We expect there to be some surprises for both businesses and individuals as the Chancellor presents another difficult Budget on 20 March 2013, in what remains a challenging period for the UK economy.
Measures anticipated which will support business growth
Is a flat 20 per cent Corporation Tax rate in sight?
With the announcement in the Autumn Statement of a further reduction in the main rate of Corporation Tax to 23 per cent from April 2013 and the promised cut to 21 per cent from April 2014, we are predicting that there will be no firm commitments on additional rate cuts in the 2013 Budget.
However, we would not dismiss the chance of a commitment by the Chancellor to introduce a flat rate 20 per cent Corporation Tax rate by the end of this Parliament.
This would enable the Coalition Government to demonstrate its commitment to creating one of the most competitive corporation tax systems within the G20 by delivering, and indeed significantly exceeding the Chancellor’s Budget 2010 commitment to reduce the headline rate to 24 per cent by 1 April 2014.
Collecting tax from profitable groups operating in the UK
The Chancellor may feel obliged to make a statement on how he intends to change the legislation to ensure that the Treasury is collecting sufficient corporate tax from profitable groups operating in the UK. At the same time he will be wary of scaring away international companies from opening new business in the UK. It is almost certain that some overseas groups will have factored into their decisions about whether to locate in the UK, the unstable and unpredictable environment if the business does not generate significant UK corporation tax liabilities, regardless of its profitability and tax reliefs.
Commercial property
Given the uneven commercial property market, it would be very unwise for the Chancellor to consider increasing the 4 per cent top rate of Stamp Duty Land Tax (SDLT) on commercial property. Nevertheless, we are concerned about the recent aggressive stance taken by HMRC in relation to SDLT group relief claims for acquisitions of property by corporate groups where there is no tax avoidance motive.
It would be a triumph of hope over expectation to anticipate that the Chancellor might look across the Irish Sea to the measures introduced by the Irish Government, reducing SDLT to 2 per cent in order to facilitate property transactions, which had been blocked by the previously egregious rates.
Disincorporation relief for small businesses
We expect confirmation of the proposed changes to allow small businesses to disincorporate without triggering a corporation tax charge in the company. This would be achieved by joint claims between the company and its shareholders to allow qualifying business assets (goodwill, land and buildings used in the business) to transfer at a reduced value for Corporation Tax and Capital Gains Tax purposes.
Small businesses, for these purposes, are likely to be those where the market value of the qualifying assets does not exceed £100,000; we consider this to be far too restrictive. A limit of £1 million would be more appropriate if HM Treasury consider a limit to be required. In essence, shareholders to whom the assets are transferred will carry over the transfer value for the purpose of Capital Gains Tax so that any gain will be deferred until they sell the assets. This is a sensible and overdue relief that will mirror the reliefs that apply to individuals who incorporate a business.
Simpler Income Tax for the Smallest Businesses
HM Treasury and the Coalition Government have a stated objective to simplify tax. Sadly, the progress towards this has been slow but the introduction of a cash basis for smaller businesses is likely to be a step in the right direction if the final legislation is operated by HMRC in accordance with the thrust of the draft legislation. We expect that the final draft of the legislation will be published on Budget Day meaning that good progress will have been made towards the desired objective of simplifying tax compliance for this important sector of the economy.
Matters principally affecting individuals
Personal allowance
The Chancellor has, of course, already announced that the personal allowance will be raised again to £9,440 for 2013/14; the pledge that no one will pay income tax until they earn £10,000 is the central personal tax policy within the Coalition Agreement and the Chancellor may well announce a £10,000 personal allowance for 2014/15.
Capital Gains, Inheritance Tax and Investment Schemes
We do not expect there to be significant changes to either Inheritance Tax or Capital Gains Tax. Originally, Inheritance Tax affected a very small number of estates at death but the increase in residential property prices has dragged more and more taxpayers into this tax which has an onerous rate of 40%. Whilst there have been some calls in recent weeks to increase both these taxes, we confidently expect the Chancellor to reject the demands. We consider that the receipts from CGT collected by the Exchequer would almost certainly increase if the existing 28% maximum rate were to be cut to, say, 20% as more taxpayers would be willing to crystallise a gain.
After major changes to Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) legislation and the introduction of the Seed Enterprise Investment Scheme (SEIS) last year, we do not anticipate much in the way of changes in this area this year.
Although some economists have suggested that the Government will have to increase the VAT rate to 25% in order to reduce the fiscal deficit, it would be difficult for the Government to justify this radical increase when consumers are already under financial pressure. We are certain that the Government will maintain the standard rate of VAT at 20%.
Last year saw the Government attempt to address various VAT anomalies and loopholes. However, this backfired with a number of subsequent amendments in respect of the ‘pasty tax’ and ‘static caravan tax’. This episode demonstrates the difficulty in changing often complex VAT rules without causing further problems or controversy.
One, somewhat remote, possibility might be the introduction of a reduced rate for the hospitality and leisure sector. The industry has been aggressively lobbying for a reduced rate for visitor attractions and hotel accommodation. According to the industry, a reduced rate would mean more jobs, more public spending and a boost to the economy. Most EU countries (including France, Germany and Italy) already apply a reduced rate as they recognise that tourism is a price-sensitive market. Introducing a similar reduced rate in the UK would only level the playing-field with most other major EU countries.