On June 22nd the UK’s Chancellor George Osborne presented the national Emergency Budget. The new Coalition Government’s budget aims to bring the UK out of its current recession, and address the country’s growing deficit and cut it to a neutral level.

In regards to business taxation, the budget statement was headlined by the announcement of a reduced corporate tax rate. On April 1st 2011, the current 28 percent corporate tax rate will be cut by 1 percent. An additional three 1 percent cuts will be carried out for the next three years, ultimately bringing the tax rate to 24 percent. The Government has also confirmed that it will instate a Bank Tax in the UK, taking effect from January 1st 2011. The new tax will be levied on the adjusted balance sheet of national banks, building societies and foreign banks operating within the UK, and is expected to raise GBP 2 billion (approx. USD 2.68) annually. The Government has also committed to carrying out an investigation on possible reforms to the treatment of research and development activities carried out by national businesses. Additionally, the Government has pledged to engage in consultation on possible new measures to battle tax evasion, with the intention of implementing new legislation by April 2011.

The Government has confirmed that increase to the levied rate of National Insurance Contributions (NIC) will not be carried out, and a NIC-holiday system will be created for new businesses. Under the holiday scheme, new businesses in selected regions of the UK will not be required to pay the first GBP 5 000 (approx. USD 7407) of its employer NIC contributions for the first 12 month of employment for newly hired staff. The exemption will only apply for the first ten staff members hired in the first year of the business’s operation. Contrary to media predictions, the Government will not lower the payment threshold on CGT, leaving it at the current level of GBP 10 100. However, the CGT rate will be increased by 10 percent to a level of 28 percent, for gains made after June 23rd 2010. The increased rate will only apply to individuals with total taxable incomes and capital gains in excess of GBP 37 400 (approx. USD 55 404).

The Budget also confirmed the widely-expected VAT rate increase. From January 4th 2011 the VAT rate will increase from 17.5 percent to 20 percent. The VAT-base will not change, with no alterations to exempt and low-rated VAT items. The move is expected to raise an estimated GBP 54 billion (approx. USD 80 billion) over the next five years.

George Osborne has admitted that the measures outlined in the Budget combine to make a “drastic” changes, but with the current state of the economy drastic actions were needed. Andrew Smith, chief economist at KPMG, summarized the general sentiment, saying, “…this is a kill or cure budget.”

Photo by The Prime Minister’s Office

On June 14th the Scottish Chambers of Commerce (SCC) released a report with the results of a survey carried out on Scottish business operators. According to the publication, 47 percent of Scottish firms are primarily concerned with the implications which an increase to CGT rates will have. In particular, respondents feared a subsequent lack of capital availability for small enterprises and start-up firms. Liz Cameron, CEO of the SCC, summarized the findings, saying, “…many businesses are clearly unconvinced of the wisdom of imposing dramatic increases in the rates of CGT during a phase of fragile economic recovery.”

On the same day, international accounting firm KPMG released the results of their National Business Confidence Survey, which aims to gauge the sentiment of national business owners. The results indicate that nearly two third of survey takers prefer increase to VAT rates over lowered CGT thresholds and higher CGT levy rates. According to Russell Hills, head of tax for KPMG in Scotland, the VAT rate rise is a temping move for the Government as it could generate in excess of GBP 1 billion in revenues per month, but the change could seriously dampen consumer spending and economic recoveries. The survey also found that an increased National Insurance Contributions (NIC) rate was the least preferred fiscal policy change by Scottish business owners.

Also, recently, both the Scottish Trade Union Congress (TUC) and the Institute for Public Policy Research issued separate calls to the UK Government to forgo VAT rate increases and instead opt to instate a “Robin Hood” bank tax. According to both groups, a VAT increase would have disproportionately negative effects on low-income consumers across the UK, especially in Scotland. Conversely, a “Robin Hood” bank tax would have a greater impact on the wealthiest sector of the economy.

According to Russell Hills, if instituted, the proposed tax changes could be “painful” for business, and “…the government’s honeymoon period with the business community could be brief.”

Photo by Scottish Government

On June 11th the Confederation of British Industry (CBI), the UK’s largest business group, sent an open letter to the George Osborne, Chancellor of the Exchequer, urging a reevaluation of the Government’s intentions for the upcoming budget announcement. The CBI stated that the nation’s budget deficit should be controlled through spending cuts and not raised taxes. According to the CBI, a radical reform needs to be carried out on public services to deliver far greater levels of efficiency, with little cost to national infrastructure. Ultimately, for every GBP 1 of tax increases the Government instates, there should GBP 4 cut from national expenditures.

