Ernst & Young comments on today's Budget announcements


Cathy Taylor, head of tax at Ernst & Young in Cambridge comments on today’s Budget announcements.

Consultation on the extension of the patent box
As hoped, the Chancellor has opened the door to a more useful patent box regime, offering the prospect of including patents that are already in existence but are not yet commercialised. This could make the regime far more relevant and mean that companies could actually see a benefit in 2013. Previously it was feared that the restriction only to patents registered after Finance Bill 2011 would mean that there would be no tax saving until 2020.

More widely, the continued focus just on patents will leave many companies dissatisfied, arguing that design rights, copyrights and other intellectual property should similarly benefit.

As expected, VAT will remain unchanged at 17.5%, although many are still speculating that it won’t remain at that level for long. A rate of 20% remains the most likely outcome of the first year of the next Parliament.

Corporation tax - A lost opportunity
In failing to address the key deterrents to undertaking business in the UK - the Corporation Tax rate and the higher personal tax rates on highly mobile top management - the Chancellor has missed the opportunity to make the UK a magnet for new investment from around the world.

NICS – Dog that didn’t bark in the night
The Chancellor forged on with his £10 billion rise in National Insurance, scheduled for 6th April 2011, in doing so ignoring the concerns of business organisations about its effect on employment. Given that the impact will not be felt for over 12 months, a future chancellor may reconsider the choice between NIC (a so called tax on jobs) or another option such as the much forecasted increase of VAT to 20%.

Inheritance tax
The Chancellor has announced that he is freezing to nil rate of tax for Inheritance Tax at £325,000 for a further four years. Many commentators had expected this to rise, in line with higher values of suburban houses that are in the ownership of many elderly people. This announcement will mean that many more people will fall into the inheritance tax net in the next few years.

Lessons in prudence
The Chancellor has preserved the option of leaving good news for Labour’s general election manifesto, which increases the chance of a further Budget after the election, even if Labour were to be re-elected.

Today’s announcements represented the continuation of themes from last December’s Pre-Budget Report, focused primarily on fixing the public finances rather than attention-grabbing giveaways. Where the Chancellor did spend some money was on tax credits, the investment allowance for businesses, and measures to help entrepreneurs, but he was clearly limited by Britain’s record deficit. In what will almost certainly be his last Budget, Alistair Darling clearly wanted to go down in history as the prudent Chancellor.

Stamp duties: ‘Darling’s own mansion tax’
The Chancellor spoke in his speech of a new 5% rate of stamp duty for properties above £1 million, to fund an increase in the stamp free band from £125,000 to £250,000 which will last for two years for first time buyers. The Budget documentation confirms that this will apply only to residential property and that the new 5% rate will only come into force in 2011.

This is likely to encourage sales before the implementation date, giving a boost to the top end of the housing market and potentially providing a welcome short term boost to exchequer revenues.

The change retains the ‘slab’ system, meaning that the regime distorts sales at £250,000, £500,000 and now at £1 million. There appears little logic for increasing stamp duty by £10,000 for a £1 increase in price from £999,999.

50% tax rate
The Chancellor didn’t take the opportunity to remove the anomalous 60% rate on income tax, meaning that highest rate is felt by those earning £100,000 to £112,950, rather than those more highly paid.

Furthermore, the 50% rate is beginning to impact on the UK’s overall competitiveness and the country’s ability to attract mobile executives. A renewed focus has been created by April's headline rate of 50% which, combined with the restrictions in relief for pension contributions, has already fed into the psyche of the globally mobile executive.

This headline rate - the fifth highest rate of the 30 OECD countries - is clearly a deterrent to attracting talent.



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