Ian Stewart, Chief Economist, Deloitte
There is a Spring-like feel to this Budget: a brighter growth outlook, some high profile tax cuts, marginally less public borrowing and lower inflation to come. The Office of Budget Responsibility believes that deficit reduction, the centre piece of the government’s economic strategy and its Plan A, is on track. While growth this year will be anaemic and less than half what was expected a year ago, it has been uprated by the OBR. The fiscal forecast for this and future years is more optimistic.
But I wouldn’t get carried away. The vast majority of the cuts in public spending lie ahead. The margin for error in reducing the UK’s still huge deficit over the next five years is small and dependent on the unpredictable path of growth. There’s still a long haul ahead for the UK economy.
Richard Mannion, National Tax Director, Smith & Williamson
Neon lights of a cut in corporation tax and top rate of income tax give the impression that the country is open for business; however, we would like to see the Chancellor do more to help enterprise when he can. Hemmed in and obliged to remain fiscally neutral, the Chancellor did as much as he could but his hands were tied by the difficult economic backdrop. Treading a difficult fiscal tightrope he managed to give a boost to working families, largely paid for by increased taxes for the wealthier and by closing loopholes.
The Chancellor is attempting to shift tax burden further to higher earners to help working families and to make the UK more attractive to external investment and incentivise UK businesses to remain and invest.
Chris Sanger, Head of Tax Policy, Ernst & Young
The UK’s arrivals lounges are likely to be booming next year as entrepreneurs respond to a far more positive message from the Chancellor. In his speech, the Chancellor has matched his reforms of the business tax environment by addressing the much maligned 50p rate. By removing this deterrent, the Chancellor has put the substance behind his rhetoric; the UK is open for business. HMRC’s report showed that the first year of the 50p rate generated far less for Treasury coffers than expected, demonstrating the pervasive image that it had portrayed of the UK. The Chancellor pointed out that a rate of 45% brought in broadly the same amount of revenue, without all the negative baggage.
The delay of a year (it takes effect from April 2013) is somewhat surprising, especially as he criticised his predecessor for forestalling. In practice, many people will now plan on 45% but we can still expect income to be deferred until after the 50p rate reaches its death day.
Raj Mody, Partner and Head of Pensions Group, PwC
It’s great that pensions have been left alone. Even speculation about changes in the run-up to the Budget was undermining confidence in pensions saving, causing some individuals to make snap judgments about their retirement plans. What we really need to see is a stronger commitment from government to a long-term stable framework for pensions tax, possibly supervised by an independent Commission, so pensions aren’t always subject to short-term political interference.
David O’Keeffe, Chairman, CIOT’s R&D Working Group
A change to an ‘above the line’ system would mean that the tax credit would be part of the cost calculation of an R&D project undertaken by the engineers or other personnel who are going to carry out the work, rather than being a relief which is claimed by the tax department after the event. This is likely to make R&D projects more affordable at the relevant decision making point, which should encourage R&D spend in the UK.
We welcome, too, the Chancellor’s commitment to ensure that small and medium enterprises’ (SME) R&D incentives are not reduced as a result of this change and look forward to being involved in the consultation on the detail. Although the drivers for an ‘above the line’ system are not so apparent for SMEs, we would advocate that the same system is applied for large companies and SMEs as to restrict the changes to large companies would only give rise to more complexities at the margins for growing (or shrinking) companies.
Michael Izza, Chief Executive, ICAEW
This Budget sends a signal that the UK is not only open for business but will actively encourage investment. However, it will have little immediate impact in accelerating the UK’s slow economic recovery. It is a Budget for tomorrow, not for today. Ultimately, businesses still need confidence to invest in the UK’s economic future.
The tax simplification measures the Chancellor outlined are not the root and branch reform of the tax system that we believe is long overdue. Whilst the smallest businesses may benefit from a simpler corporation tax regime, the vast majority of individuals and companies will still have to struggle with a tax code that is already one of the most complex in the world and which continues to grow in complexity.
Patrick Stevens, Tax Partner, Ernst & Young
Stamp Duty avoidance on the purchase of expensive homes has been rife for well over a year. Many people have wondered why the loopholes have not been closed down before now. Now that the counteraction has arrived it is draconian.
Anyone foolish enough to transfer a house (worth over £2m) into a company in the future will pay 15% Stamp Duty. It means that this will just not happen. For those houses worth over £2m that are already in companies, there is the promise of ‘a large annual charge’ (to be consulted on) and a Capital Gains Tax charge if they are sold out of the company after April 2013. All of this is clearly aimed at making people close down companies holding their houses before April next year.
