2011 Budget: construction industry implications

Practical Law UK Legal Update 3-505-3666 (Approx. 11 pages)

2011 Budget: construction industry implications

by PLC Construction

Background to the 2011 Budget

On 23 March 2011, the Chancellor of the Exchequer, George Osborne, set out the government's spending and taxation plans in its 2011 Budget.

The 2011 Budget was preceded by the June 2010 Budget and the October 2010 Comprehensive Spending Review (SR 2010), which set out the overall level of public spending for the four years from 2011-12 to 2014-15.

The June 2010 Budget had announced that public spending, not taxation, would see the most dramatic reforms to reduce the deficit, with public spending £83 billion per year lower at the end of this spending review period (taking inflation into account). The SR 2010 then allocated resources across all government departments, according to the government's current priorities. The budgets each department announced were fixed, but each department had the power to decide how best to manage and distribute the money within their areas of responsibility.

The 2011 Budget was fiscally neutral and confirms the government is continuing with its plans to reform the economy. The 2011 Budget was described as a "budget for growth", with the Chancellor saying:

"Today's budget is about reforming the nation's economy so we have enduring growth and jobs for the future."

This note looks at areas in the 2011 Budget of primary interest to construction and engineering lawyers.

For analysis of other aspects of the 2011 Budget, see Legal updates:

For more information on the:

June 2010 Budget, see Legal update, June 2010 Budget: construction implications.
SR 2010, see Legal update, Spending Review 2010: construction industry implications.

Plan for Growth: construction industry

The Plan for Growth (the Plan), which accompanies the 2011 Budget, is described as an "urgent call for action" as the UK has lost ground in the world's economy, and needs to catch up. It is the government's plan to put the UK on a path to sustainable, long-term economic growth.

The Plan contains four overarching ambitions that will ensure that progress is made towards achieving this economic objective:

To create the most competitive tax system in the G20.
To make the UK one of the best places in Europe to start, finance and grow a business.
To encourage investment and exports as a route to a more balanced economy.
To create a more educated workforce that is the most flexible in Europe.

A successful construction industry is one area the Plan identifies:

"A successful construction industry is vital for sustainable growth. Building and maintaining homes, commercial properties and economic and social infrastructure are activities that underpin the entire economy."

The Plan recognises that many of the measures included in the 2011 Budget (and SR 2010) will lead directly to work for those involved in the construction industry. For example, the government's plans on infrastructure spending over the next five years. As such, the Plan sets out a number of actions for the construction industry.

The government will:

Publish the UK's long-term view of projects and programmes in the autumn as part of the National Infrastructure Plan 2011 (see Planning reforms).
Publish quarterly from autumn 2011, a rolling two-year forward programme of infrastructure and construction projects where public funding has been agreed (see Infrastructure projects and transport).
Reform the way in which it procures public sector construction and infrastructure to reduce costs by up to 20%. This will include measures to encourage standardisation rather than bespoke designs, setting clear criteria for asset performance and introducing new models of procurement.
Support over 10,000 first time buyers to buy a home through a FirstBuy programme (see Housing: FirstBuy programme and SDLT).
Accelerate the release of public sector land to encourage new homes and jobs. (The government estimates that 40% of land suitable for development sits within public sector land banks. The Homes and Communities Agency (HCA) will announce shortly the first tranche of available sites and will publish a comprehensive strategy in May 2011.)
Strengthen demand for residential property by reforming the stamp duty land tax (SDLT) rules applied to bulk purchases (see Housing: FirstBuy programme and SDLT).
Introduce a range of measures to remove barriers to entry for new Real estate investment trusts.
Work with the construction industry between now and the 2012 Budget to review construction standards and codes, to take out duplication where necessary.
Announce the regulatory requirements for zero carbon homes, to apply from 2016. House builders will only have to account for those carbon dioxide emissions that are covered by Building Regulations. This endorses the Zero Carbon Hub's expert recommendations on the appropriate levels of on-site reductions as the starting point for future consultation. (See Zero carbon homes.)

