June 2010 Budget: predictions

Practical Law UK Legal Update 1-502-4948 (Approx. 14 pages)

June 2010 Budget: predictions

by PLC Tax

Racing certainties: measures we expect to be in the June 2010 Budget

These are tax measures which the government has already announced in the final coalition agreement or the Queen's speech.

Topic	What can we expect in the Budget?
Anti-avoidance Legal update, Tax under coalition government set to include big rise in CGT rate Legal update, HMRC targets SDLT sub-sale avoidance schemes	All Budgets include some anti-avoidance measures and this one is unlikely to be an exception. There may be further development of Liberal Democrat proposals, including a new general anti-avoidance rule for corporation tax, preventing the avoidance of stamp duty land tax (SDLT) through the use of offshore structures and additional HMRC staff resources to tackle income tax avoidance. HMRC may also publish further "Spotlights" on tax avoidance arrangements which they believe to be ineffective.
Bank levy Legal update, Tax under coalition government set to include big rise in CGT rate: CGT changes: implications and planning possibilities	An announcement is expected in the Budget. The G20 has dropped its support for a bank levy, although the European Council has agreed that EU member states should introduce levies and taxes on financial institutions to ensure fair burden-sharing and to set incentives to contain systemic risk (see EU business: EU agrees to introduce bank taxes (17 June 2010)). George Osborne has said that the UK will go ahead with a unilateral levy (see Legal update, News round-up to 8 June 2010: G20 abandons multilateral banking levy but UK presses on and HM Treasury: "Mansion House" speech (16 June 2010)).
Capital gains tax Legal update, Tax under coalition government set to include big rise in CGT rate: CGT changes: implications and planning possibilities Legal update, Coalition agreement final version: further tax measures Legal update, Queen's Speech 2010: tax implications	The final coalition agreement stated that capital gains on non-business assets are to be taxed at rates similar to income tax rates, with exemptions for entrepreneurial business activities. Subsequent statements suggest that the rate may not go as high as 40% (or 50%) but simply move "closer" to income tax rates, that short-term gains may be taxed at a higher rate than long-term gains and that there may be other exemptions and/or lower rates for employee shareholders and those of retirement age (see Legal update, News round-up to 8 June 2010: Political wrangling continues over CGT). More detail is expected in the Budget on the rates, the exemptions and the timing of the change. There may also be a reduction in the capital gains tax (CGT) annual exemption (currently £10,100), as the Liberal Democrats have in the past proposed reducing it to £2,000.
Corporation tax rates and allowances Legal update, Coalition agreement final version: further tax measures Legal update, Queen's Speech 2010: tax implications	Possible reduction in main corporation tax rate as this was a manifesto commitment for both parties and also mentioned in the final coalition agreement and the Queen's speech. May be accompanied by restrictions on capital allowances, although manufacturing industries will be protected. Rate changes may be deferred however, as the final coalition agreement plays down the likelihood of immediate tax cuts.
Corporation tax reform Legal update, Coalition agreement final version: further tax measures	The Budget is expected to include a five year programme of corporation tax reform. The programme is likely to include the Conservative's manifesto commitment to consult on moving towards a territorial corporate tax system that only taxes profits generated in the UK. It may also include changes to the controlled foreign company (CFC) regime, on which the previous government consulted extensively (see Legal update, Government publishes CFC discussion document with a view to legislation in Finance Act 2011: full update), as George Osborne has pledged to the Confederation of British Industry (CBI) that the CFC rules will be reformed. It is also possible that this project will consider the changes proposed earlier this year to the chargeable gains rules for groups of companies, see Legal update, Consultation document on chargeable gains rules for corporate groups. There may also be more detail about the role of the Office of Tax Simplification.
