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Entrepreneurs Panel

Jeremy Roberts
Julie Meyer
Brian Hay
David Pollock
Laura Tenison
Charlie Mullins
Tony Caldeira
Steve Purdham
Richard O'Sullivan
Jennie Johnson
Debbie Pierce
Michael Oliver

Emergency Budget: the predictions come in

Emergency Budget Report 2010: PwC experts give their predictions

Capital gains tax (CGT)

Brian Clark, partner and head of tax in the North West, PricewaterhouseCoopers LLP, predicts:

As outlined by the coalition Government we are expecting the tax rate on the disposal of non-business assets to be increased in line with income tax rates, which could mean an effective tax rate on capital gains of up to 50%. In an effort to discourage more speculative activity we believe there will be differential tax rates depending on whether an assets has been owned for the short or long term. It is likely that any new short-term rate, which could apply to assets held for less than two years, could take effect immediately from Budget Day.

In its simplest form a long-term rate of circa 30% could be applied to assets held for more than two years, and is likely to be introduced in April 2011. This could help increase revenue for the Chancellor as short-term gains are immediately taxed at a higher rate and individuals would then have the choice of keeping or disposing of assets. A differential rate for longer term holdings would also deal with the problem of how to grant relief for purely inflationary gains.

In order to continue to encourage entrepreneurial activity we are anticipating an extension to the existing definition of business asset, possibly to include shareholdings by employees in their employers, and predict that the CGT rate on such assets will be set somewhere between 10 – 20%. Again there may be some differential so that assets held for the longer term enjoy the lowest tax rates. This would of course take us back to a similar position to taper relief.

Although given the limits on cash available to the Treasury a simple extension of the less generous lifetime entrepreneur's relief (currently limited to £2 million for 5% shareholdings and above) may be all that is on offer.

We would not expect any change to the individual allowance of £10,100 for tax free capital gains each year, as any change would raise relatively small sums proportionate to the extra resources that would be required to collect it. In addition the change would disproportionately impact those taxpayers who made modest gains each year in order to supplement their incomes.

Enterprise

Alison Lever, partner and head of private business in the North West, PricewaterhouseCoopers LLP, predicts:

We could see a withdrawal of R&D relief for larger companies and possibly an announcement of tightening the rules more closely targeted to purely hi-tech businesses.

Personal tax

Gillian Banks, personal tax director in the North West, PricewaterhouseCoopers LLP, predicts:

It has been widely reported that we will hear further plans and implementation of an increase in the personal allowance (currently £6,475) to a £10,000 threshold, although this is unlikely to come into being all at once. There is a general expectation that this will be phased with the first step from 6 April 2011. This would certainly fit with the aims of the coalition to encourage work and employment. Funded by money that had been set aside for a proposed employee national insurance threshold, in addition to changes to CGT on non-business assets (which is estimated to deliver £2.7bn to the Treasury this year, and is rather insignificant when compared with the other ‘big three’; income tax, NIC and VAT, which combined were forecast in the March Budget to raise £321.4 billion in the current tax year).

It is possible that as part of the coalition's review of the tax and benefit system the Chancellor could announce a wider review of the interaction of the tax and NIC system, with a view to smoothing changes to marginal rates of tax as income levels rise across taxpayers but we do not expect any immediate changes.

With a focus on assisting those on lower and middle incomes we might see some proposal of changes to the Tax Credit system, which could be capped at a set amount based on household income, which would have the benefit of doing away with some of the complexities that Tax Credits has become synonymous with. It is unlikely that we will see a proposal for Child Benefit that is based on means testing as this would add unnecessary complexity.

We could see a further boost to yearly ISA subscription limits (currently £10,200), or a statement of intent from the Chancellor, as ISAs provide a tax efficient way to save in addition to being an alternative to pension planning.

The Government could also look, or hint at, something more imaginative to encourage and assist individuals to save, such as tax incentivised bonds, which could be used towards a house purchase (this has been tried in Australia), or funding retirement. After the second world war there was a partial rebate of the (admittedly much higher) taxes that had been levied in wartime, so perhaps the Chancellor could convert the 50% rate into compulsory purchase of gilts by affected taxpayers so that this becomes a timing cost until the deficit is reduced.
We may hear news of the consultation for tax treatment of interest. Any changes to this will affect the current playing field between the tax treatment of dividends (not tax deductible but only taxable on the recipient at up to 36.1%) and interest (generally tax deductible and taxable on the recipient at up to 50%), and while we do not expect to hear something immediately at Budget, this is one to watch.
With regards to any changes to inheritance tax (IHT) this is not in the coalition agreement and we don’t expect to see any significant changes to IHT.

