June 2010 Budget: the second half

Practical Law UK Articles 0-502-5302 (Approx. 25 pages)

June 2010 Budget: the second half

by PLC Tax

Reduction in corporation tax rates: is Britain really "open for business"?

Inevitably, the scheduled reduction in the corporation tax rate was popular among City advisers. But some thought the matter was not completely clear cut. Simon Yates (Travers Smith) thought it suggested a "budget airline approach to tax policy - get the headline price down, but pile on the hidden costs". Nonetheless, he concluded that the reduced rate was "welcome". Elaine Gwilt (Addleshaw Goddard LLP) cautioned that "many businesses will be looking at what the whole UK tax package looks like when deciding whether or not to come to the UK and not just the headline rate".

A similar point was made by Ashley Greenbank (Macfarlanes):

"Perhaps more important is the direction of travel which the initiatives on foreign profits, intellectual property and R&D signal. But ... [t]hese new proposals will only help if they become legislative measures reasonably quickly and are not hedged about by Treasury paranoia. Now is the time for action: not speeches and lengthy consultation processes."

In particular, the endless reform of the controlled foreign companies regime continues at its excruciatingly slow crawl. This Budget promises an overhaul by 2012. Eloise Walker (Pinsent Masons LLP) rather more charitably described the pace as "somewhat disappointing".

Cliona Kirby (Olswang LLP) wanted "a much lower rate of corporation tax targeted at intellectual property" to be introduced.

Capital gains tax rate increases: eye-watering but not fatal

"Abolition of 18% rate for capital gains as expected" (Charlotte Sallabank (Jones Day)).

The Chancellor announced that the rate of capital gains tax (CGT) would increase to 28% for higher and additional rate taxpayers, trustees and personal representatives. The increase was widely anticipated and the general consensus was that, in the circumstances, the increases were "not as high as feared" (Daniel Lewin (Kaye Scholer LLP)). Geoffrey Kay (Baker & McKenzie) described it as a "softer blow than many had feared", and Paul Hale (Simmons & Simmons) called it "an acceptable outcome in the circumstances".

Jonathan Cooklin (Freshfields Bruckhaus Deringer) considered that the "welcome pragmatism in increasing the capital gains tax rate to a lower than expected 28% suggests that the Government is serious about Britain being 'Open for Business'".

However, a substantive criticism was made by John Challoner (Norton Rose LLP) who said:

"Whilst the increase in CGT rates may not be as great as was feared, the lack of any grandfathering provisions could be seen as draconian. There will be individuals who have entered into bona fide sale agreements with third parties which are legally binding on them but may have commercial conditions which need to be satisfied. As the disposal will not be triggered until the condition is satisfied, any gain will fall to be taxed at the higher rate unless all the conditions were satisfied prior to 23rd June. As the seller will not be able to get out of the contract, this is retrospective taxation. He would have entered into an agreement knowing what the tax effect would be, only to find himself locked into a deal where the tax charge is much higher."

Although the rate of capital gains tax has risen for higher and additional rate taxpayers, the lifetime limit for entrepreneurs' relief was also increased from £2 million to £5 million. Jonathan Richards (Linklaters) thought that the private equity industry would "start trying to adopt structures that benefit from entrepreneurs' relief ... you might even see some executives paying less CGT than they did under the old rules".

However, the Budget did not introduce indexation or taper relief, as some had hoped. Peter Jackson (Taylor Wessing) also lamented that "an opportunity has been missed to broaden eligibility for the relief to officers and employees holding shares in the employer that represent less than 5% of the voting rights or of the issued ordinary share capital". Graeme Nuttall (Field Fisher Waterhouse) also urged the government to remove the 5% threshold. Catherine Robins (Pinsent Masons LLP) agreed that the enduring threshold requirement would be "disappointing news" for many management shareholders and carried interest holders, who do not meet the condition.

Nonetheless the conclusion of the vast proportion of commentators was that the CGT changes struck a "sensible balance" (Simon Skinner (Travers Smith)) "between encouraging entrepreneurial investment and discouraging tax planning to shift income into capital gains" (Andrew Loan (Macfarlanes)).

Bank levy appears to be tolerated (currently)

The contents of the Budget included the announcement of a new bank levy from 1 January 2011. The announcement had already been mooted in both national and international political arenas, although David Jervis (Eversheds LLP) notes that it was "unexpected that a co-ordinated approach with Germany and France would be adopted". David Taylor (Freshfields Bruckhaus Deringer) thought it was "not to be as bad as it might have been, though with the possibility of more to come". Mark Sheiham (Simmons & Simmons) observes that "The banking sector appears largely to have accepted the levy - not so much out of any merit, but more because it is considered to be less detriment to the UK's financial sector than other alternatives such as a financial transaction tax".

However, the government has also announced that it will explore the costs and benefits of a Financial Activities Tax on bank profits and remuneration. The truly splendid acronym has not gone unremarked, inevitably. (See comments from Colin Hargreaves (Freshfields Bruckhaus Deringer) and David Harkness (Clifford Chance LLP).)

Rise in VAT rate to the sound of the vuvuzela

In the House of Commons, the Chancellor's announcement of the forthcoming rise in the rate of VAT to 20% resulted in loud jeering. Not quite the noise of the vuvuzela, but not dissimilar. A call for order ensued.

But despite the political posturing of the moment, there seems to be a general acceptance that the increase in VAT was inevitable and should be taken bravely. Although the political parties had been previously reluctant to concede the rise, it had been widely heralded in the press and, as a matter of arithmetic, was something of a no-brainer. As Richard Croker (CMS Cameron McKenna) said: "The tax will be cheap for HMRC to collect, will raise many billions quickly, and the cost will be spread widely". Mathew Oliver (Bird & Bird) put it thus: "The sad truth is that if the government wants to raise substantial additional amounts in tax it has to look at either an increase in VAT or basic rate income tax and increasing VAT must be the lesser of two evils".

In fact, Greg Sinfield (Hogan Lovells International LLP) observed that the rate is "still just below the EU average". Matthew Hodkin (Norton Rose LLP) also thought the "increase should be put in the context of the rest of Europe".

However, Neil Warriner (Herbert Smith) thought that the proposed date of introduction (4 January 2011) was a "pity ... It might have been better if a date had been chosen that would have been in a less busy trading period".

Some commentators also noted that certain sectors would be hit unduly hard. Alexander Cox (Ashurst) noted a "secondary blow" would be dealt to large scale investors in residential property who are also facing an increased SDLT cost on properties in excess of £1 million from 6 April 2011. Ian Hyde (Pinsent Masons LLP) also acknowledged a particular blow for "exempt and partially exempt businesses such as financial services companies, universities and residential landlords which cannot recover any VAT that they incur".

Unusually, apart from the increase in rate, there were very few other VAT raising measures. David Anderson (McGrigors LLP) attributed this to " a sign of confidence by HMRC in its position following a succession of wins at court in its war on avoidance".

New approach to tax policy making (and a GAAR?)

By far the most noteworthy item seems to have been the new approach to tax policy making set out in the joint HM Treasury and HMRC discussion paper "Tax policy making: a new approach".

The response from commentators has been varied. Some report genuine optimism. Others prefer to couch their optimism in slightly muted terms. Still others think the contents of the discussion paper are no more than political rhetoric and should be dismissed as such.

At a general (high) level the concept was almost universally popular. Neil Woodgate (White & Case LLP) thought that tax practitioners would "welcome the spirit and intendment of the new approach to tax legislation". Kate Habershon (Morgan Lewis & Bockius) welcomed the "noble intention" behind the initiative. Tony Beare (Slaughter and May) thought that a new approach was "very welcome after the proliferation of poorly-drafted, voluminous and inadequately targeted tax legislation in recent years". Patrick Mears (Allen & Overy LLP) said of the initiative to create the most competitive tax system in the G20: "I hope they will succeed". Heather Corben (SJ Berwin LLP) agreed that "if the UK is to be an attractive place to do business, its corporation tax system must be predictable and relatively simple", and Julian Hickey (Lawrence Graham LLP) hoped that simplification would "drive economic recovery". Martin Shah (Simmons & Simmons) thought that any steps to respond to frequent criticisms of complexity were "welcome".

Indicating slightly less enthusiasm, Sandy Bhogal (Mayer Brown International LLP) thought the discussion document should be greeted with "cautious optimism". And showing even less, Michael Cant (Nabarro LLP) said: "Call me cynical but in my experience simplification does not lead to clarity".