An alternative way of avoiding this Stamp Duty was to use the detailed provisions of the Sub sale rules. This has also been closed down. Finally the Chancellor stated that if people found new loopholes in this area of tax they would be immediately closed down with retrospective effect.
Many people will be able to understand the reason for these changes. However some people hold property through companies for reasons completely unconnected with tax. For example, for people who come from certain other countries who have forced heirship rules, it is the only way of passing on their assets as they wish to do so. For others it is important to maintain privacy about their assets. In these and other cases these rules will have difficult side effects.
Andrew Gotch, Chairman of the CIOT’s Owner Managed Business Taxes sub-committee
The CIOT appreciates that there has been public pressure upon the government to ensure that those with high income cannot avoid tax by extensive use of tax shelters. However, introducing a cap on the amount of business losses that can be utilised in any one year would smack of being anti-business and mis-targeted at a time when businesses are trying to recover from the recession or expand.
This would mean that a business that had losses of £100,000 brought forward from previous periods, eg, during the recession, and which made a profit of £100,000 during 2013/14 could only utilise £50,000 of the losses. It would seem inappropriate to charge tax on those small business owners, forcing them to continue to carry forward the balance of losses.
The government needs to clarify whether this proposal includes loss relief for unincorporated businesses. We hope that it will ensure that it does not.
Nicholas Stretch, Partner, CMS Cameron McKenna
The fall in the top rate of income tax from 50% to 45% from 6 April 2013 (ie next year) gives rise to all sorts of opportunities for employers and employees to save tax by delaying payments of bonuses and vesting of shares awards until after that date.
In early 2010, many companies accelerated bonus payments and share vestings so that they were able to be taxed at 40% before the 50% rate came in that year. Now they should consider acting the other way – to delay payments, and given that bonuses for 2011 are now starting to be paid, some companies may wish to take urgent action. Companies may enjoy the cash flow benefit of deferral of cash bonuses, but there could be some downside.
Individuals will need in some cases to accept that if they leave employment in the meantime they will lose rights altogether. If they do, in retrospect they might well wish to have taken the bonus and paid 50% tax rather than not get anything at all. Of course, there is also a fear (as with all trends that become too popular) that if income tax receipts fall because of mass deferral, then the effect of delaying bonuses etc in this way will be reversed by specific anti-avoidance legislation neutralising any benefit. This was a fear in 2010, which never materialised, but that does not mean that it is not a relevant concern.
Kevin Cummings, Tax Partner, Berwin Leighton Paisner
Banks continued to be singled out by the Chancellor with a further hike in the bank levy (to 0.105% from 1 January 2013). The rise is as much political as it is revenue-raising, and stops the banking sector from enjoying falling corporation tax rates. Budget documents continue to focus on financial sector regulatory reform and trail the publication of a White Paper on the recommendations of the Vickers report. Budget papers also quietly announce the long-awaited nod from government ministers on tax reform to permit tax-efficient regulatory capital in line with Basel III requirements: statutory law-making powers will be granted through Finance Bill 2012.
The Budget has targeted VAT on various products from warmed-up sandwiches to large caravans. Now, sandwiches which are not hot, but warmer than the ‘ambient air temperature’ will attract VAT. But the issue is by no means cut and dried. Bizarrely, products with freshly baked bread aren’t caught in the net. Batten down the hatches for the first court case on the legal definition of ‘freshly-baked’.
The temperature issue also begs the question of whether VAT is payable depends upon how hot a day it is. Some major players in the hot food market, sandwich chains for example, will be caught by this. Will they put their prices up, or will they let it hit their margins? At the budget end of the market, where a price increase may not be possible without the threat of customers walking away, it may cause these businesses to struggle. And in an attack on the cafe culture of eating outside, a la Parisienne, cold take away food served in roped-off pavement areas around cafes is also hit. These changes are expected to raise £50m in 2012/13 rising to £120m in 2016/17, which some may see as highly ambitious.
Elsewhere, sports drinks, whether they slake the thirst or not, are now going to be liable to VAT, as will be the very large caravans which were previously regarded as homes and zero-rated. In a surprise move the government has withdrawn the VAT tax break for alterations to listed buildings. The government has recognised the inequality in the fact that altering a listed building was not liable for VAT, yet repairing it to maintain its heritage features attracted VAT. But rather than apply rational rules, the government has chosen to withdraw the relief altogether. It is expected that this will raise £35m next year, rising to £125m in 2016/17, which means the taxman is expecting people to spend an awful lot on altering their homes.
