June 2010 Budget: construction implications

Practical Law UK Legal Update 0-502-5750 (Approx. 7 pages)

June 2010 Budget: construction implications

by PLC Construction

Overview of the June 2010 Budget

The June 2010 Budget sets out the Chancellor, George Osborne's, five-year plan to rebuild the economy and reduce the budget deficit.

This note looks at areas of primary interest to construction and engineering lawyers. For a full analysis of all other aspects, see Legal updates:

Building Schools for the Future

The June 2010 Budget did not mention the Building Schools for the Future (BSF) programme (which is a long-term programme for investment in England's secondary schools). As such, the programme looks likely to survive, at least until the comprehensive spending review, announced to take place on 20 October 2010. (For more information on BSF, see Practice note, Building Schools for the Future.)

Capital allowances: writing down allowances and annual investment allowance reduced

The June 2010 Budget announced that:

From 1 April 2012 (for corporation tax) and 6 April 2012 (for income tax), the annual rate of writing down allowances (WDAs) for both new and unrelieved expenditure on plant and machinery will be reduced to 18% (from 20%) and the annual rate for special rate pool expenditure will be reduced to 8% (from 10%).
From 2012, the maximum annual investment allowance will be reduced to £25,000 (the maximum was increased from £50,000 to £100,000 by section 5 of the Finance Act 2010).

The legislation for this will be included in a forthcoming Finance Bill. These changes do not apply to oil and gas ring-fenced activities.

The reduced rate of WDAs will have some impact on construction and engineering organisations, particularly those whose activities require heavy investment in plant and machinery. In some cases, the detrimental effect of this reduction will offset the beneficial tax changes elsewhere in the June 2010 Budget. However, there will be widespread relief that the cuts are smaller than predicted by some commentators.

Capital spending

The June 2010 Budget announced that there will be no further cuts in public sector gross investment. Instead the government will undertake a fundamental review of all capital spending plans to ensure that the plans are affordable and to identify the areas of spending that will achieve the greatest economic returns. That said, further cuts seem likely, as there will have to be £26 billion of savings by 2013/14.

Given the level of public sector construction procurement (some reports suggest it is as high as 40% of industry activity), that will impact considerably on the industry and its likely economic recovery.

Industry reaction: capital spending

Graham Kean, EC Harris:

"It was fantastic to see capital projects figures so early in the speech, and that this government recognises the broader benefits from properly targeted programmes of work it is up to us now to deliver…"

Commitment to infrastructure projects, including Infrastructure UK

The June 2010 Budget confirmed the establishment of Infrastructure UK (IUK) to lead work within HM Treasury on:

Enabling greater private sector investment in infrastructure.
Improving the government's long-term planning and delivery of infrastructure.
Investigating how to reduce the cost of delivery of civil engineering works for major infrastructure projects. The investigation will be led by, Terry Hill, Chair of Transport Market, Arup.

In autumn 2010, the government will publish a national infrastructure plan that will set out goals for UK infrastructure. (For more information on IUK and the strategy, see Legal update, March 2010 Budget: Strategy for national infrastructure.)

The June 2010 Budget also announced funding pledges to regional transport schemes, including the Tyne and Wear metro upgrade, the extension of the Manchester Metrolink, and the redevelopment of Birmingham New Street rail station. The government confirmed it was also committed to the improvement programmes for the rail lines to Sheffield and between Liverpool and Leeds.

Landfill tax and aggregates levy

The June 2010 Budget confirmed that (as announced in the March 2010 Budget):

The standard rate of landfill tax will increase by £8 per tonne each year from 1 April 2011, until at least 2014. There will also be a floor under the standard rate so that this rate will not fall below £80 per tonne from April 2014, until at least 2020. (For more information, see Practice note, Landfill tax.)
The rate of aggregates levy will increase from £2 per tonne to £2.10 per tonne on 1 April 2011. (For more information, see Practice note, Aggregates levy.)

