Robert Brown, tax director at accountancy firm BDO, blogs on how the Budget will affect manufacturing in the UK.
The key themes for Mr Osborne’s third Budget, the clearest product to date of coalition politics (and also the most leaked) was the simplification and modernisation of the tax system and the removal of barriers to the UK’s competitiveness. He also warned of dire consequences for undertaking “morally repugnant” aggressive tax avoidance.
Mr Osborne demonstrated this commitment by further reducing the mainstream rate of corporation tax, doubling the qualifying limit for Enterprise Management Incentives (EMI) share options, and starting to reduce the income tax burden on entrepreneurs. Further, in a bid to develop the UK into Europe’s technology centre, he announced targeted tax incentives for digital content, in addition to R&D and patents, alongside further investments in superfast broadband.
The compromise reached on taxing the “rich” is to reduce the top rate of income tax to 45%, but increase SDLT immediately to 7% on residential properties costing over £2m, with a penal rate of 15% applying where purchased through a company. Capital gains tax will also be introduced on residential property held in overseas companies from April 2013. Furthermore, uncapped income tax reliefs will now be capped at the greater of £50,000 or 25% of income.
Headlines from the speech are as follows:
- Main rate of corporation tax is to be reduced to 24% from 01/04/12 and by 1% annually thereafter to 22%, the small profits rate remaining at 20%.
- No changes were announced to thresholds for small profits rate and main rate of corporation tax.
- R&D tax relief for SMEs increased to 225% from 01/04/12, an above the line credit will be introduced for large businesses from April 2013, with a minimum rate of 9.1% before tax and payable credit for lossmaking companies.
- Foreign profits reforms previously announced will be introduced in Finance Bill 2012, effective for companies with accounting periods starting on or after 1/1/13.
- Foreign profits reforms should now produce a 5.5% effective corporation tax rate by 2014 under the finance company partial exemption.
- 10% future corporation tax rate on profits from qualifying patents (Patent Box) is reconfirmed to be phased in from April 2013.
- 100% capital allowances on plant and machinery extended to some Scottish & Welsh and London Enterprise Zones from 01/04/12 (but not in all Enterprise Zones).
- Film tax credit approach to be mirrored for video games, animation and high-end TV production from April 2013.
- Bank Levy will be increased to 0.105% from 01/01/13 to counter the benefit of the additional corporation tax rate reduction.
These changes should be wholly welcomed by business, and the simplification agenda alone should be sufficient to produce a uniform 20% rate of corporation tax in due course. The priority to back industries in which British business has developed a competitive advantage is a clear commitment to encouraging further inward investment.
- As previously announced, personal allowance to increase to £8,105 from 06/04/12, funded by a corresponding reduction in the higher rate threshold.
- Personal allowance will increase by £1,100 to £9,205 from 06/04/13, with a quarter of the benefit passed on to higher rate taxpayers.
- No change announced to basic (20%) or higher (40%) rates of tax, or tapering of personal allowances on earnings over £100,000.
- 50% rate reduced to 45% from 06/04/13 as it has “damaged the economy and raised next to nothing”. The new effective top rate for dividends will be 30.6%.
- No changes announced to pension contributions tax relief.
- Currently uncapped income tax reliefs will now be capped at the greater of £50,000 or 25% of income, after consulting with philanthropists.
- Age related allowances will be simplified and phased out.
Ultimately, Mr Osborne agreed to pay the price required by his coalition partners (see also SDLT below) to start reducing the uncompetitive top rate of income tax. He will now be expected to also abolish the new 45% rate quickly, which may influence the timing of the extraction of profit from many owner managed businesses. The increase in the personal allowance is good news, but the squeezed middle (income around the higher rate threshold) has little to cheer. Equally, those earning £100,000 will be wondering how their marginal rate of tax is allowed to remain at 62%.
National Insurance Contributions
- No changes announced to main rates.
- Detailed consultation on integrating the operation of National Insurance Contribution (NIC) and income tax to be launched in April 2012.
As commented when the consultation was initially proposed, this seems like a very good way to keep a lot of civil servants very busy for a very long time, but will it ever lead to an improvement? And shouldn’t that improvement include examining an integration of NIC and income tax, not just the operation of the two taxes? It is, at worst, a great opportunity for simplification.
Capital Gains Tax
- No change to headline 18% and 28% rates.
- Entrepreneurs’ Relief remains at 10% on lifetime qualifying gains of £10m.
- EMI individual grant limit to be increased to £250,000 of options and qualifying conditions relaxed.
- Entrepreneurs’ Relief will be extended to gains on shares acquired through an EMI option in 2013.
- Capital Gains Tax (CGT) will apply to gains on UK residential property held by, inter alia, overseas companies from April 2013.
This is the first Budget for some time when the Entrepreneurs’ Relief lifetime allowance has remained unchanged. Its extension to EMI shareholdings, together with the general extension of the EMI thresholds and criteria, will be welcome if not hampered by complex qualifying criteria. The planned extension of CGT to property gains will require many to re-evaluate ownership structures and plan accordingly.
This is the major tax increase for the “rich”, and will require reviews of the ownership structures all significant holdings of UK residential property. It was not unexpected, should prove easier to collect than 50% income tax, and yet again the new rates have been designed to deter planning.
Other Tax Announcements
- A General Anti-Abuse Rule will be consulted on, introduced, and legislated in FA2013 as expected.
- Tax avoidance measures will raise £1bn and protect a further £10bn.