Budget 2010 predictions from Ernst & Young


Ernst & Young's Cathy Taylor makes her tax predictions for this year's Budget.


Ernst & Young believes that much of the hard work of tax policy reform is already underway and scheduled for discussion after the Budget.

Cathy Taylor, Ernst & Young’s Head of Tax in Cambridge, says: “In producing this year’s Budget, the Chancellor should be giving as much information as possible about the future direction of tax policy in order to assist business to plan. However he should steer clear of major changes in the run up to the election to ensure that measures are given proper consideration before implementation.

“On particular aspects of ongoing tax policy, Cathy commented:

  •  “The much awaited changes to the regime for controlled foreign companies remain critical in order to maintain and improve the UK’s competitiveness. These are subject to consultation until 28 April, a date falling between the Budget and the likely election date. Given this, the Chancellor might be expected to reflect on what has been heard already but not to announce any changes at this time.
  • “The bank payroll tax (BPT) remains unfinished business, with draft legislation being updated on a frequent basis. The BPT applies to bonuses up to 5 April 2010 but the Chancellor has retained the right to extend this further. The Budget gives the Chancellor the opportunity to clarify if he will indeed extend the tax.
  •  “Next year’s one percentage point increase in national insurance contributions (NIC) has drawn much criticism from employers, particularly where pay freezes mean that the burden will fall directly on to businesses rather than impacting next year’s pay rise. Faced with concerns over this representing ‘taxes on jobs’ the Chancellor might seek to instead raise the needed revenue from other sources such as VAT.
  •  “VAT rises still seem the most likely rate to be taken to generate additional revenues, either through a rate increase to 20% or through the removal of some of the zero rate reliefs. Whilst imposing VAT in food appears unlikely, other reliefs, such as the zero rate on books and children’s clothing, might be removed with some of the revenues recycled into benefits to reduce the impact on low income families. However, this is more likely to appear after the election.
  •  “One area of change could be the corporation tax rate. While current year reductions in the tax rate appear unlikely, the Chancellor might announce a plan to cut the corporation tax rate to 24% over the next Parliament.
  •  “The deferred increase in the small companies’ rate of corporation tax, from 21% to 22% is due to come into effect on 1 April 2010. Whilst the Chancellor may wish to keep the additional revenue of £400m, he may believe that a further one year extension would be appropriate.
  •  “There is further unfinished business in relation to the new ‘patent box’, announced at the Pre-Budget Report. This will apply from 2013 for patents registered after 2011, which means that it is unlikely to impact decisions for many years to come. The Chancellor might bring this forward and apply this to more patents.”

“Overall, the Chancellor is likely to look to maintain the course of tax policy change during this period of considerable uncertainty. We therefore expect the Budget to consist primarily of a reaffirmation of the direction of tax policy. From a business perspective, a clear strategy and sense of direction would be positive.”


“We are interested in three key issues:

  • What will be announced in the Budget (before the other parties get a chance to announce their manifestos)
  •  What willbe included in the Labour manifesto
  • What is not going to be announced until one party or another does so after the election

“In terms of Budget predictions, there are unlikely to be any changes to income tax rates or the rules for pension contributions. However, with the bonus tax expected to bring in some £2bn of extra revenue, the Chancellor may announce that, while some of it will be used to reduce the budget deficit, a proportion will be set aside to provide relief for those in need. This could mean that rather than freezing personal allowances at 2009/10 levels as expected, the Chancellor may instead announce an increase. This would tie in with both the 1997 and 2001 elections where above inflation increases were announced in the preceding Budgets.

“While aligning the 18% capital gains tax rate with the income tax rate would certainly raise revenue, this is another tax that the Chancellor is unlikely to change in the Budget. However, a detailed review of the tax could be announced with the objective of ensuring that people whose earnings include capital gains pay income tax on those gains. This may be difficult to achieve in reality, since the definition of earnings has always been a complex area of UK taxation.

“In relation to National Insurance Contributions, employers may be hoping that the Chancellor will defer the 1% increase past 2011 under the auspices of supporting businesses but this is unlikely to happen. Instead, the Chancellor may announce measures to support employers as they grow. This would reflect the Conservative Party proposal to offer businesses started in the first two years of a Conservative Government a break from employer NICs on the first ten employees hired during the first year.

“When it comes to the manifesto, the issue of a VAT increase may well be left open but a review of the way that VAT operates may be included. Should the Labour Party return to power, this could well translate into a 20% rate of VAT and a review of the zero rate that currently applies to all 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.

“Inheritance tax may also appear in the manifesto although it may take the form of an indication that the nil rate band will be increased together with a more general review of the way in which inheritance tax operates. If the Labour Party is re-elected, we could see a 50% rate of inheritance tax for estates over say £1.5m, which would pay for a reasonably substantial increase in the nil rate band and perhaps a review of potentially exempt transfers.”

“It is always difficult to predict the Chancellor’s approach to the Budget and this year is more difficult than ever. The one certainty is that the Budget will be an important element in the election campaign.”



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