Deloitte Budget 2011 preview

Bill Dodwell, head of tax policy at Deloitte, considers what tax measures the Chancellor is expected to focus upon in Wednesday's Budget:

Whilst we expect the Budget arithmetic to be better than originally forecast, with higher tax receipts and thus lower borrowing, the likely outcome will still be a large deficit and additional borrowing this year of at least £140 billion. Accordingly, we do not expect that the Chancellor will have significant resource to devote to tax reductions, or other 'giveaways'.

A Budget for growth

Enterprise zones

We expect the Chancellor to announce new Enterprise zones - which offer tax benefits and less restrictive planning controls in defined areas. The tax breaks usually involve enhanced capital allowances (tax deductions for spending on buildings, together with plant and machinery) and reduced business rates. Zones encourage investment in particular locations and well-chosen zones can allow clusters to grow up around universities and research centres, thus making the most of the UK's knowledge centres.

Entrepreneur's relief

This relief offers an effective 10% tax rate to entrepreneurs selling shares in a business where they own at least 5% and work for the business. The relief is currently capped at lifetime gains of £5 million. However, we hope to see the relief widened to cover business angels, cover a higher amount and also allow lower percentage shareholdings. Entrepreneurial businesses often rely on a team, rather than a single individual and so lower percentage holdings would allow the risks taken by a wider team to be rewarded, whilst not extending the relief to all employees.

Patent box and R&D tax credits

Both reliefs are intended to support growth, through encouraging innovation. We do not expect significant announcements until May, when consultation documents on the next steps are expected to be released. The current consultations were announced on 29 November 2010 and the Treasury is currently considering responses.

Personal Tax

Residence and domicile

The Coalition Government has previously mentioned consulting on the introduction of a statutory rule defining when individuals are tax-resident in the UK, together with a review of the tax implications of domicile status. We expect a consultation on possible reform to be announced. Non-domiciled status has attracted some controversy in recent years. Our view is that there remains a good economic case for retaining the benefits, so as to encourage wealthy individuals to live in the UK and thereby make a economic contribution. However, we see little reason to permit those with British citizenship to remain non-domiciled and there is also a good case for removing inherited non-domicile status.

VAT and Indirect taxes

Low Value Consignment relief

This relief allows items below £18 to be shipped into the UK free of VAT and has undoubtedly led a number of UK retailers to move fulfilment operations outside the UK, including to the Channel Islands. The Treasury has been urged to take action to protect the competitiveness of UK-based retailers. It is thought likely that the ceiling for the relief to apply could be reduced to a lower level, making it less economic to organise such activities overseas. However, it seems doubtful that the Customs authorities are geared up to levying VAT on postal imports.

Fuel duty

The increase in the oil price has caused many to call for the Government to cancel, or postpone the planned increase in fuel duty enacted by the previous Government. Current law provides that fuel duty increases annually by the RPI (which would add about 4p to the price of a litre of petrol or diesel) plus a further 1p. Abandoning the additional 1p increase was costed in Budget 2009 at £1.75 billion; failing to index the increase costs substantially more. However, the recent rise in fuel prices has increased the VAT charged, since this is based on the total of the fuel cost and the fuel duty. An increase in petrol price from £1.20 per litre to £1.40 per litre brings in an extra 3.3p in VAT. If the Chancellor abandoned the increase in duty, it could cost a net £2 billion, assuming the oil price doesn't drop.

Air passenger duty

It now seems likely that the Coalition Government will abandon its plans for a 'per plane' duty charge, replacing the current 'per passenger' levy. However, this leaves a hole in the public finances, since the change had been targeted at raising additional funds. It is thus possible that the current air passenger duty rates will be increased.

Office of Tax Simplification (OTS)

The OTS has presented two reports to the Chancellor and no doubt he will respond in the Budget. We expect the Chancellor will ask the OTS to continue its work on the simplification of small business taxation - although we would be surprised if he agrees that taxation of the self-employed should be increased, as the OTS indicated. Such a plan hardly fits with the main economic objective of encouraging growth.

We expect the Chancellor will put in place a consultation on abolishing many of the reliefs recommended by the OTS. No doubt special interest lobbying will then start!

Follow-up from previous consultations

We expect to hear how the Government plans on proceeding in a number of areas:

Foreign Branches - this is a proposal, aimed primarily at helping insurers adapt to the new capital requirements of Solvency II. In our view, the original proposal didn't achieve the desired result.

Controlled Foreign Companies - the Government is committed to significant changes to these rules, which seek to tax UK groups on certain profits taxed at low rates abroad. However, the major changes are due in 2012 and the consultation document is expected in May. In the meantime, the Government will set out some limited short-term improvements.

Disguised remuneration - these rules are intended to tax those who arrange to receive cash in a tax-free way - such as in the form of a loan. However, the December draft went further than intended and we expect an update on the next steps.

Other measures - the draft clauses issued for comment on 9 December 2010 will no doubt receive various amendments.

Major tax changes taking effect from April 2011

• Personal allowance - increasing by £1,000 to £7,475. Higher rate threshold cut by £2,400 to £35,000;
• NIC - employer, employee and self-employed rates all increase by 1%. Lower limits also increase, meaning that less NIC will be paid where earnings are less than £20,000 or so. The impact is that about 35% of the workforce will see NIC reduce. This will especially benefit part-time workers, many of whom are women;
• Pensions - new limits enter into force - £50,000 limit on contributions and equivalent changes for defined benefit schemes. Additionally unused allowances for the prior three tax years may be used (the annual allowance for those years is deemed to be £50,000 for this purpose). Contributions in excess of £50,000 and the brought forward unused allowances will face a tailored tax charge reflecting the individual's marginal rate of tax;
• Salary sacrifice for workplace canteens withdrawn;
• Higher/additional rate relief withdrawn for new registrants in Employer child-care schemes;
• Company car tax - charges increase by reducing by 5 grams of CO2 the bands. Cap on charges also abolished, together with various discounts for hybrids, etc;
• SDLT - new 5% rate for residential properties over £1 million;
• Companies - small profits rate cut to 20% and main rate cut to 27%.