Further, the specific reference to a general anti-avoidance rule (GAAR) was predictably controversial. Adam Blakemore (Cadwalader, Wickersham & Taft) noted the criticism that GAARs "do not promote stability but rather create greater uncertainty". John Christian (Pinsent Masons LLP) agreed, and considered that "the discussion around introducing a general anti-avoidance provision ... promises more rather than less uncertainty". Iain Scoon (Shearman & Sterling (London) LLP) concluded: "Let us hope that only lip service continues to be paid to the introducion of a GAAR" and Heather Gething (Herbert Smith) cautioned that a GAAR "sadly once enacted will be with us forever".

Nick Cronkshaw (Simmons & Simmons) thought it was in any case difficult to be too optimistic when faced with the "announcement that a new set of proposals for the reform of the CFC regime will be put forward for the third time in only three years - which cannot be considered, by any measure, efficient". In a similar vein, Colin Hargreaves (Freshfields Bruckhaus Deringer) commented:

"The additional restriction on the proportion of reliefs that can be surrendered through a consortium relationship does not strike an obvious blow for predictability, stability and simplicity. This has the potential to affect a huge number of joint venture arrangements. If HMRC could say just what it is that's bothering them, then consultation could help to achieve an appropriately targeted change."

Employment and pensions - it's not over yet

The increased CGT rate reduces by 10% the differences between the CGT rate and the 40% and 50% rates of income tax. However, the change seems unlikely to reduce the popularity of either tax-favoured share options or arrangements for employees to secure capital gains tax treatment of the growth in value of interests in shares or other securities, especially once National Insurance contributions liabilities on earnings subject to income tax are taken into account. Colin Kendon (Bird & Bird) thought that "the demand for loan notes in corporate transactions is likely to increase to allow EMI, CSOP, and SAYE participants to mitigate the effect of the higher CGT rate". Mathew Gorringe (Eversheds LLP) thought the new regime would still "permit a fair degree of tax planning to be undertaken".

However, the Budget also contained a confirmation that a consultation would be taken during 2010 on the tax treatment of employment-related shares and securities offered under "geared growth" arrangements. Judith Greaves (Pinsent Masons LLP) commented that it would be "interesting to see what is regarded as 'gearing' in this context". David Pett (Pett Franklin & Co LLP) noted a "subtle" change in the wording of the announcement, but wonders if he is being paranoid...

Meanwhile, Nick Beecham (Field Fisher Waterhouse) thought there would be relief that there were "no immediate plans to remove higher-rate tax relief from Gift Aided donations".

Still no final score but "so far so good"

Despite certain specific criticisms, the mood of commentators is rather kindly. Graham Airs (Slaughter and May) refers to a "more business-friendly tone than we have been used to in recent years". His partner, Steve Edge (Slaughter and May) thought it was "a good start in the business tax area for the coalition government". Murray Clayson (Freshfields Bruckhaus Deringer) concluded that the Budget "looks positive, or at least promising, for business". As Peter Nias (McDermott, Will & Emery UK LLP) puts it: "So far so good".

As ever, much of the detail is still to come. Karen Hughes (Hogan Lovells International LLP) sees the summer ahead as "being a busy period for consultation and discussion with businesses and advisers".

And who knows? England might still win the World Cup.

Read PLC Tax's detailed commentary on the June 2010 Budget in Legal update, June 2010 Budget: key business tax announcements. For PLC's full range of Budget coverage, including updates tailored to practice areas such as employee incentives, property, private client, pensions and environment, see PLC post-election coverage.

Comments in full

Graham Airs, Slaughter and May

(See Profile for Graham Airs.)

"I think that the main point of interest for business in this Budget is that, despite the proposed Bank Levy, and other increased taxes, it does have a more business-friendly tone than we have been used to in recent years. But it is very thin. Much is said about competitiveness, and about new ways of tackling tax policy and new tax legislation, but we will have to see whether these come to fruition. For now, I think that the jury is out."

David Anderson, McGrigors LLP

"In VAT there was notably no other measures introduced to increase the tax yield other than the headline increase in standard rate to 20%. The absence of any announcements of specific new powers for HMRC to deal with VAT avoidance or planning (other than the anti-forestalling measures on the inception of the new rate), is in my view a sign of confidence by HMRC in its position following a succession of wins at court in its war on avoidance, emanating from the Halifax case in 2006. The hearing of the Weald Leasing Ltd case very recently at the European Court of Justice, which has until now been decided in the taxpayer's favour in the domestic courts, will properly test HMRC's approach to what constitutes unacceptable avoidance for the first time since Halifax. In the event of a taxpayer win it may be that HMRC revisit whether there is a need to introduce further legislative anti-avoidance measures. This perhaps dove-tails rather neatly with the announcement that the Government intends to examine whether a General Anti-Avoidance Rule is necessary to develop sustainable responses to avoidance risk."

Tony Beare, Slaughter and May

(See Profile for Tony Beare.)

"It was another quiet Budget so far as the City was concerned. The main points of interest would seem to be:-

(a) The appearance of the draft legislation which is intended to avoid the recent uncertainty on the corporation tax treatment of dividends of a capital nature. Despite the new draft legislation, this is still an area where the tax implications are much more complicated and uncertain than they should be;

(b) The announcement of a new approach to tax policy making, which is very welcome after the proliferation of poorly-drafted, voluminous and inadequately targeted tax legislation in recent years. As part of the process described above, the Government is to examine the possibility of a general anti-avoidance provision. This was something which was considered and then rejected under the previous Government, on the basis that the clearance procedure which was thought to be a necessary adjunct to the provision would be too costly and labour intensive to implement. It remains to be seen whether that will prove a bar to the provision at this point;

(c) The proposed phased reduction in the rate of corporation tax. One consequence of this change will be the reduction in the deferred tax assets which many banks have recognised as a result of their losses; and

(d) The announcement of a consultation in relation to a possible generic rule countering derecognition schemes. This follows a number of attempts to produce specific legislation which covers all of the circumstances in which derecognition can occur."

Nick Beecham, Field Fisher Waterhouse

(See Profile for Nick Beecham.)

"High earners who donate to charity will be relieved that the Budget contained no immediate plans to remove higher-rate tax relief from Gift Aided donations. The Government will, however, be consulting further on "improving" the Gift Aid regime."

Sandy Bhogal, Mayer Brown International LLP

(See Profile for Sandy Bhogal.)

"Amongst a number of technical measures are the headline grabbing increases to the VAT and capital gains tax rates, and the previously announced reductions in corporation tax rates (to be funded primarily by amendments to the UK capital allowances regime). These were expected given the much publicised requirement to increase tax revenues. Although, perhaps surprisingly given the pre-Budget gossip, the tax free band for income tax was increased and no amendments were made to the basic rate of income tax.

The five-year proposal to reform the corporation tax system and the discussion document entitled “Tax policy making: a new approach”, promise simpler rules, greater transparency and stability, more open consultation and an objective of greater certainty for taxpayers. Whilst this should be greeted with cautious optimism, and any changes to encourage inward investment should be welcomed, as part of this initiative the Government has announced that it is to examine whether the use of a 'General Anti-Avoidance Rule' would be appropriate. On consideration, prior UK governments have rejected such an approach although other countries (such as Canada, Australia and recently the USA) have enacted similar measures. It will be interesting to see where this leads.

Business will welcome the proposals to amend the UK CFC regime and the taxation of branches. However, given the measures were previously announced and had been part of the previous government’s tax reform policy, the extended timetable will not be welcome and puts back progress in two areas which are desperate for reform. The private equity industry will bemoan the effects of the capital gains tax rate increase on carried interest structures, but the extension of the limit on entrepreneur’s relief caught many by surprise (and will be welcomed by many small businesses)."

Adam Blakemore, Cadwalader, Wickersham & Taft

"Given that the Government has decided to achieve its aim of eliminating the bulk of the UK’s public sector structural deficit by 2014/15 through spending reductions (as to 80 per cent.) and tax increases (as to 20 per cent.), the changes announced to the UK’s tax regime appeared relatively mild in comparison and, indeed, in some cases quite encouraging. The decision to begin lowering the headline corporation tax rate can only be welcomed from the perspective of international competitiveness and sends a clear signal regarding the Government’s priorities. It remains to be seen as to whether the severe reductions in public spending announced can be delivered and consequently whether further tax rises will be needed.