(The Plan for Growth, paras 2.283 to 2.300.)

Apprenticeships and higher-level apprenticeships

The 2011 Budget announced funding of £180 million for the creation of 40,000 extra apprenticeships for young unemployed people and 10,000 "high level" apprenticeships over the next four years. In addition, there will be 80,000 work experience places for young people. The aim is to have a skilled workforce that can support growth and productivity and is in keeping with the government's aim of creating a more educated and flexible workforce. While paragraph 1.65 of the Plan gives some further information on some of the companies involved, the 2011 Budget does not detail where the extra funding will be spent.

This follows the announcement in the SR 2010 of an increase in adult apprenticeship funding by £250 million a year by 2014-15 relative to the level inherited from the previous government.

Capital spending

Apart from the statements on infrastructure (see Infrastructure projects and transport), the 2011 Budget contained no additional announcements on capital spending. In the SR 2010, the government announced it was increasing capital spending to £51 billion, £49 billion, £46 billion and £47 billion over coming years.

Education

The 2011 Budget contained no additional announcements on the future of the schools estate. The SR 2010 announced that £15.8 billion will be available to refurbish and improve the schools estate over four years. Also, that over 600 schools from the Building Schools for the Future (BSF) (which was ended in July 2010) and Academies programmes will be rebuilt or refurbished. It has been reported that this will cost £6 billion. For more information, see Practice notes, Building Schools for the Future and Academies under the Academies Act 2010: overview).

Enterprise zones created

The 2011 Budget announced that 21 new enterprise zones will be created in areas of the greatest need, including Birmingham and Solihull, Leeds, Liverpool, Tyneside, Tees, Greater Manchester, Derbyshire, Nottinghamshire, Sheffield and London. These enterprise zones will benefit from a reduction in business rates, new super fast broadband, reduced planning restrictions and an enhanced capital allowance for manufacturing companies.

Industry reaction

Richard Steer, Gleeds

"New Enterprise zones are to be welcomed but are only helpful if you can borrow to invest and we are still not seeing a change."

Simon Rubinsohn, chief economist, RICS

"It is not clear how effective new enterprise zones will be in stimulating long term sustainable development beyond an initial boost. While the tax breaks and changes to planning restrictions may draw short term investment into an area they also have a number of downsides.

The total cost to Government can be expensive and there often needs to be other public investment in areas such as transport infrastructure."

Green Investment Bank

The government is committed to being the greenest government ever. The 2011 Budget announced a number of measures, including ensuring that the Green Investment Bank (GIB) has the resources to invest in the low-carbon economy.

The GIB will receive initial capital of £3 billion and it will start operating in 2012-13, which the government stated was a year earlier than anticipated. The SR 2010 allocated £1 billion to the GIB and the government has now indicated the remaining £2 billion will be funded by asset sales. The GIB will have borrowing powers from 2015-16.

For more information, see Legal update, Green Investment Bank: further details emerge.

Industry reaction

Paul King, chief executive, UK Green Building Council

"The Green Investment Bank is essential to plug the hole in low carbon investment and it is encouraging that this will be a proper bank, able to borrow. Sadly, the bank won’t be able to borrow from day one and it isn’t being used to finance the Green Deal, both of which are missed opportunities."

Health and safety regulations reformed

The 2011 Budget confirmed that, as part of the government's deregulation and "one-in-one-out" policy for new regulations (announced in the June 2010 Budget), the recommendations from Lord Young's report, Common Sense, Common Safety on health and safety regulation will be implemented.

Earlier this week, the government released a progress report on implementing these recommendations and published a new report, Good Health and Safety, Good for Everyone (see Legal update, Reform of health and safety law: more government announcements and Practice note, Reforming the UK's health and safety laws).