Ian Stewart, Chief Economist, Deloitte
There is a Spring-like feel to this Budget: a brighter growth outlook, some high profile tax cuts, marginally less public borrowing and lower inflation to come. The Office of Budget Responsibility believes that deficit reduction, the centre piece of the government’s economic strategy and its Plan A, is on track. While growth this year will be anaemic and less than half what was expected a year ago, it has been uprated by the OBR. The fiscal forecast for this and future years is more optimistic.
But I wouldn’t get carried away. The vast majority of the cuts in public spending lie ahead. The margin for error in reducing the UK’s still huge deficit over the next five years is small and dependent on the unpredictable path of growth. There’s still a long haul ahead for the UK economy.
Richard Mannion, National Tax Director, Smith & Williamson
Neon lights of a cut in corporation tax and top rate of income tax give the impression that the country is open for business; however, we would like to see the Chancellor do more to help enterprise when he can. Hemmed in and obliged to remain fiscally neutral, the Chancellor did as much as he could but his hands were tied by the difficult economic backdrop. Treading a difficult fiscal tightrope he managed to give a boost to working families, largely paid for by increased taxes for the wealthier and by closing loopholes.
The Chancellor is attempting to shift tax burden further to higher earners to help working families and to make the UK more attractive to external investment and incentivise UK businesses to remain and invest.
Chris Sanger, Head of Tax Policy, Ernst & Young
The UK’s arrivals lounges are likely to be booming next year as entrepreneurs respond to a far more positive message from the Chancellor. In his speech, the Chancellor has matched his reforms of the business tax environment by addressing the much maligned 50p rate. By removing this deterrent, the Chancellor has put the substance behind his rhetoric; the UK is open for business. HMRC’s report showed that the first year of the 50p rate generated far less for Treasury coffers than expected, demonstrating the pervasive image that it had portrayed of the UK. The Chancellor pointed out that a rate of 45% brought in broadly the same amount of revenue, without all the negative baggage.
The delay of a year (it takes effect from April 2013) is somewhat surprising, especially as he criticised his predecessor for forestalling. In practice, many people will now plan on 45% but we can still expect income to be deferred until after the 50p rate reaches its death day.
Raj Mody, Partner and Head of Pensions Group, PwC
It’s great that pensions have been left alone. Even speculation about changes in the run-up to the Budget was undermining confidence in pensions saving, causing some individuals to make snap judgments about their retirement plans. What we really need to see is a stronger commitment from government to a long-term stable framework for pensions tax, possibly supervised by an independent Commission, so pensions aren’t always subject to short-term political interference.
David O’Keeffe, Chairman, CIOT’s R&D Working Group
A change to an ‘above the line’ system would mean that the tax credit would be part of the cost calculation of an R&D project undertaken by the engineers or other personnel who are going to carry out the work, rather than being a relief which is claimed by the tax department after the event. This is likely to make R&D projects more affordable at the relevant decision making point, which should encourage R&D spend in the UK.
We welcome, too, the Chancellor’s commitment to ensure that small and medium enterprises’ (SME) R&D incentives are not reduced as a result of this change and look forward to being involved in the consultation on the detail. Although the drivers for an ‘above the line’ system are not so apparent for SMEs, we would advocate that the same system is applied for large companies and SMEs as to restrict the changes to large companies would only give rise to more complexities at the margins for growing (or shrinking) companies.
Michael Izza, Chief Executive, ICAEW
This Budget sends a signal that the UK is not only open for business but will actively encourage investment. However, it will have little immediate impact in accelerating the UK’s slow economic recovery. It is a Budget for tomorrow, not for today. Ultimately, businesses still need confidence to invest in the UK’s economic future.
The tax simplification measures the Chancellor outlined are not the root and branch reform of the tax system that we believe is long overdue. Whilst the smallest businesses may benefit from a simpler corporation tax regime, the vast majority of individuals and companies will still have to struggle with a tax code that is already one of the most complex in the world and which continues to grow in complexity.
Patrick Stevens, Tax Partner, Ernst & Young
Stamp Duty avoidance on the purchase of expensive homes has been rife for well over a year. Many people have wondered why the loopholes have not been closed down before now. Now that the counteraction has arrived it is draconian.
Anyone foolish enough to transfer a house (worth over £2m) into a company in the future will pay 15% Stamp Duty. It means that this will just not happen. For those houses worth over £2m that are already in companies, there is the promise of ‘a large annual charge’ (to be consulted on) and a Capital Gains Tax charge if they are sold out of the company after April 2013. All of this is clearly aimed at making people close down companies holding their houses before April next year.