Of particular interest on the technical developments side was the announcement for a UK bank levy to be introduced from 1 January 2011 and to apply to the UK banking sector. The genesis of a number of the attributes of the proposed bank levy appears to be the proposals made by President Obama in January 2010 for the US Financial Crisis Responsibility Fee, despite the lack of inclusion of the proposals for the US Fee in the US Financial Reform Bill that was passed by the House of Representatives and Senate earlier this year. As with the bank payroll tax in Finance Act 2010, policy objectives are clearly visible in the proposed parameters of the UK bank levy. The reduced rate of the UK bank levy for longer-maturity wholesale funding appears to be to encourage the UK banking sector towards retail depositors and to discourage an over-reliance on wholesale funding which has been identified by the International Monetary Fund and several commentators as being a source of vulnerability in the financial crisis. However, significant questions exist regarding some of the detailed aspects of a UK bank levy, not least whether the levy will be introduced in a form which enables it to qualify for a foreign tax credit in the home jurisdiction of a non-UK resident bank which is subject to the UK bank levy. It is possible that different jurisdictional definitions of a “bank” for the purposes of the G20 or EU jurisdictions’ respective bank levy legislation may lead to overlap and the risk of double taxation. In the event that such bank levies are not eligible for foreign tax credits or relief under double tax treaties or domestic legislation, the cost to multinational financial institutions may well be very substantial.

The re-awakening of the proposals for a GAAR is likely to prove as controversial as ever. While other Commonwealth countries have introduced GAARs (such as Australia, New Zealand and Canada) there continues to be a significant concern among many commentators, practitioners and businesses that they do not promote stability but rather create greater uncertainty in relation to the tax treatment of transactions. It will be fascinating to compare any new proposals for a GAAR with those considered in the 1990s, and to examine whether a GAAR (as opposed to more targeted measures) is really what is needed in the current political and economic climate. There is also at least a slight concern that a disparity exists between HMRC and HM Treasury initiating an “informal engagement” regarding the necessity for a GAAR at the same time as continuing consultations on more limited measures such as the proposals for group mismatch legislation first announced in the March 2010 Budget."

Michael Cant, Nabarro LLP

"One aspect of the Budget that does not seem to have attracted much attention in the press is the introduction of an independent Office for Tax Simplification and the "informal engagement" with interested parties to explore whether there is a case for developing a General Anti Avoidance Rule (GAAR). See Para 2.114 .

Call me cynical but in my experience simplification does not necessarily lead to clarity. The introduction of a GAAR might be no more than an attempt to plug the holes created by the Office for Simplification.

I am also suspicious that there is not to be a formal consultation on the possible introduction of a GAAR. The last time they looked at this idea, 5 or more years ago, HMRC (actually I think it was the Revenue at the time) thought it was all too difficult. What has changed and why do they not want to discuss the issues widely?"

John Challoner, Norton Rose LLP

(See Profile for John Challoner.)

"Whilst the increase in CGT rates may not be as great as was feared, the lack of any grandfathering provisions could be seen as draconian. There will be individuals who have entered into bona fide sale agreements with third parties which are legally binding on them but may have commercial conditions which need to be satisfied. As the disposal will not be triggered until the condition is satisfied, any gain will fall to be taxed at the higher rate unless all the conditions were satisfied prior to 23rd June. As the seller will not be able to get out of the contract, this is retrospective taxation. He would have entered into an agreement knowing what the tax effect would be, only to find himself locked into a deal where the tax charge is much higher."

John Christian, Pinsent Masons LLP

(See Profile for John Christian.)

"The Budget includes proposals to reform the way in which tax policy is developed - the aim being to make it more predictable, stable and simple. This acknowledges the deep concerns expressed by businesses about the way in which major UK tax changes have been handled in recent years- the long-running uncertainty over foreign profits being a key example. The tax policy environment is not going to change overnight however and the discussion around introducing a general anti avoidance provision (GAAR) and introducing more changes to tax law outside the Budget and Pre-Budget Review promises more rather than less uncertainty."

Murray Clayson, Freshfields Bruckhaus Deringer

(See Profile for Murray Clayson.)

"George Osborne was convincing in his claims to a fresh and more transparent approach to budgetary management and tax policy. In many respects the Budget looks positive, or at least promising, for business. Some of the less attractive trailed measures were not quite so bad as had been feared e.g. capital allowance reductions, CGT rate (retail structured products breathe again), even the bank levy. The latter will be one of the numerous important topics subject to forthcoming consultation, as will CFC reform, foreign branches and IP/innovation, though "informal engagement" concerning the possible introduction of a GAAR (a Lib Dem hobbyhorse) is more sinister: one might hope that this informality, falling short of initiating formal consultation, indicates mixed feelings and at most muted enthusiasm within the Coalition and at HMRC."

Jason Collins, McGrigors LLP

(See Profile for Jason Collins.)

"Unlike most of the recent budgets, today's Emergency Budget did not contain any big initiatives around enforcement and compliance - perhaps unsurprising given that the Coalition was looking to change taxes and expenditure on an enormous scale, so tinkering around the edges was never likely to have been a priority. Perhaps the most interesting feature is the Office of Tax Simplification, and the intention to properly consult on tax policy and changes in taxation. Hopefully this will bring to an end to the ill-thought through and rushed tax measures which have been a feature since the formation of HMRC. Worryingly the joint Treasury/HMRC document, Tax policy making: a new approach, holds out the Modernising Powers, Deterrents and Safeguards review as the gold standard - a consultation on HMRC's powers which launched in 2005, just two weeks before Royal Assent was given to the Serious Organised Crime and Police Act 2005, which granted HMRC its most intrusive powers ever, including a power to interrogate."

Jonathan Cooklin, Freshfields Bruckhaus Deringer

"Although a very tough Budget, the phased reduction in corporation tax rates down to 24% and the welcome pragmatism in increasing the capital gains tax rate to a lower than expected 28% suggests that the Government is serious about Britain being "Open for Business". The impact of the Budget measures on the economy may, however, only start to hit home following the Comprehensive Spending Review later this year."

Heather Corben, SJ Berwin LLP

(See Profile for Heather Corben.)

"If the UK is to be an attractive place to do business, its corporation tax system must be predictable and relatively simple. The "Tax Policy - a new approach" document published yesterday hopefully represents a fresh perspective on this important point."

Alexander Cox, Ashurst

"The unavoidable increase in VAT from 4 January 2011 has grabbed the headlines, with obvious consequences for the high street and consumers generally. Less obvious, however, are the wider implications - in particular, the secondary blow this will deliver to large scale investors in residential property, who will now face greater irrecoverable VAT on costs, in addition to the 5 per cent SDLT charge on the acquisition of residential property portfolios in excess of £1m as of 6 April 2011. When the need for more affordable rented accommodation is widely acknowledged, one wonders whether the implications of the VAT and SDLT increases on what is an already unattractive market for private investors have been fully considered. It is not only the residential sector that will be hit, however. The increase in VAT will also push up the SDLT costs on the acquisition of commercial properties, highlighting the rather perverse practice of charging SDLT on the VAT inclusive cost of property.

It seems rather more thought was given to the increase in the CGT rate. Indeed, it was pleasing to hear the Chancellor acknowledge that increasing the rate too far would probably reduce rather than enhance revenues. With a gap of 22 per cent between the CGT rate and the highest rate of income tax, however, it will still be very attractive to structure returns as capital rather than income."

Richard Croker, CMS Cameron McKenna

"I'm pleasantly surprised at the tax announcements.

The VAT rise was anticipated but by being deferred until January should provide a welcome boost to activity in advance of the rise. The tax will be cheap for HMRC to collect, will raise many billions quickly and the cost will be spread widely. The pledge to preserve zero rating will be popular and perhaps shows the Chancellor's approach to tax in the EU - he intends to hang on to the UKs long held derogations. This will also help the poorest who will also benefit from the rise in the personal allowance for income tax.

The right message has been sent on corporation tax with the phased reduction in rates and capital allowances have not been as hard hit as was feared, but there is still a doubt over the future of interest relief. If this can be preserved the UKs attractiveness as an international business centre will be enhanced by this Budget.

The spending cuts will no doubt cause more long term difficulties for the government but they will be confident tonight that they have got off to a good start on tax."

Nick Cronkshaw, Simmons & Simmons

(See Profile for Nick Cronkshaw.)

"Whilst the Coalition Government's focus on the competitiveness of the corporation tax system is, of course, welcome, the development of the new "roadmap" will create a degree of further uncertainty in the short term. This is exemplified by the announcement that a new set of proposals for the reform of the CFC regime will be put forward for the third time in only three years - which cannot be considered, by any measure, efficient. What is important now is to move forward to a set of proposals that do not unnecessarily hamper UK multinationals whilst protecting the UK tax base."