John Cridland, CBI Deputy Director-General, elaborated on the CBI’s view for the upcoming Budget, saying “This needs to be a bold and ambitious Budget, with a credible pathway for restoring sound public finances and a convincing narrative for growth.” The CBI stated that in evaluating the national tax balance and public spending, the Government needs carry out a root-and-branch examination of all current spending needs and infrastructures.

In regards to taxation, several already announced changes were brought into question. The CBI deems the plans for the national tax treatment of pensions as unnecessarily complex, leading to higher compliance costs. Additionally, the CBI praises the current form of the research and development tax-credits and urges the Government to leave it unchanged. The CBI is especially concerned with reforms to the Capital Gains Tax (CGT) system. The tax should be structured to minimize the impact it will have on long-term investments, and business start-ups.

John Cridland summarized the CBI’s view, saying “The UK’s future economic prospects depend on the ability of firms across the country to create new jobs and win orders. Increasing taxes makes this more difficult.”

Photo by The CBI

Following the UK’s May 6th General Election, a coalition was formed between the Conservative Party and Liberal Democrats. The new coalition soon announced several proposed changes to the country’s tax system, including a controversial increase in the CGT rate. If the planned changes are enacted, CGT in the UK will increase from the current 18 percent to 40 percent, the highest rate among western economies. Additionally, the coalition has indicated that the CGT earning threshold will be decreased from GBP 10 000 to GBP 1 000. As a result of public outcry against the change, indications are emerging that the intended changes will be altered before the national Emergency Budget announcement, scheduled to be given by Chancellor George Osborne on June 22nd.

Several representatives from the investment fund management sector have claimed that significant numbers of clients are growing concerned about the economic outlook of their investments, and the implications a rate change will have on retirement funds. David Green, Director of the UK think-tank Civitas, has stood in outspoken opposition to the CGT increase, claiming that it will punish entrepreneurs and stifle the UK’s economic recovery. His sentiments have been echoed by media sources across the UK.

On May 30th Iain Duncan Smith, UK Work and Pension Secretary, attempted to relieve tensions surrounding the CGT changes by emphasizing that no concrete decisions has yet been reached by the UK Government, and changes to the CGT system are still under the consideration. In a television interview he said, “..the chancellor has been clear that he is listening to everything and he will make the final decisions. He has also talked about major exemptions for all kinds of different groups.” The Secretary also added that the Chancellor intends to provide CGT concessions aimed at entrepreneurs and retirement funds.

Photo by Ewan McIntosh

Following the UK’s May 6th General Election the Conservative Party and Liberal Democrats formed a coalition. The two parties are now attempting to consolidate their differing economic and taxation policies. Currently, the discussion revolves around National Insurance Contributions, Capital Gains Tax, and Inheritance Tax. Although both parties have already agreed that the eventual changes will need to be more drastic than indicated by the previous Government, in order to achieve an “accelerated growth” in the nation’s economic recovery and reduction of national debt.

The new coalition has announced that substantial tax benefits will be provided to low and middle-income earners from April 2011. Although the nature of the benefits have not been disclosed, it was revealed that the cost of the eventual tax breaks will be offset by increases to National Insurance (NI) contributions made by employees. The previous Government’s proposed increase to NI payments made by employers has now been ruled out. The UK’s Capital Gains Tax (CGT) will be raised from its current rate of 18 percent to a probable 40 percent. The change could be exasperated by a proposed reduction in the CGT threshold from the current GBP 10 100 to a level as low as GBP 2 500. Thresholds for the much discussed and controversial Inheritance Tax have been delayed indefinably by both parties of the coalition.

The parties have already agreed to cut “non-frontline” Government spending by approximately GBP 6 billion. As a concession to the Liberal Democrats, the Conservative party has settled to devote some unspecified portion of the saved money to “support jobs”, as opposed to directly reducing the Government deficit. The coalition’s current plans and promise of accelerated deficit reductions has prompted Mervyn King, the Governor of the Bank of England, to describe the expected changes as “strong and powerful.”

Photo by jackhynes