Environmental tax measures Legal update, Tax under coalition government set to include big rise in CGT rate	The final coalition agreement stated that air passenger duty will be replaced by a "per plane" or "per flight" duty. The Budget may contain further details. The agreement also included a pledge to increase the proportion of tax revenue accounted for by environmental taxes, so there may be further environmental tax announcements, including reform of climate change levy to penalise electricity production from fossil fuel, as this was a Conservative manifesto commitment. (For background, see Practice note, Climate change levy and climate change agreements.)
Furnished holiday lettings Legal update, Coalition agreement final version: further tax measures For background, see Legal update, 2009 Pre-Budget Report: key business tax announcements: Withdrawal of furnished holiday lettings tax treatment from April 2010	Legislation withdrawing furnished holiday lettings relief was dropped from the Finance Act 2010. The final coalition agreement stated that the government is committed to making the rules compliant with EU law without penalising UK-based businesses. Further details may be published in the Budget.
Income tax personal allowance Legal update, Tax under coalition government set to include big rise in CGT rate	The final coalition agreement promised a substantial increase from April 2011, with the benefit focused on those on lower and middle incomes. The long term objective is to raise the personal allowance to £10,000. The Budget is expected to contain details of the April 2011 increase and possibly detail about how and when the personal allowance will increase to £10,000.
Inheritance tax threshold Legal update, Tax under coalition government set to include big rise in CGT rate	The Conservatives proposed an increase in their manifesto but the final coalition agreement stated that tax cuts are not a high priority. It is possible that an increase may be announced in the Budget, but its implementation is unlikely to be immediate.
National Insurance contributions Legal update, Tax under coalition government set to include big rise in CGT rate Legal update, Coalition agreement final version: further tax measures Legal update, Queen's Speech 2010: tax implications	The 1% rises in employer and employee NICs from April 2011 announced by the previous government are expected to go ahead but the employer NIC threshold is expected to rise by £21 per week. George Osborne indicated in a recent speech to the CBI that employer NICs will be abolished for new businesses for the first ten jobs they create. Further details, especially on timing, are expected in the Budget. The Queen's speech promised a NICs Bill, which is expected to implement the above changes and may also include anti-avoidance measures.
Non-domiciliaries Legal update, Coalition agreement final version: further tax measures	A further review of the taxation of non-domiciled individuals may be announced as this was mentioned in the final coalition agreement and both parties made manifesto pledges to review the rules.
Research and development tax credit Legal update, Coalition agreement final version: further tax measures	Possible refocusing of the research & development (R&D) tax credit on hi-tech companies, small firms and start-ups (for background, see Practice note, R&D tax reliefs: practical aspects).
Small business taxation Legal update, Coalition agreement final version: further tax measures	A review of small business taxation, including IR35, is likely to be announced in the Budget. The government's aim is to seek to replace IR35 with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed or restrict labour flexibility. It is likely that the review will consider the Liberal Democrat election pledge of allowing small businesses to choose to be taxed on a cash flow basis.
Stamp duty land tax Legal update, Coalition agreement final version: further tax measures	The final coalition agreement promised a review of the effectiveness of the temporary raising of the SDLT threshold for first time buyers of residential property to £250,000 (see Legal update, Draft legislation on SDLT residential first-time buyers' relief and section 6 of the Finance Act 2010). The review may be announced in the Budget.