Steve Edge, Slaughter and May

(See Profile for Steve Edge.)

"A good start in the business tax area for the coalition government. Signs that they have been listening in opposition and have made useful progress in their first 50 days - let's hope that we do not waste too much time on the nonsense of the GAAR."

Caspar Fox, Eversheds LLP

"It's a momentous Budget for the public, but nothing for corporate tax advisors to really sink their teeth into - at this stage, at least. It contained little detail beyond the expected eye-catching tax rate changes, and the real interest will be when the many promised consultations and reform programmes are launched later this year. In addition, the odds of a GAAR being implemented seem to have shortened, with the Government appearing truly committed to a simpler tax system."

Heather Gething, Herbert Smith

(See Profile for Heather Gething.)

"The most interesting development is the "strategic approach to tax avoidance". There are four elements in the strategy. Of the elements the most welcome is the intention that legislation should set out its objectives which will enable the taxpayers to anticipate the reaction of the judiciary to any particular provision. If that is achieved in relation to future legislation, marketed tax avoidance schemes that rely on a mere device will become a thing of the past. Systemic review (and we assume rewriting or altering in a manner which sets out the objective) of existing legislation which has been much altered should remove the "cats' cradles" that litter the legislation in particular areas such as the legislation governing financial instruments, debt and manufactured dividends. It is noteworthy that these rules were substantially "simplified" by incorporating accounting treatment specifically to eliminate the mismatch in the accounting profit and the taxable profit. But the complexity has been generated as a side effect of countering the arbitrage in the rules.

A general anti-avoidance rule is almost inevitable as the review to counter the proliferation of marketed tax avoidance schemes arising out of existing legislation and sadly once enacted will be with us forever."

Charles Goddard, Berwin Leighton Paisner

"As a first step towards creating a simpler and more internationally competitive tax regime, with lower rates than many G20 countries, this Budget will be welcomed by the City. The new approach to tax policy in particular will be welcomed by business which has found it increasingly hard to keep track of the intricacies of and sudden changes in the UK tax code in recent years. The possibility of a GAAR, however, is a retrograde step, and would be counterproductive if the simplification of the corporate tax system is carried through."

Mathew Gorringe, Eversheds LLP

"The Budget will certainly have provided many individuals and entrepreneurs a sigh of relief by virtue of the fact that the rate of capital gains tax did not increase as dramatically as expected to 40 or even 50 per cent. The rate of 28% of capital gains tax for higher rate tax payers will also still permit a fair degree of tax planning to be undertaken. Other than this, the Budget reinforced the notice given previously given in the March Budget that HMRC will attack all forms of geared growth arrangements and as share incentives advisers we therefore anticipate that there will be a need for certain company's to review their arrangements to ensure that these will not become the subject of HMRC scrutiny in due course."

Judith Greaves, Pinsent Masons LLP

(See Profile for Judith Greaves.)

"The retention of the £10,100 individual CGT annual allowance is good news for tax-favoured share option plans – it means that most participants in SAYE, CSOP and EMI plans will escape tax unless significant gains are realised. The disparity with share incentives subject to income tax means that plans where growth is taxed as capital gains, albeit now often at 28%, continue to look attractive. The promised consultation on "geared growth arrangements" is to go ahead and it will be interesting to see what is regarded as "gearing" in this context."

Ashley Greenbank, Macfarlanes

"Does the Emergency Budget mean that Britain is now “open for business” as the Chancellor claims? The reduction in the corporation tax rate over four years to 24% is welcome. Perhaps more important is the direction of travel which the initiatives on foreign profits, intellectual property and R&D signal. But we have been here before. The last Government dithered over reform of the controlled foreign companies rules as companies (such as Beazley, Brit, Ineos and WPP) queued up to leave the UK. These new proposals will only help if they become legislative measures reasonably quickly and are not hedged about by Treasury paranoia. Now is the time for action: not speeches and lengthy consultation processes."

Elaine Gwilt, Addleshaw Goddard LLP

"It is a welcome announcement that the main rate of corporation tax applicable to companies will go down to 24% over the next 4 years. This may indeed improve the UK's competitiveness when it comes to attracting and retaining businesses. But many businesses will be looking at what the whole UK tax package looks like when deciding whether or not to come to the UK and not just the headline rate and without further reform the UK may find itself sorely lacking. A different set of taxpayers will be pondering the question of whether or not to incorporate (whether fully or partially) given the increasingly competitive corporation tax rate coupled with the rises in income tax and now CGT."

Kate Habershon, Morgan Lewis & Bockius

"This is a tough budget delivered in a difficult economic climate. It can be expected to receive a mixed response generally. But the strong measures overall seem to demonstrate the Government's stated desire to restore the UK's diminished competitiveness and are likely to be welcomed by most businesses. The reduction of corporation tax rates to 24% over a four year period is a good start and, together with the reduction of some capital allowances, constitutes the first step towards the stated goal of a lower rate but broader tax base. This goal should position the UK well in its aim to become (and remain) a more attractive place to do business. It is to be hoped that the foreign branch and CFC reforms will further underpin this desire. Although unfortunate that the finalisation of CFC reform has been delayed by another year until 2012, hopefully that time will be well used to consult properly and to develop competitive, simple, workable rules.

The Government has stated its noble intention to achieve predictability, stability and simplicity in tax affairs, all of which ought to contribute to maintaining and improving the UK's competitiveness. It remains to be seen whether the independent Office of Tax Simplicity will be well used not only to ensure simplicity in the language of new legislation, but also to reduce the volume of tax legislation, rather than piling on more and more new legislation, to which we have become accustomed in recent years."

Paul Hale, Simmons & Simmons

(See Profile for Paul Hale.)

"The private equity industry is likely to be relieved by the limited increase in the rate of capital gains tax for higher earners, as there had been concerns that the UK would follow the US in seeking to tax carried interest as income rather than as capital gains. As entrepreneur relief, though increased to £5 million of lifetime gains, will not be available to many minority shareholders, there will be disappointment that, despite indications otherwise, the higher rate of CGT will apply to such business assets. A rate of capital gains tax significantly below the top rates of income tax (with a lower effective rate as a result of base cost shift in the case of carried interest) will probably represent an acceptable outcome in the circumstances."

Colin Hargreaves, Freshfields Bruckhaus Deringer

(See Profile for Colin Hargreaves.)

"Quite a lot here, a good deal of it held over from the March Budget. A few thoughts:

It's a bit surprising to see foreign branch reforms overtaking wider CFC reforms. For CFCs further interim measures (2011) are now built into the timetable before getting to something more predictable, stable and no doubt simple (2012). Wider corporation tax reform is hinted at, but without much in the way of detail, nor sign of getting much detail before the autumn.

The additional restriction on the proportion of reliefs that can be surrendered through a consortium relationship does not strike an obvious blow for predictability, stability and simplicity. This has the potential to affect a huge number of joint venture arrangements. If HMRC could say just what it is that's bothering them, then consultation could help to achieve an appropriately targeted change.

The rate change on CGT is well short of the 40% or 50% clobbering which had been mooted in some circles. It does make the extended entrepreneurs' relief relatively more significant. But that is no sop to the private equity industry as currently structured, since the 5% share ownership requirement will not normally be met.

The wider international effort on banks, targeting profits and remuneration, is labelled "Financial Activities Tax". If the arrangements can include something on "Compliance And Targeting" we could at least have a pleasing acronym."

David Harkness, Clifford Chance LLP

(See Profile for David Harkness.)

"The commitment to make the UK tax system more competitive has come at the right time. In some quarters the UK has gained a reputation as a hostile and unstable tax environment – recent corporate migrations being proof of this. In this context the decision to re-examine the CFC rules again is welcome.

The proposals for improving the way tax policy is made are long overdue and the goal of "predictability, stability and simplicity" chimes with the general CT competitiveness reforms. Tax competition is not just about lower rates but also a stable, certain tax environment.

Some commentators feared that the CT reform proposals would lead to a restriction or abolition of interest relief, but this has not happened - Italy and Germany have recently introduced such rules and they have tended to compound the issues already faced by companies struggling to survive in the current climate. Also, such a rules would severely damage the UK's competitiveness, so the Government have made the right call here.

