Budget predictions: VAT could reach 19% to bring in a further £7billion a year
Government must focus on VAT, NICs and income tax to reduce the budget deficit, warn accountants, Smith & Williamson.
“VAT, National Insurance and income tax are the three main contributors of revenue for the Government which together generate approximately three quarters of the total annual tax-take.
“While the crack-down on tax avoidance will undoubtedly continue, if the Government is to try and make ends meet, it needs to focus sharply on the big-earners of VAT, NICs and income tax. Realistically, it will have to introduce some hefty rises on some or all of these taxes from April 2011 - and possibly earlier,” said Richard Mannion, national tax director at Smith & Williamson, the accountancy and financial services group
“VAT must be a key contender, as it brings in immediate revenue, however, it’s also a hot potato because it will hit inflation and key economic indicators. One way to sweeten the medicine might be for the Government to announce a VAT rise for a defined period of, say, two or three years,” added Hannah Dobson, VAT director at Smith & Williamson.
Key predictions include (further details on each tax below) :
- VAT: to rise, next year or earlier. A hike to 19% would still put us below the EU average (just over 20%).Any increase would help to erode the deficit straight away as a rise to 19% would bring in an additional £7billion over the course of a year. However, it would feed inflation.
- Income tax: the 50% top rate to stay in place for the foreseeable future while the personal allowance for the lower paid is likely to rise, probably from 6 April 2011. Although the increase for lower earners should be above inflation, we do not expect the threshold to be raised to £10,000 from 6 April 2011.
- NICs: increase already proposed for April 2011 to go ahead for employees but not for employers.
- CGT: set to rise, most likely from 6 April 2011, rather than June 2010. An increase in the 18% rate for non-business assets is very likely. The use of ‘taper relief’ to reward long-term investment would be welcome.
- Corporation tax: the Government intends to reduce this to 25%, with the Smaller Companies rate cut to 20% over the course of the next Parliament. However, we may see the end of the Annual Investment Allowance to pay for this which will hit smaller businesses.
- IHT: no substantial rise in the IHT nil rate threshold during the course of this Parliament, but small increases in line with inflation to be reinstated.
- Non-doms: a review of the system for UK resident foreign domiciliaries expected to be announced
- Anti-avoidance: the crack-down on avoidance and evasion to continue.
- Bank tax: increasingly likely that the UK will act unilaterally to introduce some form of levy on bank profits and/or transactions.
Further details below:
VAT
A 19% VAT rate could be in the pipeline next year (or earlier) which would bring in an additional £7billion per year. This must be tempting for the Government as a rise in VAT produces immediate cash inflows, unlike, say, CGT increases which take years to feed through. Moreover, it effectively outsources VAT administration (and hence the disruption caused by any increase) to business. Moreover, given that the standard rate of VAT in the EU is now typically just over 20%, the UK would still look competitive. However, as VAT rises, it also pushes up inflation, damaging economic statistics and hitting the lower paid more severely.
Removal of the zero rating of items such as food, books and children’s clothing is not expected. However, the Government could consider removal of the exemption of private schooling.
Other tax-raising VAT options could be an increase to the ‘reduced’ rate of VAT which applies, for example, to domestic fuel and power. This is currently 5%, which is lower than the typical EU rate of around 8%, leaving scope for an increase.
*It is generally considered that a 1% rise in VAT generates about £4.75 billion pa for the Government.
Income tax
The 50% top rate of income tax is likely to stay in place to contribute to the cost of increasing the personal allowance for lower earners. Modest earners should see a ‘substantial increase’ in their personal tax allowance not from 22 June 2010 but from 6 April 2011; it appears that further rises will be staggered over several years to take the threshold to £10,000 for the less-well paid.
So what might the Chancellor do in the June Budget? Realistically, we might see an increase in the personal allowance from the current £6,475pa to £7,150, but restricted in some way to those with incomes of less than, say £30,000pa with effect from April next year. If the £10,000 threshold were to be introduced in one fell swoop for all taxpayers, this would cost around £16billion which we cannot afford. These tax breaks are due to be funded largely by the employee NIC increases.
