It is now rather clearer, although not entirely so, what the main planks of coalition tax policy will be when George Osborne presents his first Budget sometime in the next 7 weeks. The insight is useful for those considering planning prior to the Budget, assuming that retrospection and retroaction are ruled out (see below).
Income Tax
Such would be the cost of the Liberal Democrat proposal to increase the personal allowance to £10,000 that it is effectively impossible to implement at one fell swoop. However, the coalition has committed itself to this as a longer term objective. The logical assumption is thus that, over the fixed 5-year life of the current Parliament (another coalition proposal), the personal allowance would be increased by an average of £700 per year, allowing the objective to be met by 2015-16. This would take around three and a half million people out of the income tax net, although query whether national insurance thresholds will rise on the same basis?
The Conservative proposal for a partially transferable personal allowance between spouses and civil partners looks set to go ahead, which is seen as a tax break for couples where one partner spends most or all of their time on childcare duties.
National insurance
The 1% rise in employee national insurance from 2011-12 looks set to go ahead, but the equivalent rise in employer national insurance looks set to be scrapped.
Capital gains tax
The link between capital gains tax and income tax rates looks likely to be reintroduced, perhaps accompanied by a drastic cut in the annual exemption from the current five figure sum to, perhaps, £2,500. This would lead to a significant increase in capital gains tax on non-business assets, although gains on business assets appear likely to continue to attract generous reliefs. This is again broadly Liberal Democrat policy.
Inheritance tax
The Conservative proposal for a £1 million nil rate band looks set to be abandoned.
VAT
A rise to 20% is widely anticipated.
Tax avoidance
We can expect to see something of a blitz on tax avoidance activity from the coalition, which is only sensible given the scale of the budget deficit. It remains to be seen whether any distinction is drawn between avoidance and mitigation in this respect, or whether some of the more mainstream tax mitigation strategies are attacked also. Liberal Democrat policy is for a corporation tax general anti-avoidance rule with a taxpayer-funded clearance system, which I would personally welcome; whether this might be extended to other taxes remains to be seen. One would hope that this is matched by an equally decisive clampdown on tax evasion, which is after all illegal, and thus utterly beyond the pale in a civilised society.
Retrospection?
We have of course already had a 2010 Budget, and we have a tax regime in place for the current year. Opposition objections to the 'retroactive' nature of the pre-owned assets tax were loud and prolonged, so it will be interesting to see whether any of the above proposed direct tax changes are back-dated to 6 April 2010, or merely put in place from 6 April 2011, allowing a significant planning window for taxpayers to reorganise their affairs. One great advantage of VAT is of course that the rates are not set by tax year, which makes it such an obvious candidate for an early increase.
The proposed package leaves no one in any doubt that the coalition is serious about tackling the budget deficit, and appears unlikely to shrink from unpopular measures introduced with that aim in mind. Not, one feels, necessarily a recipe for electoral popularity, but a very necessary one for the UK economy.
Mark Simpson
13 May 2010
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