An alternative way of avoiding this Stamp Duty was to use the detailed provisions of the Sub sale rules. This has also been closed down. Finally the Chancellor stated that if people found new loopholes in this area of tax they would be immediately closed down with retrospective effect.
Many people will be able to understand the reason for these changes. However some people hold property through companies for reasons completely unconnected with tax. For example, for people who come from certain other countries who have forced heirship rules, it is the only way of passing on their assets as they wish to do so. For others it is important to maintain privacy about their assets. In these and other cases these rules will have difficult side effects.
Andrew Gotch, Chairman of the CIOT’s Owner Managed Business Taxes sub-committee
The CIOT appreciates that there has been public pressure upon the government to ensure that those with high income cannot avoid tax by extensive use of tax shelters. However, introducing a cap on the amount of business losses that can be utilised in any one year would smack of being anti-business and mis-targeted at a time when businesses are trying to recover from the recession or expand.
This would mean that a business that had losses of £100,000 brought forward from previous periods, eg, during the recession, and which made a profit of £100,000 during 2013/14 could only utilise £50,000 of the losses. It would seem inappropriate to charge tax on those small business owners, forcing them to continue to carry forward the balance of losses.
The government needs to clarify whether this proposal includes loss relief for unincorporated businesses. We hope that it will ensure that it does not.
Nicholas Stretch, Partner, CMS Cameron McKenna
The fall in the top rate of income tax from 50% to 45% from 6 April 2013 (ie next year) gives rise to all sorts of opportunities for employers and employees to save tax by delaying payments of bonuses and vesting of shares awards until after that date.
In early 2010, many companies accelerated bonus payments and share vestings so that they were able to be taxed at 40% before the 50% rate came in that year. Now they should consider acting the other way – to delay payments, and given that bonuses for 2011 are now starting to be paid, some companies may wish to take urgent action. Companies may enjoy the cash flow benefit of deferral of cash bonuses, but there could be some downside.
Individuals will need in some cases to accept that if they leave employment in the meantime they will lose rights altogether. If they do, in retrospect they might well wish to have taken the bonus and paid 50% tax rather than not get anything at all. Of course, there is also a fear (as with all trends that become too popular) that if income tax receipts fall because of mass deferral, then the effect of delaying bonuses etc in this way will be reversed by specific anti-avoidance legislation neutralising any benefit. This was a fear in 2010, which never materialised, but that does not mean that it is not a relevant concern.
Kevin Cummings, Tax Partner, Berwin Leighton Paisner
Banks continued to be singled out by the Chancellor with a further hike in the bank levy (to 0.105% from 1 January 2013). The rise is as much political as it is revenue-raising, and stops the banking sector from enjoying falling corporation tax rates. Budget documents continue to focus on financial sector regulatory reform and trail the publication of a White Paper on the recommendations of the Vickers report. Budget papers also quietly announce the long-awaited nod from government ministers on tax reform to permit tax-efficient regulatory capital in line with Basel III requirements: statutory law-making powers will be granted through Finance Bill 2012.
The Budget has targeted VAT on various products from warmed-up sandwiches to large caravans. Now, sandwiches which are not hot, but warmer than the ‘ambient air temperature’ will attract VAT. But the issue is by no means cut and dried. Bizarrely, products with freshly baked bread aren’t caught in the net. Batten down the hatches for the first court case on the legal definition of ‘freshly-baked’.
The temperature issue also begs the question of whether VAT is payable depends upon how hot a day it is. Some major players in the hot food market, sandwich chains for example, will be caught by this. Will they put their prices up, or will they let it hit their margins? At the budget end of the market, where a price increase may not be possible without the threat of customers walking away, it may cause these businesses to struggle. And in an attack on the cafe culture of eating outside, a la Parisienne, cold take away food served in roped-off pavement areas around cafes is also hit. These changes are expected to raise £50m in 2012/13 rising to £120m in 2016/17, which some may see as highly ambitious.
Elsewhere, sports drinks, whether they slake the thirst or not, are now going to be liable to VAT, as will be the very large caravans which were previously regarded as homes and zero-rated. In a surprise move the government has withdrawn the VAT tax break for alterations to listed buildings. The government has recognised the inequality in the fact that altering a listed building was not liable for VAT, yet repairing it to maintain its heritage features attracted VAT. But rather than apply rational rules, the government has chosen to withdraw the relief altogether. It is expected that this will raise £35m next year, rising to £125m in 2016/17, which means the taxman is expecting people to spend an awful lot on altering their homes.