Lower earning married couples may receive a further small tax break.
National Insurance Contributions
NICs paid by employees and the self employed will rise by 1% next April as proposed by the previous administration, and this will bring in about an extra £4.5 billion for the government during 2011/12. The threatened increase for employers has been scrapped.
Capital gains tax
This is clearly set to rise although we expect this is more likely to take effect from April 2011, rather than from June 2010 as there is no precedent for changing the rate part-way through the tax year.
While any CGT system should preserve reliefs for entrepreneurs, it also needs to recognise the impact of inflation on long-term investment and provide discounts for the length of ownership. In short, a taper system would be welcome. Similarly, the threshold and rates need to be at a level which does not penalise those in retirement who seek to release funds from investments to supplement their pension.
CGT is never going to be a huge money spinner for the Government. To put it into context, in 2008/09, CGT brought in £7.8 billion, whereas total tax receipts for that year were just under £440 billion – ie CGT was less than 2% of the total. Its main purpose is therefore probably to complete the range of taxes in order to minimise ‘leakage’.
Moreover, CGT can be a discretionary tax. Many people may be able to chose when to sell their investments and may be able to act to reduce the impact of any increase. Therefore, a high CGT rate tends to mean the tax-take falls when the new rate is effective as people either postpone selling the asset, or sell prior to the introduction of the new rate .
We need to have a CGT system which is as simple as possible and which will last for the next 10 years or so to provide certainty for all.
Inheritance Tax
Although we do not anticipate changes to the IHT threshold to be indicated this June, it is likely that its link with RPI will be restored so that in future it rises with inflation.
Corporation tax
The Government has said that it wants to create ‘the most competitive corporate tax regime in the G20’. To reduce the headline tax rates from 28% to 25% and the smaller companies rate to 20%, would almost inevitably mean removing certain ‘complex’ reliefs. This is likely to include the end of the Annual Investment Allowance which gives 100% allowance on up to £100,000 of new plant and machinery. The removal of the AIA is likely to be of most concern to smaller and medium sized businesses.
It appears that Research & Development (R & D) tax credits will stay but we can expect the system to be modified.
The Treasury has looked closely at the possibility of taxing small companies on a cash flow basis, but the consultations found that these proposals would give rise to more complexity. So this is unlikely to see the light of day.
The government also has a stated aim to reduce ‘red-tape’ so any new measures should aim at simplification, as well as predictability for business.
Tax avoidance
Tackling tax avoidance is a stated ambition of the new Government. Both companies and individuals will come under closer scrutiny and it is likely that the Government will focus on specific alleged ‘high-risk’ groups. So far, it has pinpointed doctors, barristers and those with offshore bank accounts. But any increase in enquiries will inevitably stretch HMRC’s reduced resources even further.
The Government could introduce a general anti-avoidance rule (GAAR) as proposed in the Liberal Democrats manifesto. We came very close to having a GAAR in 1998 but it floundered at the last minute when what is now HMRC realised that they would have to provide a clearance system and they did not have the resources to do so.
Bank tax
Given the failure of the G20 to agree a multi-lateral approach, a new tax on the UK’s banking sector looks very likely. However, it is unclear whether it would be a tax on profits, transactions (the ‘tobin tax’) or take some other form. In any event, consultation is necessary to be sure of a regime which does not need amendment in the short term.
For further information, before or on the day of the budget:
Richard Mannion – National Tax Director – 020 7131 4252 / mob 07799 761326
Tim Lyford – Head of Corporate Tax – 020 7131 4213
Inez Anderson – Employment Tax and Incentives Director 020 7131 4919
Hannah Dobson / John Voyez – VAT directors 020 7131 8138 / 020 7131 4285
PR queries:
Kate Harrison 020 7131 4228
Jess Koslow 020 7131 4264
Matt Rowe 020 7131 4550
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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