Today's Budget was expected to be a painful affair and indeed it was a masochist's delight. There was precious little carrot but lots and lots of stick.
As expected, VAT is to rise to 20% from 4 January 2011 - as mentioned in my last Budget blog, this should actually stimulate spending on luxury items in the short term.
For large companies, the reductions in corporation tax, although welcome, will undoubtedly be partly offset by the reduced rates of capital allowances. The tax rate may decrease but the taxable base will increase. I wonder whether and how the relatively certain knowledge of lower rates of corporation tax in the future will affect actual investment on the one hand and accounting on the other. Making a provision in one year even if one only has to release it in the next could be worth significant sums of tax for larger companies.
Many smaller companies may be more concerned with how they are going to stay in business and make profits rather than how those profits will be taxed when made. Those investing in plant and machinery for future production will be "incentivised" to do so early in order to avoid the effects of the reduction in the Annual Investment Allowance in 2012, again stimulating spending on fixed assets in the short term by making it more expensive to do so in the long term.
Buried in the Press Releases are announcements of the legislation amending the Enterprise Management Initiative and Venture Capital Trusts scheme to ensure that they qualify as approved State Aid under EU rules. There are some similarly-motivated changes to Consortium Relief. The fact is that it is no longer possible for the UK to single out UK companies for support of this kind. In times like this, one wonders whether that can be considered a good thing.
The increase in the CGT rate from 18% to 28% is swingeing. The fact is that most taxable capital gains are made by higher-rate taxpayers and trustees - or by basic rate taxpayers who for one year only are turned into higher-rate taxpayers by the receipt of a capital gain - so the tax take will be increased substantially. There will be issues arising for deceased estates because the higher rate applies to personal representatives as well - there may be some traps for the unwary here. Since there is no longer any indexation allowance for individuals and trustees and inflationary gains are therefore taxable once more, the effective rate of tax is extraordinarily high. What fairness there once was in the CGT system now seems to have flown out of the window. Note, however, the Government's contrasting generosity in increasing the entrepreneur's relief lifetime limit to £5 million.
There is an interesting Press Release, the contents of which are, in effect, that if MP's were subject to the same rules as everybody else regarding their subsistence and travelling expenses, they might have to pay some tax and this will never do. Therefore the said payments will be tax-exempt. Unlike many of the other Budget proposals, I would suggest that this is unlikely to meet with much opposition in Committee or in the Finance Bill debates.
