There were some aspects of George Osborne’s Budget which could have been delivered by Gordon Brown: lots of goodies were dangled before us but many of these will not materialise until later. Jam tomorrow is well and good but, given the fragile state of the economy, the prospect of all these tax cuts coming to fruition will depend on the UK’s future fiscal fortunes or further spending cuts.
Another over-riding observation and one of the biggest disappointments from yesterday is the lack of transparency from the Treasury. Much of the all-important details that follow the Chancellor’s statement seem to have been buried away in the back alleys of various HMRC communication channels. A prime example of this is the announced limit on tax reliefs. In the 116 page Treasury document there is only a short paragraph referring to this which gives no further indication of what reliefs will be capped. This is a surprising development given the improvements in communicating the small print of recent Budgets.
The Chancellor’s speech contained few genuine surprises as much was leaked in advance to the media starting with the cut in higher rate tax from 50p to 45p which comes into effect in April 2013. The Chancellor justified this cut for higher earners citing a review conducted by HMRC suggesting that a lower rate would significantly increase overall tax receipts. The rise in personal allowance which increases to £9,205 from April 2013 - also heavily trailed – could serve as an effective counter balance to the top rate cut as it will benefit those on lower incomes.
The rise of the child benefit threshold to £60K is higher than expected and will be welcomed by many families. However the anomaly that a husband and wife earning a combined income of £60,000 will not be affected when a single income household exceeding that amount will be, still remains. The UK tax system is based around the individual while benefits are based on households - unless these are to be merged these anomalies will likely remain.
Was this, as the Leader of the Opposition claimed, a Budget for millionaires? It’s a mixed and somewhat blurry picture at present. The 15 per cent tax on homes registered through companies will effectively close the loophole for the wealthy to avoid stamp duty. The ‘mansion tax’ on homes worth over £2m, which will see a rise in stamp duty to seven per cent, will mostly impact on the very wealthy in southeast England. Few homes in Scotland are valued above this threshold so it will unlikely affect many north of the Border and then only when buying new property.
The general crack-down on tax avoidance which was also well-reported in the run up to yesterday’s Budget will also have an impact on higher earners but there is still a ways to go before we know how this will be implemented and what it will mean in practice. Draft legislation on the back of Graham Aaronson QC’s review has already been published and a consultation process will now take place over the summer. Given the criticism of the draft legislation the Government can expect a rocky road ahead and we could see a watering down of proposals.
Along with the all the reported announcements, there were a few other welcome surprises. The maintenance of higher rate tax relief on pension contributions will be welcomed by many who feared changes so much so that many people had brought contributions forward expecting a reduction in this threshold. While this measure may not fully restore confidence in pensions it may help reduce the current high levels of mistrust in them. Was this a conscious decision?
The reduction in the main rate of corporation tax which falls to 24 per cent in April and then by a further 1% in 2013 and 2014 is very welcome, even in Scotland which has a very high ratio of SMEs and perhaps would prefer to have seen a reduction in the small companies rate. The reduction in corporation tax rates may well encourage smaller firms, typically those employing 2-5 people, to think about incorporating their business.
The announcement of 100% capital allowances available in Enterprise Zones, in Dundee, Irvine and Nigg, is also welcome and could see business in these areas benefit through these targeted tax reliefs. However, like many elements of this Budget, the detail is still to emerge.
Dundee should see a further boost through the Chancellor’s plans to give tax relief to video game developers, a concession for which the sector has long been lobbying. This will be subject to state aid rules, meaning it will require EU approval before it is implemented in 2013.
Finally, the announcement about employee ownership whereby the threshold through Enterprise Management Incentives is to increase from £120K to £250K is most welcome for Scotland. These are major changes which will make employee ownership far more attractive and could benefit many SMEs in Scotland, especially in core sectors such as life sciences and IT. Many start-ups in these sectors often face cash flow issues but can attract the highest calibre people through this mechanism.
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