Taxing time for the coalition

As the electoral rhetoric turned to reality and that reality became a hung parliament, I have been watching and waiting to see exactly what the Lib-Con coalition will bring. The coalition is faced with what David Laws has called a "colossal" task – they must take drastic steps to reduce one of the highest public deficits in the developed world.



Responding to the Conservatives' preelection pledge to hold a Budget within 50 days of coming to power, George Osborne quickly announced a date for an emergency budget – 22 June. He also declared that he will be following the 80-20 rule to address the massive budget deficit – 80% cuts in public spending, 20% tax measures. The deficit reduction plan has been well received by Mervyn King, Governor of the Bank of England who called it "strong and powerful".


But what is it all likely to mean for British business – and specifically for the tax regime?


Capital Gains Tax
The coalition is looking at an increase in Capital Gains Tax (CGT) - and to reach what it describes as “a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities".

There is talk that it could be hiked to as much as 50% but official details are unlikely to be 

available until after the Budget so judging extent or impact of the proposals is speculation at the moment. The big questions will be – what exactly is a 'non-business asset' and what is ‘similar or close to’?

No announcement has been made on the introduction date yet – it could be introduced from 6 April 2011, which is most likely, or the date could be effective from Budget day. With that risk looming it makes sense to take preventative action straight away.

One market that will be seriously affected by this change would be the second home owner, especially those who bought buy-to-let properties to fund retirement. Property sales could be accelerated as investors look to avoid the increase which will in effect mean that for every £100,000 of profit, the seller could pay as much as an extra £32,000 in tax.

NI thresholds
The Brown government planned to increase National Insurance Contributions (NICs) for both employers and employees – dubbed by the Conservatives as "Labour’s jobs tax". Both Conservatives and Lib-Dems opposed the proposals and the coalition now plans to raise the starting point for employers' NICs which will reduce the cost to employers, but leave in place the higher levies on employees, protecting jobs and raising revenue.

Corporation tax

Osborne seems keen to reinforce his ambition to make the UK tax system as competitive as possible for business. He is also keen to defuse the growing unrest about increases to CGT and a reduction in Corporation Tax may help in that process.


As a result it is expected he will announce that the coalition is pressing ahead with a
flagship plan to reduce the main and small business rates of Corporation Tax. Both rates could come down by as much as three pence in the pound, funded by cuts in complex reliefs and allowances offered by Labour.


VAT
The coalition continues to insist it has no plans to increase VAT. But a BBC survey of independent economists pointed to a VAT rise, with 24 of the 28 independent experts forecasting VAT would increase during the life of the Parliament with most predicting a rise to 20% before the end of next year.


Inheritance Tax
The Conservative proposed rise in the threshold on inheritance tax to £1million has been abandoned under the coalition.


No doubt more information will come out of Number 10 over the coming weeks and 22 June will put pay to the speculation.

Tracy Jenkins

Tax Director