Housing: FirstBuy programme and SDLT

The 2011 Budget announced two measures of interest:

A £250 million shared equity fund (very similar to the previous government's HomeBuy Direct initiative). The "FirstBuy programme" will be targeted at the first-time buyer market and aims to help 10,000 households with equity investments jointly funded with house builders.
The outcome of the government's review of SDLT relief for first-time buyers will be announced in autumn 2011. (This review was first announced in the June 2010 Budget, when the then new government said that it would review first-time buyer relief, taking into account its impact on affordability and value for money.) (For more information, see Practice note, Stamp duty land tax.)

The 2011 Budget did not contain any further measures, aimed at shaking-up social housing. In the SR 2010, measures announced included £4.4 billion funding for social housing.

The 2011 Budget also announced a measure aimed at the construction industry: SDLT will be levied on the mean value of the houses being purchased within a portfolio, not the bulk cost.

Industry reaction

Graham Kean, partner and global head of public sector, EC Harris

"This is most welcomed, but does not address the crisis in the second hand housing market, which is suffering hugely from an inability to sell houses and for families to move as their needs change."

Brian Green, commentator

"There was plenty to perk up the new build housing market with the Home Builders Federation getting what it wanted in a replacement for HomeBuy Direct."

David Orr, chief executive, National Housing Federation

"This scheme will offer first-time buyers on moderate incomes a much needed helping hand towards buying an affordable home and is a very welcome move."

Pete Redfern, chief executive, Taylor Wimpey

"Whilst we control our use of shared equity schemes carefully, we do believe that they have a place given the current challenges in the mortgage market. This new government scheme will allow us to maximise our support to [first-time buyers] whilst focusing more of our capital on investment in new sites."

Ian Fletcher, director of policy, BPF

"This is impressive backing for a long-standing BPF campaign to have stamp duty on residential portfolio trades reformed. It will provide an important boost for the private rented sector and we hope will tip the balance in encouraging institutional funds into building homes."

Simon Rubinsohn, chief economist, RICS

"RICS is pleased that the Chancellor has listened to our calls to make changes to stamp duty and Real Estate Investment Trusts in order to support investment in house building."

Income tax and national insurance to be merged?

The 2011 Budget announced that the government will consult in 2011 on merging National Insurance Contributions (NIC) and income tax. The Chancellor said his goal is to simplify, not increase taxes, and it will make the tax system "fit for the modern age".

Industry reaction

Graham Kean, partner and global head of public sector, EC Harris

"[This] will have a big impact on the large number of self employed people working in construction."

Ben Geoghegan, news correspondent for the BBC

"Some businesses had been calling for this in order to cut down on paperwork. NI was established in 1911 to fund pensions, other welfare payments and later the NHS. But this 'contributory principle', the link between some benefits and NI payments, has weakened over the years. However, the political difficulty with it is that it could be perceived as a tax increase."

Infrastructure projects and transport

The 2011 Budget announced that:

The government will spend over £30 billion in transport projects over the next four years, with £200 million of new investment for rail projects and £100 million for local authorities to spend on repairing winter potholes.
From autumn 2011, the government will publish the UK's long-term forward view of projects as part of the National Infrastructure Plan (NIP). It will also publish quarterly, a rolling two-year forward programme of infrastructure and construction projects where public funding has been agreed. This is specifically aimed at building contractors to enable them to respond more effectively to emerging market opportunities. (For more information, see Legal update, Government publishes National Infrastructure Plan 2010: construction, environment and property implications.)

This is consistent with the announcements in the SR 2010 on spending on transport projects over the next four years.

Industry reaction

Alasdair Reisner, director of external affairs, CECA

"There were some nice surprises in this budget. The announcement of a two-year forward programme of publicly funded infrastructure projects represents a huge victory for the industry, which has long campaigned for greater clarity over future opportunities."

Paul Fleetham, managing director, Tarmac National Contracting & Middle East

"Road maintenance remains a huge issue for the UK... There is still a backlog approaching 12 years in road repairs in England and Wales, so these short-term funds only serve to prevent a bad problem becoming even worse."