The informal consultation on a GAAR is interesting. Although politically this makes good copy in practice workable GAARs are difficult to craft and inevitably will require a clearance system with the huge resources and uncertainty to business that it will create. Any GAAR proposal also runs counter to the Government's stated objective of a more competitive, simple and a predictable tax system. Maybe it is too early to say, but I can see the GAAR proposal being kicked into the long grass.

Further details on the Bank Levy will have to be carefully scrutinised. Issues include guarding against the risks of multiple taxation where other jurisdictions have similar rules which they apply to UK banking group's branches and ensuring there is a level playing field between UK banks and UK branches of foreign banks. It is also hard to see that this levy will encourage bank lending, crucial to the recovery. Perhaps the banks are an easy target and I worry that the levy could cause banks to relocate their operations which would be very unfortunate. Banks will also be waiting in anticipation for details of any tax on banks' profits or remuneration – the charmingly named FAT tax.

The outcome on CGT rates at least recognises that there is a point at which raising rates reduces revenue take. Generally this is an area to keep an eye on as the press release indicates that CGT rates will be looked at again in 2011.

The clarification of the tax treatment of capital distributions is very helpful. However, this is a complex area and all the consequences of the redrafting of the rules need to be considered – for example, by solving the issues for distributions from UK companies there appears to be a change in the tax treatment of distributions from non-UK companies.

It will be interesting to see if the intention to examine the SDLT rules on high value properties will lead to the introduction of SDLT on land-rich companies."

Julian Hickey, Lawrence Graham LLP

"The Chancellor has delivered a harsh and cold winter on entrepreneurs to tackle the deficit. While the increase in Capital Gains Tax (CGT) to 28% is not as draconian as many had expected, it will still have material ramifications for the UK’s highly-mobile entrepreneurs and HNWIs leaving the country. “Considering how complex our tax regime is already, the UK risks losing our competitive edge. The banks’ failure to lend means entrepreneurs are already being forced to use and risk their own capital and the CGT increase will act as a further disincentive. “A simplification of the tax codes, clamping down on wholly artificial tax planning and CGT exemptions for business assets should help to encourage these individuals to stay in the UK and to drive economic recovery."

Louise Higginbottom, Norton Rose LLP

"The initial reaction is relief; the headline changes are not as severe as anticipated, and the material changes are through rate adjustments, not regime change. However, a review of the background documents makes it clear that the next couple of years will bring many changes - a modernised corporate tax regime, a new process for dealing with tax policy changes and a new regime for "green" taxes. Consultative bodies will be in for a busy period."

Matthew Hodkin, Norton Rose LLP

"Banking levy

The Chancellor announced that he is still looking into a Financial Activities Tax on banks, but this cannot be introduced without international co-operation. The new bank levy that has been announced for the UK might work on a unilateral basis as it is based on the liabilities in the "UK" balance sheet of each bank. There are to be anti-avoidance provisions and, coming after the bank payroll tax, this will be another set of new rules for banks to become familiar with.

Transport

The Chancellor announced the coalition will look into changes to Air Passenger Duty, changing it from a per-passenger basis to a per-plane duty. This is the resurrection of an idea that was doing the rounds 18 months ago and then shelved. The key will be gearing the duty in a way that benefits greener aircraft. It will be interesting to see if this remains a priority as the coalition examines the options.

The decrease in rate of capital allowances might not generally be seen to support transport. However, many commentators anticipated capital allowances to be cut altogether, and so the move will be seen by many transport companies as a win, especially when coupled with the decrease in rate of corporation tax.

VAT

The increase should be put in the context of the rest of Europe. Setting Vat at 20% puts the UK in line with other big EU countries. France currently has VAT set at 19.6%, Germany at 19%, Italy at 20%, and Ireland at 21%. The Chancellor also ensured zero rated goods remained as such, which alleviates concerns people had that VAT could be imposed on food.

CGT

The Chancellor did what many expected him to do and raised CGT, but not to the extent that was predicted. The speculation in the run-up to the Budget may have softened the blow a little for many who were expecting bigger rises.

Increasing the lifetime gains qualifying for Entrepreneur’s Relief from £2m to £5m will be a popular move. It will take the vast majority of businesses outside the tax, and will make it more attractive for entrepreneurs to start up businesses."

Karen Hughes, Hogan Lovells International LLP

(See Profile for Karen Hughes.)

"The Red Book contained a number of the more interesting bits for our multi-national corporate clients. The summer certainly looks like being a busy period for consultation and discussions with businesses and advisers!

Of the provisions with more immediate effect, the reduction in corporation tax (as part of the review of the UK's competitiveness) is clearly to be welcomed.

The CGT changes were also not as bad as many feared. It was indeed a (pleasant) surprise to me that 28% is a number "similar or close to" 40/50%! And the retention of the 10% rate for entrepreneur's relief, as well as the increase in the lifetime limit, will please individual business owners."

Ian Hyde, Pinsent Masons LLP

"The increase in the rate of VAT will be a blow for retailers who will either have to increase their prices to cover the increase in VAT or accept a reduction in profit margins if they absorb the increase.

Exempt and partially exempt businesses such as financial services companies, universities and residential landlords which cannot recover any VAT that they incur will also suffer with the increased rate. For these businesses there will either be a 2.5% increase in their cost base or pressure on suppliers to hold down prices.

The UK has joined other EU member states including Greece, Hungary, Spain, Ireland, Finland and Portugal in increasing its VAT rate in recent months."

Peter Jackson, Taylor Wessing

"As expected, the rate of CGT was increased for higher and additional rate income tax payers with effect from 23 June. The top rate of 28% was lower than had been feared, but the key disappointment is that the increase was not accompanied by wider access to entrepreneurs' relief and an effective 10% rate of CGT. The increase in the threshold of aggregate lifetime chargeable gains to which entrepreneurs' relief may apply (from £2m to £5m) is welcome, but an opportunity has been missed to broaden eligibility for the relief to officers and employees holding shares in the employer that represent less than 5% of the voting rights or of the issued ordinary share capital. Extension of entrepreneurs' relief to all such employee shareholders would have complemented existing income tax reliefs on the award and exercise of EMI or approved share options and would have provided continuity of tax treatment with the business asset taper relief regime as it applied prior to its abolition in 2008. It is to be hoped that further reform of entrepreneurs' relief may be considered for 2011. In the meantime there may be increased interest in the use of fiscally transparent structures (e.g. LLPs) which confer on members an interest in underlying business assets to which entrepreneurs' relief may more readily apply.

The increase in the top rate of CGT is intended to discourage tax planning that relies on the conversion of income profits into chargeable gains, but the effect of the announced reductions in the main rate of corporation tax over the next four years to a main rate of 24% by 1 April 2014 will serve to focus attention on individual tax planning through adoption of corporate structures. Similarly, the increase in the rate of VAT from 17.5% to 20% with effect from 4 January 2011 will focus attention on strategies for mitigating irrecoverable input tax for the financial and other VAT exempt sectors but all such tax planning strategies may expect to be targeted by existing or new anti-avoidance legislation (including the possible introduction of a general anti-avoidance rule or "GAAR").

The proposed reforms to corporation tax are most welcome, particularly in relation to the contentious areas of taxation of foreign profits, IP rights and reform to the controlled foreign companies legislation. It is to be hoped that these reforms, once finalised, will make the UK a more attractive jurisdiction for undertaking business."

David Jervis, Eversheds LLP

"The phased reduction in corporation tax rates is welcome and should make the UK more competitive in Europe; the introduction of the bank levy could however make the UK less competitive for banks. It was unexpected that a co-ordinated approach with Germany and France would be adopted, although it remains to be seen what proposals will be put forward in France and Germany."

Geoffrey Kay, Baker & McKenzie

"Although the increase in the rate of capital gains tax is unwelcome, at 28% (and with the annual exemption being preserved) it was a softer blow than many had feared. Let us hope that the Chancellor's desire to avoid complexity by refusing to introduce indexation or taper relief is carried through into other areas. With a mid-year rate change, he failed to avoid all complexity, however.

The Budget itself was short on detail in relation to corporation tax reform, but the Government will consult further and the intends to introduce reform in a number of important areas: CFC rules; taxation of foreign branch profits; intellectual property taxation; research and development and other reforms designed to improve competitiveness of the UK tax system. All of which should keep business, professional advisers and the Government very busy over the months ahead."

