Chancellor George Osborne's first Budget has introduced an increase in VAT, a disappointing reduction in capital allowances and a welcome decrease in corporation tax.
Included in the measures is an increase in VAT from 17.5% to 20%, from 4 January 2011. The rise, due to come into force next January, will generate more than £13bn a year by the end of this parliament. Zero-rated items – including food and children’s clothes – will remain exempt from VAT over the course of this parliament. Although health and international aid would be protected, Osborne said that reductions to other government departments totalling £17bn by 2014/15 equated to 25% cuts over the next four years.
Corporation tax, currently 28%, to fall by 1p in the pound a year for four consecutive years until it reaches 24%. New firms outside south-east/east to be let off employer national insurance contributions, up to £5,000, for each of first 10 employees recruited.
“Among the tax rises of the most severe Budget for decades, there was definitely a focus on business growth,” said Bill Dodwell, a tax partner at Deloitte in London. “Companies will see a 1% annual reduction in the corporation tax rate from today’s 28% level, staring from April 2011. Companies with profits up to £300,000 will see a rate cut to 20%. Although this will be partly financed by a cut in the rate of capital allowances, the overall effect is to reduce corporate tax by over £1 billion per annum.”
The Government has increased the rate of capital gains tax from 18% to 28% from midnight tonight for higher rate taxpayers. Capital gains made by basic rate taxpayers will continue to be taxed at the 18% rate, as will gains made prior to 23 June 2010. The annual exempt band will remain at £10,100 for 2010/11 and increase in line with inflation in future years. The Chancellor has also announced an increase in the Entrepreneurs’ Relief lifetime limit from £2 million to £5 million for qualifying capital gains.
David Brookes, tax partner at BDO LLP commented: “It will come as some considerable relief to many entrepreneurs holding assets with latent capital gains that the rate was not increased in more in line with employment income, as had been widely reported in the press. An increase to 28% is significant but it could have been far worse. Fear that the rate would be increased to 40% or even 50% has seen a number of wealthy taxpayers hastily implementing planning to capture the benefit of the 18% rate.”
Other business related changes:
• Regional Growth Fund to provide finance for regional capital projects over the next two years.
• Capital allowances for the majority of plant and machinery assets to fall from 20% to 18%, while the allowance for longer-lived assets will fall from 10% to 8% from April 2012.
• Annual Investment Allowance to fall to £25,000 a year to April 2012.
“It’s fair to say that the capital gains tax changes were not as bad as had been feared,” added Deloitte’s Dodwell. “From 23 April there will be a top rate of 28%, payable where the total of an individual’s gains and income exceeds the income tax basic rate threshold (about £44,000). The current 18% rate will continue for gains below this level. At the same time the exempt allowance of £10,100 is being retained and the limit for Entrepreneur’s relief is being increased from £2 million to £5 million. This allows entrepreneurs to release gains of £5 million and pay tax at 10% on those gains.
Food and drink sector responds
Responding to today’s budget, Food & Drink Federation director-general Melanie Leech said: “We recognise that this is a tough budget addressing serious issues. No one welcomes spending cuts or tax increases for their own sake. But we are relieved that the chancellor has confirmed that most foods will continue to be zero rated for the life of this Parliament. We had argued against ending existing zero ratings as such a move would disproportionately impact the poorest in society, dampen consumer spending and fuel inflation – and are pleased that he has listened to our arguments.
According to the EEF, the manufacturers’ organisation, today’s budget falls short of rebalancing economy. “Today’s Budget may have given manufacturers much-needed clarity on how the government will go about reducing the deficit, but the short-term pressure to start tackling the deficit means the Chancellor has only done part of the job of rebalancing the economy,” said Terry Scuoler, Chief Executive of EEF.
“While businesses will welcome long-term reform and predictability of corporation tax and, have been spared the worst impact of changes to capital gains tax, predictability has come at the cost of competitiveness. Recently manufacturers had been encouraged by strong commitments from the Prime Minister and the Chancellor on the role of manufacturing in a better balanced economy. They will now be left wondering where the necessary growth and investment will come from, given the cuts to investment allowances and capital budgets.”