Non-domicile rules

Gillian Banks, personal tax director, PricewaterhouseCoopers LLP, North West, predicts:

We don't expect any changes, but the coalition have signalled a review and both parties had measures in their manifestos to increase the burden for non-doms so there will be anxiety among those potentially affected, until the nature and scope of this review is clear.
Corporate tax
Brian Clark, partner and head of tax in the North West, PricewaterhouseCoopers LLP, predicts:
There has been much discussion already regarding the role the corporate tax system plays in attracting and retaining business in the UK. We can certainly expect more detail about the coalitions’ five year plan to revamp the competitiveness of the corporate tax system. The issues are finely balanced and will need careful thought, so we may see more in the way of further consultation announced, rather than immediate measures. Some of the items we may hear more about include:

The stated aim to bring the corporation tax rate down, possibly defined by a target rate to be achieved over a five year timeframe once it is affordable.
The ‘affordability’ of any rate reduction might be driven by restrictions to capital allowances or a scaling back of measures such as research and development reliefs.
More positive detail on the Patent Box already announced.
While a dash for immediate change cannot be ruled out, the hope and likelihood is that (further) consultation opposed to new legislation will be announced regarding the controlled foreign companies regime, the taxation of overseas branches, and the tax treatment of debt. Of course there is also the promised General Anti Avoidance Rule, but again consultation is expected, given the agreed difficulties of introducing such a measure.

VAT

Jonathan Main, partner, indirect taxes, PricewaterhouseCoopers LLP, North West, predicts:

We expect to hear an announcement of a planned rise in VAT to at least 20% effective from April 2011. A rise of 2.5% would be an extra 2.1% of the price of goods going to VAT (6.3 pence) which will have an impact on retailers as they would either lose the margin especially on items which sell at a price point e.g. £2.99 rather than £3.06, or need to reduce the cost of production elsewhere. Accordingly, we would predict that in order to implement the change retailers would need six months' notice to avoid being hit on margins and therefore we do not expect to see the change become effective until April 2011. Additionally delaying the rise could provide a further stimulus to the economy as people bring expenditure forward and would delay the inflationary impact of the increase.

As VAT is a tax on consumption an increase should see a small acceleration in retail sales before the increase and a fall afterwards, the question therefore is ‘could this fall turn positive GDP growth in to a negative?’ Hopefully this will not be an issue in April 2011. It is estimated that a VAT rise to 20% would raise circa £1 billion per month, a substantial revenue raiser for the Exchequer, and much needed cash injection to help plug the fiscal gap.

In the 1973 Budget much of the speech was taken up with detail of the new 10% VAT. Along with children’s clothes and shoes, food remained zero-rated. The then Chancellor Anthony Barber, on announcing some exceptions, introduced a 10% VAT rate to be applied to sweets, ice-cream, salted peanuts, crisps and soft drinks, saying: "The day has passed when these items can be regarded as luxuries". So although, not that they are now seen as "luxury", they may be coming in for special treatment again!

Lifestyle taxes

Jonathan Main, partner, indirect taxes, PricewaterhouseCoopers LLP, North West, predicts:

Taxes on alcohol and tobacco are already expected to raise £18 billion in the current year. The Chancellor may not be able to resist increasing taxes on 'unhealthy' choices as part of the way for paying for ring-fenced spending on the NHS.

Green taxes

Jonathan Main, tax partner, PricewaterhouseCoopers LLP, North West, predicts:

Plans have already been announced to replace air passenger duty (APD) to an aviation duty (per plane duty) in line with new Government proposals. It is expected that receipts will increase from the current level of £2 billion. In the Liberal Democrats manifesto proposal it was estimated that receipts could go to £5 billion, but we suspect industry pressure will mitigate this, at least in the short-term to in the region of £3 billion to £3.5 billion. Fuel duties and APD were expected to raise £29.9 billion in the current tax year in the March Budget so increasing these by 10% would offer an increase close to the maximum possible on more than doubling CGT (although fuel is already heavily taxed therefore an increase of this scale to fuel duty is probably unlikely). These figures are shown in the Treasury Ready Reckoner as being possible for this year, whereas CGT changes, as noted above, are only possible next year.

The climate change levy is to be reformed to a carbon levy which could see receipts go up from £0.7 billion, possibly in the region of £3 billion. Should the new coalition Government introduce a carbon tax in line with the carbon tax introduced to Ireland, we could see projected receipts from this of circa £5.5 billion. The Irish tax priced carbon at €15 per tonne, and the UK may be looking to put a similar floor on the carbon price at around £12 per tonne, which is also close to the current EU ETS spot trading price.

Pensions

Peter McDonald, partner, pensions, PricewaterhouseCoopers LLP, North West, predicts:

The new Government has stated in its formal coalition agreement that it will simplify the rules and regulations in relation to pensions, although it remains uncertain whether the Government will make concessions to the higher earners tax, which affects all individuals earning more than £130K per annum. The Liberal Democrat manifesto proposals to extend this tax further to hit anyone earning over £43K per annum were not included in the coalition agreement. There is a small chance that dividend tax credits for pension funds will be reinstated over time, which would bring some relief to a pensions industry in which employer motivation to provide defined benefit pensions has all but disappeared.

Bank Payroll tax

Susie Holmes, tax senior manager, PricewaterhouseCoopers LLP, North West, predicts:

The Bank payroll tax ended at the end of the last tax year (2009/10) and there has been no announcement to extend it, but it is likely that there is more to come for banks. The Government has indicated its intention to introduce a banking levy, in addition to this there could be some new rules to come regarding banking remuneration. The thinking here appears to be regulatory rather than a tax based approach. However there are currently concerns in the sector that some form of bank remuneration tax could be considered and maybe announced in the June 2010 budget.