2010 Emergency UK Budget Initial reaction – "Overspent not undertaxed"

18 April 2010

Although we like to think of ourselves as being completely different to the UK, today's emergency budget delivered by George Osborne drew some direct comparisons with what has happened in the islands. He made it clear at the outset that the UK had over spent and that people had not been overtaxed. This theme was constant as he gave a little and took a lot.

Before he even stood up it was widely publicised that spending cuts would be the major focus and tax increases would be secondary. As it turned out, 77% of the additional revenue will be through cuts whilst 23% will be funded by the taxpayer.

So what do we have?

In terms of cuts, the ones that will make tomorrow's headlines will be the reductions, abolitions and widespread reforms that were announced to a whole range of welfare measures: housing benefit will be capped; tax credits will be restricted; health in pregnancy grant abolished; disability living allowance will be means tested, were just some of a wide range of benefit changes.

Pay freezes were also announced for two years for public sector work forces except for those earning £21,000 or less, who will receive at least a £250 pay rise in each of these years. In addition an earnings cap will be introduced as to the multiple that the person at the top can earn (20 times) compared to that of the person at the bottom.

However the real cuts will be contained in the spending review in the autumn (20 October) where we expect to see some very draconian cost saving.

In terms of tax rises the headlines are:

• VAT up by 2.5% to 20% from 4 January 2011 - though no VAT on food or children's clothes etc;
• Capital gains tax up to 28% from midnight tonight for non basic rate taxpayers;
• Insurance premium tax up to 20% (higher rate) from 4 January 2011;
• A bank levy (announced today by France and Germany as well) from January 2011 at a rate of 0.04% initially, rising to 0.07% based on banks' balance sheets;
• Changes to the capital allowances (18% and 8%) and a reduction in the annual investment allowance (£25,000); and
• National insurance up by 1% from April 2011.

In relation to tax reductions a number were announced:

• Personal allowances for those with lower incomes, up by £1,000;
• An increase in the lifetime allowance (increased from £2m to £5m) for entrepreneurial business activities from tomorrow;
• Start up NIC reliefs for certain businesses;
• No duty increases, though a reduction of duty on cider;
• A reduction in corporation tax from 28% to 24% over the next four years from 2011;
• A reduction in the small companies' rate to 20% from next April; and
• An intention to simplify tax legislation and policy making.
  

The above are the major stories that came from the speech. What measures were contained in the small print (as promised in his speech a lot less than normal) that will have a direct affect on us?

There was written confirmation that the very popular EFRBS (Employer Financed Retirement Benefit Schemes) are within the scope of the review announced in March 2010. Given the prominence of the statement I would expect that their life is limited.

Consultation was announced on whether inheritance tax on trusts should be brought within the Disclosure of Tax Avoidance Scheme regime and, if adopted, the island will experience a greater amount of compliance in relation to inheritance tax planning. I would expect to see a more rapid closing down of any perceived IHT avoidance schemes in the future.

On the theme of anti avoidance, views will be collated as to whether a General Anti-Avoidance Rule ("GAAR") should be introduced to form one element of "strengthening defences" against tax avoidance. With the acceptability of avoidance continually being questioned, a GAAR could have some far reaching affects. As always, the Budget closed down various specific tax avoidance schemes were closed.

The whole speech was centred on cuts and efficiencies. Various other tax reviews and consultations which were announced included: stamp duty land tax to see if changes are needed to counter avoidance on high value properties; the reform of the Controlled Foreign Company legislation; and reviews of the intellectual property regime and R&D tax credits, to see whether more of this type of business could be located in the UK. All these reviews could affect the types of business coming to the island both in a positive or negative way, but we will have to wait and see.

As expected non domiciled individuals again received a mention but unlike the other reviews and consultations no dates were set. Hopefully the UK Government will concentrate on more pressing matters.

The most interesting comment from a local perspective was contained in the roadmap for corporate tax reform. Hidden away in the 112 page document was a simple statement saying that a move to a more territorial basis for taxing the profits of foreign branches would be looked at. Is territorial taxation therefore acceptable? This is especially relevant given the corporate tax review going on in the islands and the recent announcement concerning territorial taxation in Gibraltar.

The loudest cheer of the day was when the Chancellor announced that the UK will not be joining the Euro in the current Parliament and the disbanding of the group of people looking at Euro preparation - whoever said that there was no waste in Government!

So for Jersey, not a particularly exciting budget but the thought process and analysis surrounding cutting spending and stimulating growth will hopefully encourage debate on our own Fiscal Strategy Review.

To discuss any of these issues further contact:

John Shenton | Tax Director
T (direct): +44 (0)1534 885866
john.shenton@gt-ci.com