Colin Kendon, Bird & Bird

"The increase in the fixed rate of CGT to 28% for 40%+ taxpayers will make SIPs more attractive (being the only tax favoured plan which exempts participants from CGT). The demand for loan notes in corporate transactions is likely to increase to allow EMI, CSOP and SAYE participants to mitigate the effect of the higher CGT rate. There was no announcement on geared growth arrangements which remain attractive for 50% taxpayers, indeed the net savings (after taking into account NIC and corporation tax) increase from nearly 6p in every £1 to over 10p as the rate of corporation tax diminishes to 24% in 2014/15."

Cliona Kirby, Olswang LLP

"The Chancellor took the unusual but expected step of increasing the CGT rate for higher rate tax payers to 28% with effect from midnight on Budget day (rather than the beginning of the next tax year). However, the CGT rate could have been worse and is balanced by the generous entrepreneurs' relief providing a flat 10% CGT rate on the first £5 million of qualifying gains. We were very disappointed that the video games tax relief was axed and that a relief aimed at keeping our growing and innovative games industry in the UK was described as "poorly targeted". We very much hope that Chancellor’s reference to “their longer term approach to intellectual property” and the “proposals on R&D in the Dyson report” will also benefit video games. Whilst we welcome the attractive lower rates of corporation tax, we consider that in order to make the UK a hub for the creative industries a much lower rate of corporation tax targeted at intellectual property should be introduced (as is the case in other jurisdictions such as Ireland)".

Daniel Lewin, Kaye Scholer LLP

"As expected, there are a number of tough measures in the Budget, not all of which will be popular, but the straight-forwardness of many of the measures is a positive compared to the complexities we had become used to in more recent Budgets. Raising the maximum capital gains tax rate to 28% was obviously not as high as feared, which is relatively good news for the asset management industry given the pre-Budget announcements, although the increased VAT rate will add cost to some managers and with a 28% capital gains tax rate, we are now at the higher end of our peer jurisdictions."

Andrew Loan, Macfarlanes

"The rate of CGT was increased less than had been widely feared in this “tough but fair” Budget, avoiding the complexities of taper relief and indexation. Bringing the change into effect immediately also avoids the need for anti-forestalling measures. With the significant extension of entrepreneurs relief making a lower rate of CGT available on the first £5 million of business gains, the Chancellor has attempted to strike a balance between encouraging entrepreneurial investment and discouraging tax planning to shift income into capital gains."

Patrick Mears, Allen & Overy LLP

(See Profile for Patrick Mears.)

"The Exchequer Secretary to the Treasury in his foreword to the Budget "Tax Policy Making: a New Approach" consultative document in effect accepts that the UK corporation tax system, and policy making behind that system, has not created predictability, stability or simplicity. The Government is promising to shape a new approach to tax policy making, and to "create the most competitive tax system in the G20". I hope they will succeed.

It is this fresh look at the cohesiveness of the UK corporation tax system, acceptance that reforms are needed and that consultation is necessary, and the promise of a detailed programme for reform being set out in the autumn which offers encouragement to those of us who would not only like the UK to have a competitive tax system, but also a tax system of which we can be proud.

I am having trouble reading between the lines on some of the Budget material. Is the reference to considering a GAAR more than a sop to the hard line anti-avoiderists? If it is, at least the Policy Making consultative document suggests the case for developing a GAAR will take account of the proposals for corporate tax reform.

The Budget will probably leave those who migrated from the UK feeling vindicated, leave those contemplating migration firmly on the fence, and leave those contemplating moving to the UK interested in hearing more. The UK's outdated CFC regime has been a key motivator for migrations from the UK. Although some, unspecified interim improvements to the CFC regime are promised for spring 2011, the much needed wider reform is now pushed back to 2012."

Jennie Newton, Pinsent Masons LLP

"The emergency budget contained changes to a number of rules which will affect individual investors in the real estate sector. Most obviously, the immediate CGT increase for higher rate taxpayers to 28% (not the 40-50% feared) will impact on property investment profits just as the commercial property sector was showing signs of life. Collective investment schemes to take advantage of Business Property Renovation Allowances have survived for the time being, although this relief expires in 2012 anyway.

No further changes were made to SDLT, although January 2011’s VAT increase to 20% will increase the SDLT bill and overall cost of acquiring a VAT-opted or standard-rated property. The Government has not ruled out attacking SDLT planning structures on high value property transactions in the future, but for the moment existing structures are still available. Overall, individual investors in real estate are not immune as the Chancellor looks to high earners and profitable private sector businesses to shoulder the burden of repaying Britain’s debt."

Peter Nias, McDermott, Will & Emery UK LLP

"I was pleased to see the new Government wants to continue and expand the previous Government's initiative of improving the competiveness of the UK fiscal regime. The reduction over 4 years to 24% of our corporation rate without too much damage - just a further timing delay - in relief for capital expenditure is very welcome and there was no sign - as rumoured - of paying for this reduction with restrictions on interest deductibility. They have committed to introduce from 2011 the long awaited CFC reforms and related branch taxation following further consultation over the summer although there was a hint that this would be introduced on a phased basis. So far so good."

Graeme Nuttall, Field Fisher Waterhouse

(See Profile for Graeme Nuttall.)

"The confusing capital gains tax (CGT) regime for employee shareholders continues and is now even more complicated to explain (and justify) to plan participants. Parts of the regime work well. The favourable CGT treatment for shares in a share incentive plan continues. The £10,100 annual exemption remains, and benefits many employee shareholders. It helps to know this exemption will rise annually with inflation. An employee with a 5% or more shareholding in his or her company will be very relieved that entrepreneurs' relief remains in place to provide a 10% effective rate of CGT. But, employees who fall between these provisions will now be paying 18% and/or the new 28% rate on gains. This discriminatory part of the regime needs changing. Entrepreneurs' relief should be extended by removing the 5% or more threshold for employee shareholders, and any period holding a tax advantaged option should count towards the 12 months ownership requirement. This would send a clear message that the Coalition Government is serious about encouraging and rewarding employee share ownership."

Mathew Oliver, Bird & Bird

"I thought overall that the budget was a fair attempt to deal with the deficit. The sad truth is that if the Government wants to raise substantial additional amounts in tax it has to look at either an increase in VAT or basic rate income tax and increasing VAT must be the lesser of two evils. I can understand why CGT rates had to increase, but would have thought that the 22% differential between the higher rate of income tax and CGT (or more if one takes into account NICs) is not going to stop avoidance activity in this area. Maybe that's why they're suggesting a GAAR - although I had hoped we had seen the back of this.

On the plus side, the corporation tax measures were on the whole promising, although clearly high spenders on plant and machinery will lose out. Additionally, the proposed consultation on IP and R&D in light of the Dyson Review is good news, particularly if it results in a better more user friendly R&D tax credit system and an IP regime that is of wider application and more immediate benefit than the current patent box proposals. The proposals for reform of corporation tax, related consultation forum and Office of Tax Simplification all seem like a good idea provided that the end result is less not more regulation. It seems ironic however that this should be proposed immediately after the rewrite of the Corporation Tax Acts."

David Pett, Pett Franklin & Co. LLP

(See Profile for David Pett.)

"No exception from the application of the higher rate charge to CGT has been made for gains realised upon the disposal of, or of interests in, employment-related securities - employee shares are treated in the same way as any other chargeable assets.

This reduces the attraction of CSOP and EMI share options, although many employees holding SAYE options will still expect to avoid paying CGT on gains when option shares are sold at least to the extent that such gains fall within the £10,100 Annual Exempt Amount (the “AEA”).

Nevertheless, CSOP, SAYE and EMI share options still remain attractive even at the new CGT rate of 28% when compared with an effective rate of income tax plus employers’/employees NICs on unapproved option gains, of 58.9% (for 2011-12), assuming a full transfer to the employee of the employers’ NICs.

The fact that CT rates are to be reduced is likely to make it more worthwhile for an employer company to transfer to an employee optionholder the burden of employers’ 13.8% NICs (from 2011-12).

Existing EMI share option holders, whose gains are in excess of the AEA are significantly worse off than when the EMI regime was first introduced in 2000 : with the benefit of time running from the date of grant for taper relief purposes, the effective rate of CGT was commonly as low as 10%. From 2008 until today, it was a flat rate of 18%. Now it is 28%. This may create a tension within those smaller, high-growth, companies (at which the EMI regime was aimed) who have attracted senior employees from safer and higher paid employment in larger companies with the prospect that will instead have the opportunity to benefit from growth in value subject to tax at relatively low rates. These are, after all, the companies expected to be at the heart of the economic recovery!

Sadly though, no changes to the existing tax treatment of SIPs have been announced. It would take only a small change – removal of the risk of a penal clawback if the company is sold within 3 years – for SIPs to become very much more attractive as a tool for promoting employee share ownership in smaller and privately-owned companies (in particular).

