Budget 2012: personal and corporate tax predictions

PREDICTIONS can confidently be made ahead of next week’s budget, when it comes to upcoming changes to personal and corporate taxes, according to experts at accountancy firm Ernst & Young.

TheBusinessDesk.com has teamed up with Ernst & Young to give our readers comprehensive coverage of next week’s budget.

Ahead of the day, the firm’s tax partners Chris Sanger and Patrick Stevens have given their Budget 2012 predictions on expected changes to both personal and corporate tax rules.

Expected announcements for personal tax include: changes to non domiciled rules to encourage them to bring funds into the UK to invest; the statutory residents test; and findings of a review of the 50% income tax rate.

Mr Stevens said: “Many of the measures that we know are going to be brought in have been consulted on for quite a while.

“In many ways the 2012 budget is a staging post – particularly in the taxation of non domiciled individuals – but there may also be some more fundamental rethinks on ways of raising revenue.”

He added: “We know the coalition is looking to raise the personal allowance up to £10,000 or possibly even more than that. This of course is a significant reduction in revenue.”

Mr Sanger said that it would bring 3 million people out of tax, who are currently paying just more than £1bn.

“That’s not where the largest amount of tax will be lost. That will be the 23 million people who are paying the basic rate of tax and will each be saving about £500. That is costing us just north of £11bn,” he added.

That gap will need to be plugged by finding funds from income taxes or other sorts of taxes. The question is whether this burden will be passed on to the wealthy and if so in what form?

Taxing income is a disincentive to high earnings so instead there may be a tax on wealth, the pair said.

This could include a mansion tax, increased council tax, inheritance tax, stamp duty land tax and a financial activity tax.

Mr Stevens said: “Those highest earners are the most mobile. If the temperature isn’t good here in the UK it is much easier for many of them to move somewhere they find the climate a little more attractive. Therefore we may need a rethink on how to tax the wealthy or high earners – of course those two are not exactly the same.”

Click here to listen to the personal tax predictions podcast in full.

When it comes to corporate tax changes, Mr Stevens said the 2012 budget will be “the culmination of the restructuring of the UK corporate tax system for the last 10 or 12 years”.

Ernst & Young expects to see a further confirmation of the UK’s position over financial transactions tax, in the budget.

Mr Sanger said: “One of the things the UK has said in the past is that whilst it doesn’t like a Financial Transactions Tax it might be tempted by a Financial Activities Tax and I think from a UK perspective we may see some further focus on that once the heat has moved away from the Financial Transactions Tax.”

The Controlled Foreign Corporation rules are designed to stop UK companies avoiding tax in this country and Mr Sanger said he expected to see ongoing work by the government related to CFC and anti avoidance – both before and continuing after the budget.

Mr Stevens added: “We are keen to see that the legislation and explanatory notes are eventually written so clearly that we can explain it to our overseas clients so they can see how attractive this regime really is for them to come and set up in the UK.”

Patent box draft legislation – where a company can ring fence a part of its profits relating to patents and pay tax at a lower rate – is also expected to be announced.
Mr Stevens said: “Companies for whom this is of interest really ought to be looking at it now because structuring the assets in the right places around the group is going to be important… to make most use of this new regime.”

On the general anti avoidance rule, Mr Sanger said the firm is expecting a budget announcement to proceed, with a formal consultation to follow in the spring.

“One of the real challenges is going to be the details of the legislation,” he added.

Click here to listen to the corporate tax predictions in full.