A Taxing Budget: Neil Holyoake of Ernst & Young asseses the likely policies

TAX changes and ammendments will be a primary concern for business leaders in tomorrow’s budget.

According to Neil Holyoake, Yorkshire tax partner at accountants Ernst & Young, the Coalition’s Programme for Government represents a rare blueprint as to what will be announced in the emergency budget.

But he says while the framework is clear the detail is not.

“With a significant budget deficit to close, the challenge for the new Chancellor will be in balancing the long-term prospects against the short-term need for revenue,” he said.

“Taxpayers will be keen to get some clarity as to the ‘big picture\’ of the coalition approach. This is particularly true for businesses that will be waiting anxiously to see quite how the pledges will play out.”

Among the key issues is corporation tax and anti-avoidance measures. Read one for Mr Holyoake\’s predictions for tomorrow.

Corporation tax

Mr Holyoake said that one of the key issues for business will be what changes are introduced or allowances reduced to fund the reduction in the headline rate of corporation tax.

He added: “We can expect to hear of a long-term plan, perhaps with staged reduction in the corporation tax rate from 28% to the 25% level the Conservatives aspired to move to immediately in their manifesto.

“To fund this change, capital allowances are likely to be a target for the Chancellor. This may be less radical than feared given the pledge to protect manufacturing industries.”

Research and Development

“The Dyson report recommends refocusing the R&D tax credit on hi-tech, small companies and start ups, as well as increasing the intensity of the credit, with an aspirational target of 200%,” said Mr Holyoake.

“While the target is unlikely to be met in this budget we may see the first steps taken or a blueprint set out. The key question will be where the focus will fall and there remains much concern over the definition of ‘hi-tech\’ and in relation to those who will no longer benefit from this much valued incentive.”

Tax Avoidance

According to Mr Holyoake anti-avoidance will be another key area that businesses will be nervously anticipating.

Despite the absence of detail in the Coalition\’s Programme for Government, the Liberal Democrat manifesto proposals provide some perspective. In particular, the introduction of a general anti-avoidance rule, something that has been considered and discarded by successive Chancellors is back on the cards.

“The challenge for the Chancellor will be to ensure that such action does not undermine legislative certainty and that a suitable clearance system is introduced,” continued Mr Holyoake.

“This idea has stalled in the past due to the cost to the Government of implementing such clearances but the change in HMRC\’s operating model may have reduced the extra cost of this approach. Furthermore, the Liberal Democrats have previously suggested that taxpayers should bear the cost of clearances although this is likely to be resisted by business.”

Drinks and Leisure Industry

Mr Holyoake believes that the Chancellor has two options here – differential rates of duty versus the imposition of controls on shop prices and pub promotions.

Changes in this area of alcohol taxation need to consider a whole range of other issues such as cross-border sales and other behavioural responses. The previous government\’s attempts to raise tax on cider in March\’s budget was defeated by the Conservatives.

He continued: “At this early stage in the process, it is it is important that any radical changes are articulated as part of a wider package so that businesses, both those in the UK and those considering coming here, have clarity going forward.

“In its manifesto, the Conservative Party indicated that it proposed to set out a five year road map for the direction of corporate tax reform, providing greater certainty and stability to businesses\’. Such an approach would provide businesses with a much needed sense of direction. The challenge for the Chancellor will be to ensure that there are no road works or diversions to block the route.”

Income Tax Personal Allowances

With the ultimate goal of a £10,000 personal allowance, the Chancellor is likely to confirm a staged increase with the allowance starting somewhere in the region of £7,500 for 2011/12.

What is not yet clear is whether the Chancellor will maintain Alistair Darling\’s rules to withdraw the personal allowances for those earning over £100,000 or perhaps allow the personal allowance at 20% for all taxpayers alike.

What is clear is that this policy is derived from the Liberal Democrat manifesto so was not part of the original costings. The money to fund it will need to come from other tax rises (or lack of reductions) such as not delivering the increase in the lower earnings limit for employees\’ national insurance contributions and possibly other areas.

Capital Gains Tax

The rate of capital gains tax is likely to rise to 40% for non-business assets and perhaps even to 50%. It is not yet clear what form exemptions for entrepreneurial business activities will

Also unclear is whether we will see the reintroduction of relief for inflation for non-business assets or whether a taper of some sort will be reintroduced. This will be a key concern for those who have held land for a significant period and have only seen an increase in line with inflation. Returning to an inflation relief would remove an unfairness in the current system.

Bonuses

The precise mechanism to deal with ‘unacceptable bonuses\’ has not yet been made clear but it is likely that a combination of regulation and tax will be used.

Mr Holyoake concludes: “The measures not included in the Coalition\’s Programme for Government are as telling as those that have been included. Principal among these is the expected increase in the rate of VAT – expected to be to 20%.

“The Chancellor could also announce a review of the zero rate that currently applies to lots of spending on essential purchases, such as food, books, and children\’s clothing. A more targeted relief focused on the vulnerable is likely to be included as part of the proposal.

“Another measure that we expected to see in the Coalition\’s Programme for Government was the Conservative Party manifesto pledge to increase the inheritance tax nil rate band to £1m. This has been deferred in preference for the changes to the income tax personal allowance.

“While the business pledges laid out in the Coalition\’s Programme for Government focus on the aim “to create the most competitive corporate tax regime in the G20”, it is important that the Chancellor does not lose sight of the impact that personal tax issues can have on international competitiveness.

“The 50% income tax rate remains a key deterrent for businesses operating in the UK and deters those key executives and ‘rainmakers\’ considering coming to the UK. A clear statement on the future of this high tax rate would be keenly received. We are already experiencing the impact of this rate on UK attractiveness.”