The Chancellor of the Exchequer handed down his Emergency Budget on 22 June 2010. For both business and individual taxpayers, there are a number of headline points to note:
The main rate of corporation tax will be frozen at 28%. The main rate of corporation tax, payable by companies with profits over £1.5 million, will reduce from 28% to 27% from 1 April 2011 and then by a further 1% for each subsequent year, until it reaches 24% in 1 April 2014.
A number of other technical changes were made to the debt cap rules (which limit UK deductions for interest), the treatment of capital distributions received by UK companies and others.
The Government has announced that, as part of a new approach to tax policy-making, it intends to make the tax legislation more robust and able to combat tax avoidance in a more systematic manner, while reducing the instability and complexity of the tax code. This includes considering whether it is necessary to introduce a General Anti- Avoidance Rule (GAAR).
Tax Policy: making future tax law
The Government has published a discussion document, Tax policy making: a new approach, containing proposals to reform the manner in which tax policy is made in order to restore the UK tax system’s reputation for predictability, stability and simplicity.
The proposals include establishing an independent Office of Tax Simplification (further details to be announced shortly) and a new more transparent approach to changing tax law involving the Government being more accountable in the development of tax policy.
The Government proposes to improve on the current consultation process including consulting at each identifiable stage of any reform, being more transparent on the underlying rationale for tax policy changes and publishing supporting analysis and assumptions. Views are sought on a new convention that the majority of changes to tax law are confirmed no later than three months before the tax year in which they come into effect or publication of the Finance Bill in which they are to be included and are accompanied by draft primary legislation and, where appropriate, significant statutory instruments.
Capital Gains Tax
Following much media speculation, the Government has announced that there will be two rates of CGT on gains, 18% and 28%, in place of the current single rate of 18%. The rate paid by individuals will depend upon the amount of their total taxable income. For basic rate taxpayers, whose total taxable gains and income are less than the upper limit of the income tax basic rate band (£37,400 for 2010/11), the rate of CGT remains 18%. The 28% rate will apply to gains above that limit. The annual exempt amount for 2010/11 will remain at £10,100. The change was effective from midnight on 22 June 2010.
The effective rate of CGT for gains qualifying for entrepreneur’s relief remains 10%. The lifetime limit on gains qualifying for entrepreneur’s relief is increased from £2 million to £5 million. However, shares acquired under employee share schemes will not generally benefit from this relief (largely because employee shareholders do not meet the 5% interest requirement).
The Government has confirmed that it intends to formally review the taxation of non-domiciled individuals. No timeframe is given for draft legislation or consultation.
The standard rate of VAT will increase from 17.5% to 20%. The change will be introduced for supplies made on or after 4 January 2011. So far as we are aware, the supplies of goods and services on which VAT is charged will not be changed.
As with other recent changes to the VAT rate, there are detailed anti-forestalling measures (applying from 22 June 2010) to prevent the current 17.5% standard rate of VAT applying to supplies made on or after 4 January 2011.
The UK (along with France and Germany) will introduce, with effect from 1 January 2011, a bank levy at a rate of 0.07% (but a lower rate of 0.04% will apply for 2011). This levy will apply, we understand, at least until the G20 and the IMF agree an international course of action.
The levy will be based on the balance sheets of UK banks and building societies, and of the UK operations of non-UK banks. However some smaller UK banks will not be caught. Final details of the levy will be published later this year, following consultation.
Green Investment Bank
As previously announced in the March Budget, the Government will put forward detailed proposals on the creation of a Green Investment Bank for investment in the low-carbon sector. These proposals are intended for some point after the Spending Review, with the Government considering a wide range of options for the scope and structure of the Bank.
Financial Activities Tax (FAT)
In addition to the proposed Bank Levy, the Government has also announced that it will explore the costs and benefits of a FAT, working with international partners to secure agreement. It is likely that the tax will be levied on all regulated financial institutions including banks, insurance companies and possibly funds and private equity houses.
If a FAT is introduced along the lines recommended by the International Monetary Fund (acting on the instructions of the G20), the FAT will be levied on the sum of the profits and remuneration of financial institutions, and paid to the Exchequer (as opposed to being retained separately as a kind of insurance for future failure within the sector). The rate of the proposed tax is not yet known.
The 20% rate of writing-down allowances applicable to the main rate pool and the 10% rate applicable to the special rate pool will be reduced to 18% and 8% respectively. This will be effective from chargeable periods ending on or after 1 April 2012 for corporation tax payers and 6 April 2012 for income tax payers, with hybrid rates applying to periods that span these implementation dates. From April 2012, the maximum annual investment allowance will also be reduced from £100,000 to £25,000. The effect of these changes is to delay relief for expenditure, rather than to remove relief altogether.
Stamp duty land tax / stamp duty on land rich companies
Contrary to expectation, the Government did not introduce a stamp duty or SDLT charge on the transfer of shares in land rich companies however, the Government does propose to examine whether such changes are needed to prevent avoidance in this area, particularly on high value transactions.