The Budget 2010 – Reaction

Posted on 23 Jun 2010 by The Manufacturer

Has the reduction in capital allowances been offset by the fall in the rate of corporation tax for your company? Industry experts debate the fall-out of the Budget 2010.

Business experts and industry trade bodies give their views on new Chancellor Osborne’s first Budget.

Chartered Institute of Personnel and Development
Dr John Philpott, chief economic adviser at the Chartered Institute of Personnel and Development, said:
“The Chancellor has introduced what must surely rank as the most astonishing UK budget statement in modern times. Mr Osborne’s combination of £32 billion additional spending cuts by 2014-15 and an £8 billion net tax hike amounts to an unprecedented fiscal squeeze, including an extremely severe clampdown on the welfare bill.

Yet both he and the independent Office for Budget Responsibility (OBR) reckon there is a greater than evens chance that the government will meet what the Chancellor calls its ‘fiscal mandate’ with barely any serious short-term impact on economic growth and employment.

“Although the OBR has downgraded its pre-Budget economic growth forecasts in the light of Mr Osborne’s austerity measures, and become a bit more pessimistic about jobs, the suggested outlook for the economy is nonetheless remarkably rosy, with investment and net exports more than making up for weak household spending and a big drop in public spending. The Chancellor could hardly have asked for more had he and his Treasury team stuck with tradition and come up with the forecast themselves.

Terry Scuoler, chief executive of EEF, the manufacturers’ organisation
“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.

“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.

“In recent weeks, 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.

Roger Bootle, economic adviser to Deloitte and chief spokesman for Capital Economics, said:

 This was a Budget with two faces. The total discretionary tightening will build up to 8% of GDP per annum by 2015-16, larger than Canada’s in the 1990s, but smaller than Sweden’s and Finland’s.

 But the tightening announced over and above that embodied in the Labour Government’s plans, although somewhat larger than many outside commentators expected, was in fact fairly modest, building up to about 2% of GDP per annum. So much of the pain announced by this government would have been inflicted under Labour.

 This Budget still hides some of the pain that will be felt because it has not yet laid out the detailed plans for public spending. That has to wait until the Spending Review due in October. All we know is that outside the protected departments, departmental spending will be cut by 25% in real terms, compared with implied cuts of 20% under Labour.

 The deferral of the VAT rise until January 2011 was a deft move, not least because it will help to keep inflation down this year. But beyond this year the danger is not inflation but deflation. Freezes which appear to be both painful for the victims and generative of lower borrowing for the Exchequer would be neither if prices were falling. Similarly, the “triple-lock” deal on pensions would turn out to be inordinately expensive.

 Although the Budget delivered a tightening over and above what was built into the OBR’s pre-budget forecast of 1% of GDP in 2011/12, the growth of the economy has only been revised down by 0.3% of GDP. This assumes a significant crowding-in effect on private expenditure. Interest rates may go up by less than would have happened under the old fiscal policy, but there is not much scope for them to go down. Any monetary response, therefore, would have to rely on more quantitative easing. Yet this has not seemed to be very effective so far.

Capital allowances

Catherine Robins, partner at law firm Pinsent Masons:

“Manufacturers will be disappointed that capital allowances are set to reduce but the reduction will not come in until April 2012. Also it will be partially offset by the annual reductions in the rate of corporation tax with the first reduction from 28% to 27% coming in a year earlier in April 2011, the reduction to 26% coming in from April 2012 and the rate eventually reducing to 24% in April 2014.

Smaller companies with large amounts of expenditure on plant and machinery will be worse off following the reduction from 2012 in the annual investment allowance from £100,000 to £25,000. This allowance gives 100% capital allowances for capital expenditure, accelerating tax relief and reducing complexity for many smaller businesses. Smaller businesses will be partially compensated by the reduction in the small companies ‘rate of corporation tax to 20% from 2011 but they won’t see as much of a benefit as larger companies as the small companies’ rate is only set to reduce by 1%, whereas the main rate will eventually reduce by 4%. ”

David Woodward, head of capital allowances at KPMG:

 “While not good news for the sector, in fact manufacturers will be breathing a sigh of relief as the reductions were expected to be greater. Taken with the corporation tax rate cuts many manufactures are likely, in overall terms to be no worse off, and some possibly better off.

 “The manufacturing industry has been lobbying hard against significant reductions in the tax relief for investment. It is encouraging to see that the Coalition Government has not just listened but acted on business’ concerns.

 “The Chancellor indicated that the new rates will bring the relief more in line with depreciation. However, whether that is true or not will vary from business to business, the assets they invest in and the life expectancy of those assets. When the new rates are introduced in 2012, expenditure on plant and equipment eligible for the main rate will obtain tax relief over approximately 12 years and special rate plant over 27 years. Companies will need to compare their depreciation polices to these rates.

Annual Investment Allowance
David Woodward, head of capital allowances at KPMG:
 “For smaller and medium-sized manufacturers the picture is a little less clear. The Annual Investment Allowance, which allows businesses to write off the full costs of expenditure on plant and machinery in the first year, has been reduced from £100,000 to £25,000. For those with annual capital investment of between £25,000 and £100,000, the reduction will see the rate of relief they obtain shift significantly.”