The attraction of Joint share Ownership Plans, relative to unapproved share options/LTIPs, is reduced – having regard to the increased rate of CGT and the lack of any CT relief for the gain realised by the employee – but they remain an attractive incentive arrangements in those cases in which significant growth in value is anticipated (albeit not guaranteed !).

Hidden in the “small print” is a confirmation that the consultation, announced in March 2010 on the taxation of “geared growth” schemes (which includes the JSOP), is being undertaken during this year. However, there is a subtle change in the wording describing its purpose : the aim is now “...to develop proposals to ensure that employment income from employment-related securities is subject to income tax and NICs.” [Emphasis added]. The earlier announcement referred to “...[ensuring] employment income is subject to correct tax and NICs”. Are we just becoming paranoid....?"

Jonathan Richards, Linklaters

"Two points that strike me about the Budget are:

The private equity industry will not like the CGT rate rise, but they might start trying to adopt structures that benefit from entrepreneurs' relief. That relief is now much more valuable than it was previously and, if it can be accommodated in private equity structures, you might even see some executives paying less CGT than they did under the old rules.
UK headed banking groups with significant overseas operations appear to be subject to the banking levy on the entirety of their capital whereas if they had a non-UK holding company they might be subject to the levy only on liabilities relating to UK operations. Whether that is enough of an incentive for banks in this position to restructure themselves remains to be seen, but it is odd that the levy should discriminate so substantially against groups with a UK parent company."

Catherine Robins, Pinsent Masons LLP

"The increase in the rate of capital gains tax to 28% is somewhat lower than the increase which had been expected in some quarters (a headline rate of 40% or even 50% had been rumoured), which will come as a relief to many. The extension in the lifetime limit for entrepreneur's relief to £5m of lifetime gains is welcome but there is still no relaxation in the strict qualifying criteria for entrepreneurs’ relief. Specifically, despite lobbying from the private equity sector, shares will still only qualify if they are held in a 'trading company', and the shareholder is an employee with a holding of at least 5%. This will be disappointing news for many management shareholders, and also 'carried interest' holders, who frequently do not meet the 5% qualifying condition, as there had been hopes of a more thorough overhaul of the regime.

On the other hand, however, owners of assets such as property investments, which would generally not qualify for entrepreneur's relief, will be relieved that they have not suffered a higher increase in their liabilities."

Charlotte Sallabank, Jones Day

(See Profile for Charlotte Sallabank.)

"Abolition of 18% rate for capital gains as expected. The fact that the Chancellor rejected calls for a tapering or indexation relief will increase the simplicity of the system but the extension of entrepreneurs' relief to the first £5m of lifetime gains does not live up to the "generous reliefs for entrepreneurs" announced before the budget. The alchemy of income into capital is still likey to be studied keenly, as 28% is more attractive than 50% plus NI. There is surprisingly little specific anti-avoidance legislation, presumably because of yet another consultation on a GAAR. The Chancellor's claim that the phased reduction in corporation tax rate to 24% shows Britain "is open for business" may prove to be a vain hope in view of the attendant uncertainty a GAAR is likey to generate. No doubt HMRC will be pleased that the further reduction in the rate of capital allowances renders tax structured leasing transactions even less worthwhile."

Iain Scoon, Shearman & Sterling (London) LLP

(See Profile for Iain Scoon.)

"It is difficult to remember the last time when a Chancellor took so much credit for repeating announcements already made, gave away little or no detail on a number of things that are still to happen (and are likely to have a significant impact), put up taxes in a significant way, and yet still came away smelling of roses. It remains to be seen whether there will be positive developments on CFCs, the taxation of foreign profits, and the other changes that have been ongoing for some time. Let us also hope that only lip service continues to be paid to the introduction of a GAAR."

Martin Shah, Simmons & Simmons

(See Profile for Martin Shah.)

"In relation to the joint HM Treasury and HMRC discussion document on a "new approach" to tax policy, the focus on increased transparency in policy making is important, though clearly there must be caveats - for example, the proposed commitments around consultation would fall away in the case of revenue protection measures or where there is a significant forestalling risk. That said, any steps to respond to the frequent criticisms of the complexity of the UK's tax system, and the adverse consequences this has both for business and individuals, are welcome."

Mark Sheiham, Simmons & Simmons

"The bank levy is a thinly veiled revenue raising device, intended to capitalise on the current negative public sentiment regarding banks, towards reduction of the deficit. Despite a liberal smattering of references to a wider objective to better regulate the banking sector and prevent future collapses, the bank levy makes little serious attempt to measure effectively or tax the level of systemic risk any particular bank might give rise to. Similarly, despite the rhetoric of making the institutions who benefited from a public bail-out contribute towards its cost, the levy applies regardless of how much (or indeed whether any) public funding was received. The banking sector appears largely to have accepted the levy - not so much out of any inherent merit, but more because it is considered to be less detrimental to the UK's financial sector than other alternatives, such as a financial transaction tax."

Rupert Shiers, McGrigors LLP

(See Profile for Rupert Shiers.)

"The New Labour administration was characterised by an explosion in the length of the UK tax legislation. That explosion has also led to serious confusions of policy in the legislation. Where policy is confused, loopholes and disputes arise. In the Emergency Budget announced today 22 June 2010, Chancellor George Osborne announced a number of measures to deal with and close down tax avoidance. However, unlike recent Budgets and pre-Budget reports, today's announcements reflect what may be a much more measured approach to controlling tax avoidance. If HMRC and the Treasury follow through on this in years to come, this could mean real simplification for the tax system and ultimately a reduction in UK tax disputes.

Rather than introducing yet more legislation to try to prevent taxpayers skipping from income to capital, today's Budget simply reduces the incentive to do so by closing down the very significant gap in the maximum rates charged on income and on capital gains. The Chancellor's speech rightly referred specifically to "avoidance activity that has exploited the wider gap between the rate of capital gains tax and the top rates of income tax". With ongoing legislative reform, the Government committed to making sure that there is "time to consider carefully" how to make the rules robust. Perhaps most importantly, a document entitled "Tax policy making: a new approach" emphasises a commitment to a wholesale change in the approach to passing new legislation, probably including a much slower timetable and substantially more Parliamentary scrutiny. More ambitiously, it also discusses the need for clear policy in new legislation, the prospect of a principles-based approach and possibly even a GAAR.

Few people will have real enthusiasm for yet another rewrite with the work of Tax Law Rewrite Committee barely complete. But noone can deny that the legislation has become horribly confused in the last twelve years. If the coalition is willing to spend time making sure that new legislation actually works and incentives for avoidance are removed, and with HMRC's ongoing commitment to stop disputes arising and close them down quickly, then we might just get the competitive tax system that this country so badly needs."

Greg Sinfield, Hogan Lovells International LLP

(See Profile for Greg Sinfield.)

"I think that 20% is the right rate for VAT as it is still just below the EU average and the commitment to retain the UK's extensive zero-rating on everyday essentials means that VAT is, to some extent, a progressive tax. The increase is likely to costs each household around £480 a year on average and deferring the increase until 4 January 2011 is a smart move because it will encourage people to spend from now until Christmas giving the economy (and retailers in particular) a little boost. That may mean that the New Year sales in January are not going to be very exciting for retailers. I do not foresee any further increases in the standard rate of VAT above 20% in this Parliament nor do I believe that a luxury rate is likely (though we have had one in the past). The Chancellor only promised to keep zero-rating for "everyday essentials such as food and children’s clothing, as well as other zero-rated items like newspapers and printed books" for the life of this Parliament but that leaves other zero-rated items that are not protected by EU law or ministerial statement and which could be taxed. I would not be surprised to see construction and supply of houses and buildings used for residential and charitable purposes brought within the reduced rate of 5%. Some transport services could also be subject to the reduced rate at a later stage.

The increase in the IPT standard rate was very modest and it could have gone up more (eg 7.5% or even 10%) as the UK is still behind most EU states in this area. The insurance industry has done a good job persuading Government that a substantial increase in IPT would force some people to stop buying insurance. Nevertheless, an increase in IPT to 10% could produce an additional £2.3 billion and the Government might think that it would be unlikely to change people's spending on insurance if introduced gradually. I think that it is very unlikely to be the last increase in IPT in this Parliament.

In relation to excise duty, the big news is that the planned increase to cider duty has been scrapped (although the last administration had indicated that it was having second thoughts about the increase). This is clearly an attempt to make the tax increases and benefit cuts more acceptable to the cider drinking community (or even imperceptible if you drink enough scrumpy)."