Chasing pack: March 2010 Budget measures and election pledges which may be in the Budget

In this section, we have three groups of measures that may be in the June 2010 Budget:

March 2010 Budget measures stood over to Finance Bill in next Parliament.
Other tax commitments of the previous government that may be progressed in the emergency Budget.
Conservative and Liberal Democrat election pledges that did not appear in the final coalition agreement or the Queen's speech.

Of course, some of these measures (particularly those which are tax-relieving) may be dropped, watered down or postponed.

March 2010 Budget measures stood over to Finance Bill in next Parliament

A large number of measures were announced in the March 2010 Budget with the explicit intention that they would be legislated in a Finance Bill in the next Parliament. This table summarises those measures and also gives an indication of how likely it is that they will be adopted by the current government.

Measure	What can we expect in the Budget?
Capital distributions: corporation tax treatment clarified	Uncontroversial, technical measure but may be deferred again due to lack of Parliamentary time.
Consortium relief rules: proposed amendment	First change (allow EEA resident companies in UK consortia to pass on relief for losses to UK-resident subsidiaries) is necessary to comply with EU law, so action is likely in the Budget. Second (give consortium relief in proportion to member company's active involvement in the consortium) is more controversial and government may choose to consult before implementing.
Debt cap rules to change	Technical changes that may be deferred again due to lack of Parliamentary time.
Enterprise management incentives (EMI): amendments	Extension of EMI to companies with UK permanent establishment needed to comply with EU state aid rules so expect an announcement.
Employer supported childcare: relaxing the "generally available to all employees" condition for tax exemption	This would extend an existing tax relief so unlikely to be a priority for this Budget.
Financial security for PAYE and NICs	Dropped from the Finance Act 2010, due to opposition objections so seems unlikely that the government will adopt.
Income tax adjustments between settlors and trustees	Uncontroversial revenue-neutral measure, so could be adopted.
Interest harmonisation: corporation tax and petroleum revenue tax	Uncontroversial move to harmonise the regime with the rules in the Finance Act 2009, which apply to most taxes.
North Sea oil tax regime	This measure would correct a "technical oversight" in changes made by the Finance Act 2009 which give chargeable gains exemption where proceeds of disposal are reinvested in another ring-fence asset. An announcement is possible.
Penalties for late filing and late payment of tax: extension to remaining taxes and duties	Uncontroversial move to harmonise the remaining taxes and duties with the rules in the Finance Act 2009, which apply to the main taxes. Likely to be adopted, subject to Parliamentary time being available.
Relief for carers of children under special guardian and residence orders	This would extend an existing tax relief so unlikely to be a priority for this Budget.
SDLT: overpayment claims	A collection of largely technical measures, some of which already apply to other taxes, so it is likely to be adopted, subject to Parliamentary time being available.
Stock dividends will meet 90% distribution requirement for REITs	Revenue-neutral change supported by powerful lobby, so it is likely to be adopted, subject to Parliamentary time being available.
VAT: abolition of Lennartz accounting	A revenue-raising change which is also necessary to comply with EU law, so expect an announcement.
VAT: definition of "qualifying aircraft" to change for zero rating	This measure will align UK law with EU law, so it is likely to be adopted.
VAT: postal services exemption to be narrowed	This measure will align UK law with EU law, so it is likely to be adopted.
VAT: scope of place of supply of gas, heat and cooling	This change implements EU law changes from 1 January 2011, so expect an announcement.
Venture capital schemes: EIS and VCT	Four changes needed to comply with EU state aid rules, so action likely in the Budget. HMRC also undertook in the March 2010 Budget to consider increasing the employee limit, the gross assets limit and the annual investment limit, so there may be an announcement in the Budget.
Zero-emission goods vehicles: 100% first year allowance	May be dropped, given that the coalition has committed to simplifying capital allowances and made it clear that tax cuts are not a priority.

Other tax commitments of the previous government that may be progressed in the emergency Budget

The March 2010 Budget also made a number of announcements committing the government to non-legislative action (such as a review or a consultation) in the next Parliament. In addition, a number of consultations were announced in the run-up to the election. We have set out these measures in the table below, together with an indication of how the current government may deal with these issues.

