Emergency Budget - what to expect

Top of the agenda for the Conservative-Liberal Democrat coalition government is cutting the UK's budget deficit of £156billion. The parties plan to cut £6billion in 2010/11, which means June's emergency Budget is likely to focus on slashing spending and raising taxes as the economic recovery continues to take centre stage.



Capital Gains Tax



The coalition government has already announced plans to charge CGT on non-business assets at rates similar or close to those applied to income. The disparity between CGT and income tax rates means the Chancellor may raise CGT from 18% to 25% or 30%. Raising CGT to 40% or 50% risks upsetting traditional Tory voters, but an uplift to 30% is in line with the CGT rate as it was prior to the introduction of taper relief and may be more palatable – especially if the CGT exemption is reduced from £10,100 to £2,000 as the Liberal Democrats proposed. Exactly when the government will introduce the new CGT rate is unclear although, historically, a new rate has never been introduced part way through the tax year. Instead, 6 April 2011 is more likely.



Income tax and National Insurance



The coalition government has agreed that the personal allowance for income tax will rise from April 2011 to help lower and middle-income earners. The allowance is expected to increase for all taxpayers but will only reach the target personal allowance of £10,000 after a few years, while the threshold for the personal allowance being tapered down may be reduced from £100,000 to a lower earnings limit so that the benefit of the full allowance only goes to the lower paid. And to help fund the increase, the National Insurance (NI) rate for higher earners is predicted to rise by 1%. The Conservatives have abandoned plans to increase employers' NI from 12.8% to 13.8%, calling it a tax on jobs and predicting it will increase unemployment.



Corporation tax



The Chancellor's aspiration is to reduce the main headline rate from its current 28% to 25% in order to improve the international competitiveness of the UK, and to reverse the trends whereby multinational companies headquartered here seek to relocate to more favourable jurisdictions. Any such provision would almost certainly be accompanied by restrictions to reliefs available to render it 'revenue neutral'.



However the government can't afford to lower the headline rate of corporation tax – which has remained at 28% since 2008 – without securing additional tax via reductions in reliefs and allowances. Plans to raise the small companies' rate by 1% to 22% have been shelved since the pre-Budget report 2008 due to the economic situation.



VAT



With recent VAT increases to 21 % announced by Greece and Portugal and to 18% by Spain, it would not come as a surprise to see the main rate of UK VAT increased from 17.5% to 20%, according to Kingston Smith tax partner Adrian Houstoun. However, if the new government follows the last one the change may not be effective immediately. It seems unlikely that a 5% rate will be imposed on zero-rated items such as books and food, although the Liberal Democrats were keen on bringing in a 5% rate for certain domestic property that is currently zero-rated. With the coalition this might still happen, but probably not in this Budget.



Inheritance Tax



The government has shelved Tory plans to increase the inheritance tax (IHT) threshold from £325,000 to £1m as part of the coalition negotiation agreements, blaming the u-turn on the Liberal Democrats' promise to increase the personal allowance. Andrew Shaw, a partner at Kingston Smith says the decision to freeze the IHT nil-rate band for the next five years is regrettable, and will result in thousands of people being dragged into the IHT net – rather more than just the '3,000 richest families in the land,' referred to throughout the election campaign.



Anti-avoidance



A continuing assault on tax avoidance in all its forms is expected in the emergency Budget. Promoters of tax-avoidance schemes are required to disclose them to HMRC, giving the tax authorities an early opportunity to identify and shut down those schemes that they think might work. A raft of tax avoidance measures against which the Labour government failed to legislate is expected to be scooped up in the emergency Budget.



'The Coalition: Our Programme for Government' document refers to a "detailed development of Liberal Democrat proposals" in relation to tax avoidance. These include a proposed general anti-avoidance provision for companies, a crackdown on perceived NI avoidance on benefits-in-kind and a change to the SDLT( Stamp Duty Land Tax) rules where shares in a company owning a property are sold instead of the property itself. The most worrying of these proposals is the suggestion of a general anti-avoidance rule, as this will mean that any planning which HMRC views as having a tax avoidance motive would fail. This brings a great deal of uncertainty to companies at a time when one of the key reasons given by companies for leaving the UK is the uncertainty of the UK tax system.





Article based on the comments of tax partners at accountancy firm Kingston Smith, LLP.