SECOND BUDGET OF 2010
The coalition government’s first Budget was put together in a hurry – and it shows.
The most striking announcement, for readers of Schmidt Tax Report, is probably going to be the change in capital gains tax (CGT) rates, which we’ve mentioned in a number of other articles this month. The headline is that, for investment assets, the rate goes up from 18% to 28%. This is a very strange kind of compromise between those who wanted to leave the tax alone and those who felt that some form of taper relief should be introduced. The latter suggestion made a lot of sense, because insofar as the politicians’ muddled thinking is aimed at anything, it’s aimed at counteracting those who try to turn income into capital: an opportunity, incidentally, that Gordon Brown introduced for the first time only in 2008! Taper relief would have dealt with this perfectly, because it would have had the effect of charging short-term gains at income tax rates, which only gradually reduced as the gains became longer and longer term.
Interestingly, though, the threshold for entrepreneurs’ relief doubled from £1 million to £2 million in April, has now leapt up to £5 million in June.
Before small (and not so small) businesses crack open the champagne at this, you have to bear in mind that entrepreneurs’ relief is more limited than the old business asset taper relief, even though the resultant rate of tax, at 10%, is the same.
Where business asset taper gave you the 10% rate on any sale of a trading asset, entrepreneurs’ relief only applies where you sell a business or part of a business. So the farmer who gets planning permission for a few acres of his land won’t qualify for entrepreneurs’ relief, because a few acres don’t qualify as part of a business. The same disposal would, however, have qualified for business asset taper.
So we are back in the planning environment that applied to the old retirement relief, abolished many years ago now. Under retirement relief, you had a similar requirement to sell part of a business. If what you are actually doing is only selling a business asset, it may be possible (we await the detailed rules) to engineer a disposal of the rest of your business, perhaps to a connected person, at the same time. This may then qualify your ‘real’ gain for entrepreneurs’ relief.
The other major nasty, in our view, was the increase in National Insurance Contributions (NIC) by 1% from next April. Having fulminated against employers’ NI as a “tax on jobs”, which is exactly what it is, David Cameron has had to perform a U-turn, whether in response to pressure from the Lib Dems or in response to the desperate need to pull in some more money, we’re not sure.
In the area of capital allowances, there is also a bit of a hit for business, whose rate of allowance is to be reduced from 20% to 18% and from 10% to 8%, as the case may be, and whose annual investment allowance (which is basically the ability to write off capital expenditure completely in year 1) is to be reduced from a maximum of £100,000 to £25,000.
On the plus side, there is the rate of corporation tax, which is going down to 20% for profits of up to £300,000 next year, and will gradually go down to 24% for profits over £300,000.
This makes tax planning using companies even more attractive than it was before, when you consider that the 50% rate of income tax is being kept, at least for the time being. The same income could therefore be chargeable either at 50% or 20% (see our piece ‘Tax Rate Shopping’ elsewhere in this edition).
Oh, and we almost forgot, VAT is going up. Given the almost complete lack of excitement at the decrease, last year, from 17.5% to 15%, the government is probably banking on the increase similarly passing without major ructions. There’s evidence that they may have been a bit optimistic, if they thought this, but at the end of the day this is mainly a tax on the consumer, although we will be including some tips in the months that follow on how to reduce your VAT exposure if you are in business.
Good news on furnished holiday lets. We were all told that they were going to have all of their tax breaks (which are huge) taken away from 6th April 2010. However, the tax breaks have been given a stay of execution of a year, but the tone of the Budget notice, which came out on 22nd June, is that they may consider keeping them for ever, in their newly extended form, which will encompass the whole of the EU. This, after all, deals with the issue which led to the proposed changes in the first place: giving generous tax reliefs to furnished holiday lets in the UK only, and not the EU, was always contrary to EU law. It’s just that someone in HMRC has only just noticed this.
Good news also for all those who fail to get a buzz from nightmarish complexity is the replacement of Gordon Brown’s proposed pension rules. These were aimed at hitting the rich (a cynic would say without particularly benefiting anyone else) but for some reason the job of putting the rules into some kind of orderly form was given to some backroom boy in Somerset House who just loves making things difficult. A series of phased withdrawals of higher-rate relief on a taper basis, combined with hideously complex ‘anti-forestalling’ rules, which were only needed because of the announcement now taking effect in two years’ time, all these are now, hopefully, out of the door and being replaced by a much simpler arrangement whereby the annual allowance (which is the amount you can put into a pension each year) is to be reduced to some figure in the region of £30,000–£45,000.
Despite being hurried, the Budget did find some time to announce the usual raft of changes aimed at stopping the leaks in the employment rules, which clever tax avoiders are constantly finding, in this case relating to employment-related securities and earnings provided through trusts and other vehicles.
And, as far as the taxes we’re interested in (which are the taxes you can plan for and reduce), that’s about it. Quite enough, a number of you may say.