Measure	What can we expect in the Budget?
Associated companies rules to change, but not yet	Previous government promised a positive change to the associated companies' rules for small companies' rate of corporation tax in Finance Bill 2011. May be considered as part of promised review of small business taxation.
Deliberate wrongdoing by tax agents	Draft legislation empowering HMRC to access documents relevant to a client's (or former client's) tax affairs held by a tax agent who has engaged in deliberate wrongdoing or held by other third parties was published in February 2010. The consultation closed on 28 April 2010, so the Budget may indicate how the government intends to progress this proposal.
Employee benefit trusts: tackling tax avoidance	The previous government said it would consider introducing legislation from April 2011 to counter arrangements which have the purpose of "avoiding, deferring or reducing liabilities to income tax and national insurance contributions or avoiding restrictions on pensions tax relief". Given the coalition's commitment to tackling tax avoidance, action seems likely in this area.
Growth shares, JSOPs, carried interest and similar arrangements	The previous government committed to a review of the tax treatment of these arrangements over the summer. May be covered by the proposed changes to capital gains tax.
Group mismatches	Consultation only closed on 31 May 2010, so no substantive announcement likely in the Budget. Previous government promised draft legislation with the 2010 Pre-Budget Report with a view to its possible inclusion in the Finance Bill 2011. As this is an anti-avoidance measure, it is likely to be adopted.
Investment funds tax rules	Previous government undertook to review various aspects of the investment funds tax rules. This Budget may indicate whether and how the government intends to progress the review.
Islamic finance	The Budget may include further details of whether and how the government intends to progress proposals to clarify how the capital allowances regime interacts with the rules on the taxation of alternative finance arrangements and align the tax treatment of islamic finance products not involving payment of interest with that of conventional loans.
Patents box consultation	Consultation was promised in summer 2010 by previous government. This measure is likely to be considered as part of the current government's promised reform of corporation tax.
Transactions in securities: anti-avoidance provisions	The Budget may indicate how the transactions in securities rules will be rewritten for corporates (they were rewritten for income tax in the Finance Act 2010 and the previous government promised a comprehensive reform of the rules for corporates).
VAT: EU cost sharing exemption to be implemented	The previous government committed to working with industry bodies to implement this VAT exemption but, as it is a tax-relieving measure, it may be dropped or deferred.
Video games industry: tax relief	Previous government promised to consult this year on a new tax relief to support the UK video games industry. May be considered as part of the commitment in the final coalition agreement to review the tax treatment of research and development.

Conservative and Liberal Democrat election pledges

This section sets out election tax pledges made by the Conservatives or the Liberal Democrats that did not appear in the final coalition agreement or the Queen's speech. Of course, some of these may be dropped or watered down as a result of the coalition process.

Conservatives

The Conservatives pledged during the election to start to reverse the effects of the abolition of the dividend tax credit for pension funds. This was not referred to in the final coalition agreement or the Queen's speech. It would be a considerable cost to HM Treasury so action in this Budget is unlikely.

For more detail, see Practice note, General election 2010: implications for business taxation: Conservative party.

Liberal Democrats

Five tax measures from the Liberal Democrat manifesto or other campaign materials, are not referred to in the final coalition agreement or the Queen's speech. These were to:

Give tax relief on pensions only at the basic rate.
Set Gift Aid tax relief at a single rate of 23% (currently given at the donor's highest marginal income tax rate).
Introduce a new 1% levy on properties with a value of over £2 million. (This appears to be limited to residential properties as the manifesto calls it a "Mansion Tax".)
Equalise the VAT treatment of new build and repairs to existing properties on an overall revenue-neutral basis.
Reduce the CGT annual exemption from £10,100 to £2,000.

For more detail, see Practice note, General election 2010: implications for business taxation: Liberal Democrats.

Dark horses: speculation

Neither the final coalition agreement nor the Queen's speech made any references to possible increases in the rates of VAT, stamp duty land tax or income tax. However, there has been intense media speculation that the Chancellor may increase the standard rate of VAT or remove or restrict VAT zero-rating. There have also been suggestions that the rate of insurance premium tax may be increased (see Legal update, News round-up to 15 June 2010: Rise in rate of insurance premium tax? and Practice note, Insurance premium tax).

The final coalition agreement also stated that the government will introduce measures to tackle unacceptable bonuses in the financial services sector. There was no express reference to tax, but it is possible that this initiative could include tax measures, for example, an extension of the bank payroll tax (see Practice note, Bank payroll tax).

PLC's Budget coverage

For details of how we will be covering the Budget and how to sign up to receive our coverage, see Legal update, June 2010 Budget: PLC Tax coverage.

June 2010 Budget: predictions | Practical Law