £10,000 per home, paid for by the savings from lower energy bills, and make sure every new home is fully energy-efficient by improving building regulations.

• Improve energy efficiency in the commercial and public sectors, by strengthening the Carbon Reduction Commitment Energy Efficiency Scheme.

• Boost investment in clean energy by reforming the EU emissions trading scheme.

12. COUNCIL TAX

12.1. Conservatives

• Freeze council tax for two years.

• Scrap plans for a council tax revaluation.

12.2. Liberal Democrats

• Give local authorities power to set higher rates for second homes.

13. PENSIONS

13.1. Conservatives

• When resources allow start to reverse the effects of the abolition of the dividend tax credit for pension funds.

• Raising state pension age sooner than planned.

• Restore the link between Basic State Pension and average earnings.

• End the obligation to buy an annuity at age 75.

13.2. Labour

• Re-link the basic state pension to earnings in 2012 and conduct a review of the retirement age.

• Pension credit to rise in line with earnings.

• Support 10m people to build up savings through occupational pensions and personal pension accounts.

• Retirement age to increase to 68 between 2024 and 2046.

13.3. Liberal Democrats

• Restore the link between annual increases in the Basic State Pension and increases in average earnings immediately.

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.