Regional growth fund

The June 2010 Budget announced plans to set up a regional growth fund to provide finance for regional capital projects over the next two years, 2011-2013. This fund will be used to help areas and communities particularly affected by reductions in public spending and will operate in England only. The fund will support increases in business employment and economic growth. The Scottish government and Welsh Assembly government will be encouraged to undertake similar action.

In summer 2010, the government will publish a white paper setting out its plans for a new approach to sub-national growth.

Regulations

The June 2010 Budget announced a "one-in-one-out" policy for new regulations. This is potentially confusing. For example, it is not clear whether this new rule is intended to apply to the Building Regulations 2000 changes expected in October 2010. (For more information on those changes, see Legal update, Building Regulations 2000: changes to Parts F, G, J and L.)

SDLT rates and first-time buyer relief

The June 2010 Budget has confirmed that a new SDLT rate of 5% for purchases of residential property, where the consideration exceeds £1 million, will take effect on 6 April 2011. The new rate was announced in the March 2010 Budget. The previous highest rate was 4% for purchases where the consideration exceeds £500,000. All other SDLT rates and thresholds remain unchanged.

In the June 2010 Budget, the new government also said that it will review first-time buyer relief, taking into account its impact on affordability and value for money. (In the March 2010 Budget, the former Labour government announced the introduction of SDLT relief for first-time buyers of residential property where the consideration does not exceed £250,000.)

Industry reaction: SDLT and first-time buyer relief

Imtiaz Farookhi, chief executive, National House Building Council (NHBC)

"The budget is tough but not at the extreme end of tough. The real issue is the impact of public sector cuts on unemployment and the knock on effect on the economy... The housing recovery is very fragile and we have to keep it on track. It would have been nice to hear some mention of the importance of housing, affordable housing and housing numbers."

Steve Turner, Home Builders Federation

"There was nothing that stood out as particularly bad and there was some relief that the Lib Dems suggestion of putting VAT onto new build houses, hasn’t happened. We will be awaiting further separate announcements on schemes like Kickstart over the next few weeks."

VAT rise to 20%

The June 2010 Budget announced that from 4 January 2011, the standard rate of VAT will rise from 17.5% to 20%. Zero rated and exempt supplies will be unaffected by the change.

Industry reaction: VAT rise to 20%

Richard Diment, Director General, The Federation of Master Builders (FMB)

"Cash strapped homeowners will be more likely to resort to 'cash-in-hand' traders in order to avoid adding 20 percent to the cost of keeping their home in good condition. This in turn will leave homeowners more vulnerable to being ripped off or having sub-standard work done on their home."

Ian Hyde, a tax partner at Pinsent Masons

"For the construction industry this will have an impact on any business supplying VAT exempt and partially exempt businesses such as financial services companies, universities and residential landlords. These sectors cannot recover any VAT that they incur and so will resist price increases."

Graham Watts, Construction Industry Council (CIC) chief executive

"This will impact on the retrofitting of buildings. It will cost people even more to bring offices and houses up to scratch."

Comment

Like all other sectors, the construction and engineering industry has been forced to accept its share of the pain that is necessary to reduce the structural deficit. In that context, there seems an air of resignation in the industry's reaction to some of the specific measures announced in the June 2010 Budget. However, two overarching concerns have emerged:

A widespread sense that increased taxation, especially in the form of VAT, will restrict the amount of privately funded work in the construction and engineering sector. Major contractors may feel the impact of changes to capital allowances, even if this is balanced (to some extent) by the promise of reduced corporation tax.
A sense that decisions about public sector spending have been postponed, with the real possibility of major initiatives (such as the BSF programme) being axed on 20 October 2010, as part of the comprehensive spending review.

Despite this, there are positive steps that may help the construction and engineering industry, such as the government's announcements about Infrastructure UK and the regional growth fund. However, the actual impact of such schemes remains to be seen.

June 2010 Budget: construction implications | Practical Law