Budget June 2010 – Olswang Analysis

As the dust settles on (yet) another Budget, the first for a new Goverment and a new Chancellor, what have we learned of what the future might hold?

This was always going to be a Budget in which spending would be slashed and taxes raised and, with regard to the latter, the hike in VAT is certainly a painful one. However, such draconian measures were expected.

The proposed reduction in corporation tax rates and the £5,000 NICs holiday for the first ten employees hired by new employers outside South East and Eastern regions certainly appear to be pro business but it’s the contents of the Treasury document entitled “Tax Policy Making: a new approach” which may contain the most cause for hope.

In this document it is acknowledged how unpredictable, complex and unstable the UK’s tax regime has become in recent years.  In particular, it is recognised that the way in which the Government has looked to tackle tax avoidance has increased the complexity of the system and, by making frequent announcements with little or no warning, has contributed to the perception of instability. 

The Government promotes, in its “new approach”, the idea of greater consultation and scrutiny with a view to ensuring that changes are both more considered and properly targeted.  It also commits to making fewer piecemeal changes and to slow down the rate of change so as to increase the UK tax system’s reputation of stability.

These are, of course, noble aims and ones which others have promoted in the past but with little perceivable success.  However, a new administration surely represents the best chance of implementing such changes.  So if, while it cannot make the UK’s tax rates materially more enticing, the Coalition Government can focus its efforts on making the machinery of the UK’s tax system simpler and more predictable (and so more attractive), this will probably represent as good a result as we could hope for.

Significant changes to corporation tax rates are proposed, the main rate is to be reduced from 28%  to 24% by 1 April 2014 by way of annual 1% reductions. Oil profits (ring fence) remain at 30%.

The main rate applies to profits above the upper limit of £1.5 million. Companies subject to the small companies rate are to benefit from a 20% rate (profits less than £300,000) from 1 April 2011 (previously announced to be 22%). Oil profits remain subject to the same rate, at 19%.

This represents a significant shift. By 2014 the differential should be such that an equalisation of rates between small and large companies is a real possibility.

But these reductions need to be considered in a wider context. The true tax burden is a function of rates and calculation, the Budget makes it clear that profits for tax are set to increase by reference to capital allowance rule changes:

1. Capital allowances – from April 2012 writing down allowances will be reduced, from 20% to 18% for main pool expenditure (in other words general plant and machinery) and from 10% to 8% for special rate pool expenditure (such as long life assets, but also integral features and certain cars).

2. Annual investment allowance – this is to be reduced from the current limit of £100,000 to £25,000. This also takes effect from April 2012.

There is no general anti-avoidance rule (a Lib Dem favourite) but its introduction is to be examined.