Simon Skinner, Travers Smith

"Outside the VAT rate rise, the chief revenue raising measure of course, the tax announcement likely to gather most column inches will be the changes to CGT. Many investors will be relieved that the rate is not higher, and it remains materially lower than that for dividends, let alone ordinary income, although there will be disappointment at its immediate effect.

In many ways, the CGT changes strike a sensible balance. It seems unlikely investors will desert the UK en masse by reason of that rate (even if the UK starts to look pretty uncompetitive in terms of CGT alone), and it goes a long way to reducing the (probably unsustainable) gap between the rates of tax on income and capital. The absence of indexation and taper is a shame but unsurprising, and the immediate implementation while somewhat harsh addresses concerns over the impact an April deadline would have on the housing market. Critics may question whether the extension to entrepreneur's relief really adds up to "generous exemptions for entrepreneurial activity" as originally billed, but this approach at least avoids potential conflict in the Coalition on which areas deserve lower rates of CGT (buy-to-let, second homes?).

There are some other reasonable criticisms, though. With the importance of "predictability" and "stability" emphasised elsewhere in the Budget, the refusal to rule out a CGT rate change in the next Budget stands out; non-doms will be weary of facing yet another review; and the shadow of the "geared growth" consultation looms large over CGT on employment-related securities."

Nicholas Stretch, CMS Cameron McKenna

(See Profile for Nicholas Stretch.)

"Those paying basic rate tax will in effect continue to pay capital gains tax at 18% but income tax at 20%. Those on higher rate income tax will in effect pay income tax at 40% or 50% but capital gains at 28%. Each kind of taxpayer though can have up to £10,100 in tax free capital gains before tax is payable. Capital gains tax treatment therefore still supports employee share schemes, particularly for wealthier taxpayers, but just not as much as it did, and maybe it was unrealistic to expect the differential to remain. I think that spouse transfer will now become much more extensive, particularly with a non-earning spouse. In addition to accessing the other spouse's annual exemption, it would now make sense to access the lower rate of capital gains that spouse can enjoy on £37,400 of gains which could lead to an approximate overall £5,000 saving in tax.

What is just as interesting is that the supporting Budget papers mention that this Government is continuing with two reviews announced by the previous Government - one of geared growth schemes where employees are rewarded using shares which will possibly include Joint Share Ownership Plans and other similar arrangements and the other a review of arrangements which use employee trusts for indirect remuneration purposes, where the Revenue have had mixed success in litigation under the current law. If followed through, these are much more likely to change practices at the more adventurous end of remuneration planning although have less impact on the more standard arrangements for quoted companies.

Overall, however, there is a sense of relief. We could have been waking up today to a reduced annual exemption or an exemption that didn't apply to higher rate taxpayers and worse still a standard rate of cgt of 40% or even 50% for wealthier taxpayers - and while practitioners would have been shocked and a major workstream for practitioners in our area would suddenly disappear, there would probably have been a very happy public."

Richard Sultman, Cleary Gottlieb Steen & Hamilton LLP

"This is a Budget that is high on political impact but when it comes to the detail on proposals for business is more of a trailer for things to follow over the next few months. Corporation tax reform, CFC and foreign branch reform and employment related securities proposals are some of the main measures which many in the corporate sector will be keen to hear more about. The new approach to tax policy making is one of the more welcome items -- in the current environment, predictability, stability and simplicity are admirable and important objectives and we should all hope that sufficient effort is made to ensure that they can be delivered."

David Taylor, Freshfields Bruckhaus Deringer

(See profile for David Taylor.)

"Unusually difficult to find all the relevant announcements, which is probably explained by the hurried nature of the process. For example, the “Tax policy making” document tells us that the new policy making approach will be applied to “the major reform of the corporate tax regime set out in the Budget” but it is quite hard to find what it is that is set out. There are some specific changes of course and some comments made that have been well trailed in advance (broad base, lower rate, more territorial approach, etc.) but the impression remains that in the autumn (when a detailed programme should actually be provided) there will be rather more to it than was actually laid out in the Budget announcements.

Bank levy seems not to be as bad as it might have been, though with the possibility of more to come (a possible further tax on profits and pay, following the IMF lead). The CGT change seems fairly simple; perhaps surprisingly it is not as bad for private investors as feared but is worse than expected for many owners of business assets."

Eloise Walker, Pinsent Masons LLP

"One would have to be castaway on the oceans to have missed the anticipated bank levy or the rise in CGT rates yesterday, but of wider ranging interest to corporates may be the announcement that the government are going to have another go at a general anti-avoidance rule (GAAR). HMRC's attempts to introduce a GAAR have thus far met with considerable opposition and it is to be hoped such will prove to be the case here; although GAARs are a great idea in theory, one worries that in practice they do tend to hit innocent transactions with a compliance burden out of proportion to their intended targets.

In among the good news and bad is also a mixed bag for corporate tax reform. Among the key announcements was a phased reduction in the corporation tax rate, which will be good news for most sectors (albeit funded by reductions in capital allowances). An overhaul of the Controlled Foreign Company (CFC) rules by spring 2012 is also promised. Given the (very) slow progress to date on CFC reform, it's somewhat disappointing that we're going to have to wait another two years for this to bed down into new rules. It's good to take the time to do the thing properly, but the further delay will particularly hit the UK's attractiveness as a holding company jurisdiction, which has suffered over the last few years from lack of stability and certainty in the UK tax treatment of global groups."

Neil Warriner, Herbert Smith

(See Profile for Neil Warriner.)

"Overall, yesterday's Budget will have come as no surprise to business, but the items of more interest will be those that were left for further discussion. Business will want to ensure that it is involved in these matters, for example, the further discussions on CFCs, IP and branches.

The phased reduction in the rate of corporation tax, the reduction in the rates of capital allowances and the increase in the standard rate of VAT were all anticipated, and the Bank levy was also well publicised in the run up to the Budget.

It is, perhaps, a pity that the VAT rate increase will come into effect on 4th January 2011 after the logistical issues that caused difficulties for businesses, particularly retailers, the last time. It might have been better if a date had been chosen that would have been in a less busy trading period.

Much remains to be seen - one senses a sword of Damacles hanging somewhere, but it would appear from yesterday that it is not hanging over business."

Neil Woodgate, White & Case LLP

(See Profile for Neil Woodgate.)

"The Big Tax Headlines speak for themselves, but leading tax practitioners will welcome the spirit and intendment of the new approach to tax legislation proclaimed in the “Tax policy making: the new approach”: personally, I should like to see more emphasis on clarity of policy in relation to, say, “tax rerecognition” and whether the corporate profits tax base “follows the accounts” (or not) and why, not another go at GAAR. (Can’t we just derecognise this idea now?)

On a very particular level, I plead for clarification sooner rather than later of the new, EU inspired definition of “qualifying aircraft”: many overseas clients are currently confused and clearer clues as to how this will all work in the context of tiered, cross-border leasing arrangements would be good."

Simon Yates, Travers Smith

"Amidst all the economic gloom, and the widely-trailed increases in VAT and CGT, there was better news on the corporation tax front. The headline rate is to be cut by 1% a year over the next four years, funded in part by 2% reductions in the rates of capital allowances from 2012 (mercifully not the wholesale abolition of allowances which the Tories had floated in opposition). Whilst in some ways this smacks of a budget airline approach to tax policy - get the headline price down, but pile on the hidden costs - the drive to reduce the rate must be welcome.

Proper details of the five year roadmap for corporation tax reform - "the most fundamental and far-reaching reform of our corporate tax regime in generations", according to the Chancellor - must wait until autumn. But there is a commitment to getting the new CFC regime in place in 2012, with interim changes in 2011, and encouraging noises on IP and R&D. Time will tell, but the mood music is good. Also encouraging is the consultation document on tax policy making.

In its later years the last government provided all too many examples of the dangers of creating policy in haste and repenting at leisure. Suggestions of full consultation, and even a minimum three months' notice of non-anti-avoidance changes, are all terrific news if actually implemented. Again, fingers crossed.

Finally, a general anti-avoidance rule makes its once-a-government return to the tax policy agenda. Doubtless the Liberals are keener than most to try and get this off the ground, but in the past the costs and bureaucracy associated with the inevitable clearance procedure have always killed the idea, and especially with spending so tight it will be surprising if the same doesn't happen again."

June 2010 Budget: the second half | Practical Law