Budget June 2010 - Initial reactions for corporates

"The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."

Summary of the emergency budget: for businesses

The initial impression is that this was an encouraging and reassuring budget for business. There was a mood of openness and transparency from the new government, and an effort to bring about greater certainty for business.  The chancellor’s plans to “balance the books” by 2016 will be welcomed as the encouragement to increase in private sector jobs through lower taxation.

VAT will rise to 20% from 4 January 2011

The VAT increase was an obvious choice as it brings in big money straight away at no extra cost to the government. The additional income goes straight to “the bottom line”, but it will hit economic indices. The new 20% rate will apply from 4 January 2011. By the end of the Parliament, this is likely to bring in an extra £13 billion a year.

It is likely to result in a spike in Christmas sales activity and a general boom in spending from late Autumn on when the implications start to hit home. At the moment 4th January is too far away to worry about, and summer holidays are more important.

The VAT rise might also result in a resurgence of more aggressive VAT planning activity which has been much more low key in recent years as HMRC have got to grip with targeted anti avoidance legislation. Previous increases in the SDLT rate from 0.5% to 4% saw much more planning take place as a result of the increase.

Certainly some businesses will be affected more severely than others, such as the financial services, charities, housing associations, and the health and welfare sectors as these sectors typically have very low VAT recovery rates.

Employment taxes

The “NIC holiday” is good news for those employers who will benefit. Although there is still a lot of uncertainty around pension changes and employment related securities, it will be good to have clarification on these areas.

Corporation tax will fall to 24% over the next 4 years

We now have a five year plan to reform the corporation tax system which helps to provides certainty for larger and small businesses. If the consultation on Intellectual Property, R&D and foreign profits meets business expectations it will be helpful. These announcements should undoubtedly help to stem the flow of any businesses thinking of leaving the UK. However the headline reduction in corporation tax is being paid for by a reduction in capital allowances.

The AIA (annual investment allowance) is to come down from £100k to £25k from April 2012. So there is time for businesses to go on a spending spree before that kicks in.

Capital Gains Tax will go up from 28% from midnight (from 18%)

Simplicity, competitiveness and fairness are the watchwords here; the new rules appear to underline the fact that CGT isn’t a big money spinner. The CGT rate increase is part of a defensive shield to protect the tax base.

It’s unprecedented to have a change mid-way through the tax year. This will complicate the tax return for 2010/11 as it will mean pre and post budget day gains will need to be reported separately. As a result, many investors are going to find these rules hard to apply.  However, it is good news that the threshold of £10,100 has not been reduced which will be particular helpful to the country’s moderate savers.

Increasing CGT to 28% for higher rate taxpayers will no doubt encourage the transfer of assets to spouses paying basic rate tax before they are disposed of.

Anti avoidance

The measures proposed in this budget were not as bad as some had been expecting. The government have announced there will be a consultation on a General Anti Avoidance Rule (GAAR), however there is still some way to go before this becomes reality given the uncertainty it would mean for business and the burden it would put on HMRC.

For industries

Property

The Chancellor has announced that Capital allowances are going down from April 2012. Writing down allowances will be reduced, from 20% to 18% for general plant and machinery and from 10% to 8% for special rate expenditure which includes integral features.

This will particularly impact on taxpayers with significant rolling capital expenditure programmes, such as those operating in the retail, leisure and hotel sectors.

The future lower main rate of corporation tax will not compensate capital intensive companies for this further deferral of capital allowances. As a consequence there will be an even greater incentive to ensure where possible that expenditure qualifying for 100% allowances is specified for construction and fit out projects, for example enhanced capital allowances on energy efficient plant.

The Annual investment allowance will also be reduced from April 2012 down from £100,000 to £25,000. This will impact most on enterprises will smaller capital expenditure programmes and will no doubt motivate some to accelerate capital expenditure plans.

The overnight increase in the higher rate of capital gains tax is likely to catch some buy to let and second home sellers on the hop and may well discourage potential vendors, thereby restricting the level of stock coming on to the market.

Nick Cartwright, Head of Property

Media

In a disappointing move for the video gaming industry, the chancellor announced that the planned tax breaks would be scrapped.  The big concern is that while countries such as Germany offer the industry government support, the UK now looks less attractive to developers.

The controversial plans for a phone line tax have also been scrapped. The previous government had proposed the levy to fund the upgrading of the UK’s broadband network. The chancellor announced support for “private broadband investment” partly using funding from the TV licence fee.

There was also very small reference to film tax credits. The intention is to “correct an unintended anomaly affecting the amount of tax credits claimable where films are produced over more than one accounting period” in the autumn.

Andrew Wilkes, Head of Media

Private equity

The increase of Entrepreneurs’ Relief (ER) from the first £2m of lifetime gains to £5m is a welcome boost to entrepreneurial activities in the UK.  However this is likely to mean increased scrutiny on which assets qualify for the relief (broadly assets used in a trading business, or shares in a personal trading company), as the relief could be worth as much as £900k on a gain of £5m (gains qualifying for ER will continue to be taxed at 10%).

Adrian Walton, Director, Corporate tax

Banking

Banks will be hit with a balance sheet levy calculation from January 2011 to raise £2billion per year. There will be deductions in the levy based on lending to business.

This joint move with France and Germany is not a surprising decision but politically it will be a very popular move.  

Tim Lyford, Head of Corporate tax