Landfill tax and aggregates levy

The 2011 Budget announced that:

The standard rate of landfill tax will increase by £8 per tonne (to £64 per tonne) in April 2012, but the lower rate will continue to be frozen at £2.50 per tonne in 2012-13. This was announced in the June 2010 Budget. (For more information, see Practice note, Landfill tax.)
The rate of aggregates levy will not increase from £2 per tonne to £2.10 per tonne on 1 April 2011. It is scheduled to increase in April 2012. This differs from the announcement in the June 2010 Budget, which indicated the price increase would take place in April 2011. (For more information, see Practice note, Aggregates levy.)

Small businesses: moratorium on regulation

The 2011 Budget announced that there will be a three-year moratorium for small businesses on "new domestic regulation". The government stated that this measure should save businesses £350 million. It also announced that the small business rate relief holiday is being extended by one year to October 2012.

Planning reforms

The 2011 Budget announcements on planning reforms include that:

All planning bodies will be expected to prioritise jobs and growth.
The government will introduce a presumption in favour of sustainable development, so that the default answer to development is "yes".
The government will streamline the system for planning applications and introduce new fast-track planning for major infrastructure through the Major Infrastructure Planning system.
The government will consult on proposals to make it easier to convert commercial premises to residential premises.

Industry reaction

Graham Kean, partner and global head of public sector, EC Harris

"The approach to reforming the planning system is seeking to create jobs, promote sustainability to ensure that applications are successful and green belt is sustained. The Regional Growth Fund will...underpin this, helping make applications fundamentally viable (while house and land prices remain suppressed)."

Professional services

The Plan for Growth, which accompanies the 2011 Budget, notes that the UK is a world leader in legal arbitration and commercial law services. The Plan confirms that the Ministry of Justice and UK Trading and Investment (UKTI) will work with the legal sector to further promote the UK's business arbitration and commercial law services. This is intended to coincide with the opening of the new Rolls Commercial Court building later this year, which will house a number of High Court divisions including the Commercial Court and the Technology and Construction Court (TCC).

In promoting UK legal services internationally, the government has announced that it will work to protect the supremacy of English contract law. The UK government submitted a robust response to the European Commission's Green Paper on European Contract Law for consumers and businesses (see Legal update, UK government response to European Commission's Green Paper on European Contract Law).

Zero carbon homes

The Plan, published alongside the 2011 Budget, indicates that from 2016 the government will introduce zero carbon requirements that "hold house builders accountable only for those carbon dioxide emissions that are covered by Building Regulations". (Building Regulations cover carbon dioxide emissions from energy use through heating, fixed lighting, hot water and building services.)

This means emissions related to energy use from cooking or from plug-in electrical appliances such as computers will be excluded, as these are beyond the influence of house builders.

The government says these are more realistic requirements for on-site carbon reductions, endorsing the Zero Carbon Hub's expert recommendations on the appropriate levels of on-site reductions.

For more information on:

Building Regulations, see Practice note, Building Regulations: an overview.
Zero carbon buildings, see Practice note, Zero carbon buildings.
Zero Carbon Hub, see Legal update, Zero Carbon Hub delivers final report on carbon compliance standards for zero carbon homes.

Industry reaction

Paul King, chief executive, UK Green Building Council

"In the space of two weeks, this government has gone from a firm commitment on zero carbon homes, to a watered down policy. Zero carbon home will no longer do what it says on the tin."

Comment

In announcing the 2011 Budget, George Osborne said:

"Today's budget is about reforming the nation's economy so we have enduring growth and jobs for the future."

In the June 2010 Budget, George Osborne decided how to cut government borrowing. This budget, his second, focuses on growth, but with slower growth and rising inflation, the state of the economy and the public finances do not give him much room for manoeuvre.

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 deficit. In that context, it has already seen some cuts and there seems an air of resignation in the industry's reaction to some of the specific measures announced today.

Despite this, there are positive steps that may help the construction and engineering industry, such as the government's announcements about the pipeline of infrastructure opportunities and measures aimed at supporting first-time buyers. However, the actual impact of many schemes, such as enterprise zones, remains to be seen.

2011 Budget: construction industry implications | Practical Law