Corporate Tax Reform

EEF Chief Economist, Lee Hopleyd: “The UK’s tax system needs reform to keep it modern and internationally competitive. Manufacturers will see the plan as a useful first step towards improving competitiveness and predictability after the drift in tax policy and strategy during the past few years. Hopefully this more deliberative process should stop the legislative churn that has added to complexity.”

EEF senior economist Jeegar Kakkad, added: “Reducing the corporation tax rate over time was in principle the right course of action. But financing it, in part, by cuts to investment allowances will be a heavy price to pay, especially for smaller companies. It might be a positive signal for large companies, but not for their suppliers.

Capital gains tax increase from 18% to 28%

BDO LLP, business advisors: “It will come as 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,” said David Brookes, a tax partner at BDO. “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.

“The Chancellor’s decision was clearly the result of a balancing act to ensure the highest tax take in the short to medium term. Many commentators have voiced concerns that too great an increase in the tax rate would actually reduce the overall tax take by either discouraging entrepreneurs from investing, or by persuading them to simply hold on to assets longer to avoid crystalising tax liabilities.

“At first glance, keeping the lower rate of 18% for basic rate taxpayers seems generous, but this is likely to have only a limited benefit as, in many cases, the capital gains themselves are likely to push taxpayers into the higher rate band, e.g. gains on the sale of a buy to let property. In other words, the amount of capital gain will be taken into account when considering whether a taxpayer exceeds the £37,400 higher rate band.

“Although the increase in the Entrepreneurs’ Relief lifetime limit to £5 million is welcome, it is disappointing that the Government did not take the opportunity to decrease or remove the 5% shareholding requirement which currently has a negative impact on many employee shareholders.”

EEF Senior Economist, Jeegar Jakkad: said: “Closing the gap between income and CGT rates is right because the wider the gap between the two, the greater the incentive for tax evasion. Minimising that gap should make the tax system fairer and more efficient. Increasing the lifetime cap for the Entrepreneurs’ Relief will provide a significant boost for entrepreneurs and investors, while maintaining the annual exemption will be vital for employees.”

High-tech sectors welcome Budget moves
A|D|S, the UK’s AeroSpace, Defence and Security trade organisation
speaks up about policies for an enterprise-led economy.

Derek Marshall, A|D|S director of policy, said: “We welcome the Government’s focus on rebalancing the economy and seeking an enterprise-led recovery across the country. Our world-leading manufacturing and services sectors are spread across the whole of the UK and have room for growth in export markets that will deliver for the whole country on this crucial priority for the Government.

On capital spending projects and defence investment:

“The Government is right to maintain capital spending and to view this through the prism of significant economic return to the country,” said Marshall. “This is particularly applicable to defence spending because £100 million spent on defence delivers a return of £227 million to the UK economy. Defence employs 300,000 people across all regions of the country and contributes over £35 billion per year to the UK economy. Given the Chancellor’s recognition of the pressure on the defence budget and also the fact that defence spending has halved as a proportion of GDP over the last twenty years we look forward to the Government confirming through the Strategic Defence and Security Review that further reductions in the defence budget will not be made.”

On support to businesses, manufacturing and small firms:

“It is encouraging to hear the Chancellor’s commitment to research and development, stability and certainty for business. The long-term nature of the sectors that we represent means that this is a vital climate in which to encourage investment in the UK by both multinational and domestic companies,” added Marshall.

“Reductions in the corporation tax rate and the small businesses rate are welcome. A commitment to reducing the overall tax paid by manufacturers is also good news and will assist our members to further contribute to the UK’s economic recovery. The contribution of small businesses to the UK’s success in aerospace, defence, security and space cannot be underestimated. For example, in defence alone the UK has more SMEs than France, Germany, Spain, Italy and Norway combined. Small firms underpin our country’s innovation and our participation in supply chains for programmes across the globe. The assistance announced to enable them to access credit is good news but reducing the rates of capital allowances offsets the benefits somewhat.”

On support for local and regional economic growth, Marshall said:

“Our sectors have a presence across every region of the UK and our members make a major contribution to all our regional economies. The Chancellor’s proposals for a regional growth fund to increase innovation and jobs outside London, the South East and the Eastern region are welcome but close attention will need to be paid to ensure that this support does not disadvantage sub-regional areas in the South East of England that also need development. We look forward to more details in the White Paper on encouraging local economic growth.

Federation of Small Businesses (FSB)

John Walker, National Chairman, FSB, said:

“The measures announced in the Emergency Budget will go a long way to reducing the deficit and will please the 93 per cent of FSB members who called for a clear plan on tackling the country’s debt.

“The increase in VAT to 20 per cent will however, hurt small firms who will have to pass the increase on to their customers, unlike big business which can absorb the cost.
“We welcome moves to give a national insurance holiday to start-up firms, but are concerned that with 70 per cent of firms operating below capacity, those businesses already trading will not be helped. We need to see a full reversal of NICs increases to fully offset the ‘tax on jobs’ which the previous administration initiated.”