George Osborne delivered the new Coalition Government's eagerly awaited Emergency Budget this afternoon.

No doubt more detail and reaction will emerge over the days and weeks ahead but this bulletin summarises the initial headline implications of the Emergency Budget for businesses and high net worth individuals.

CGT

An increase in the headline rates of CGT was largely expected and the following changes have effect from midnight tonight:

• The rate of CGT will rise from 18% to 28% for higher and additional rate taxpayers. There will be no such increase, however, for basic rate taxpayers. Meanwhile gains made by the trustees or personal representatives of deceased persons will be charged at 28%. It is possible that the increase in the rate of CGT may be the beginning of the attack on CGT and that there may be another hike in the rate in April 2011 to align the higher rate of CGT more closely with income tax rates. The notes that accompanied the Emergency Budget did little to alleviate this concern, although the Chancellor did comment in his speech that any further increase would potentially generate less revenue. Presumably this is because he recognises that taxpayers are more likely to investigate tax planning opportunities if the rate is perceived as beyond the "tipping point".
• The lifetime limit for entrepreneurs relief will be extended from the first £2m of gains to cover the first £5m of gains made by an individual. Any capital gains within that limit will be subject to CGT at the rate of 10% irrespective of whether the individual is a basic rate, higher rate or additional rate taxpayer. This is a welcome change.
• There will be no increase to the annual exempt amount which remains at £10,100.

Corporation Tax

A reduction in the rates of corporation tax had been flagged by the Coalition Government since the election, but the details are interesting. From April 2011, the rate of corporation tax will be reduced by 1% each year for the following four years, thereby reducing corporation tax from the current rate of 28% to 24% by 2014/15. The aim is to avoid UK resident corporations emigrating (which has been happening in recent years) and to make the UK a more attractive jurisdiction for international business.

The corporation tax rate for small companies will also be reduced by 1% to 20% from April 2011.

VAT

As was widely expected VAT will rise, however, what is perhaps surprising is that the increase in the rate from 17.5% to 20% will not be gradual but rather will be in one go. The increase will be effective from 4 January 2011.

Income Tax

The income tax personal allowance for under basic rate taxpayers under 65 will be increased by £1,000 to £7,475 in 2011/12, with the Coalition Government looking to increase this up to £10,000 over the next four years.

To ensure that the majority of higher rate taxpayers will pay the same total level of income tax and NICs as previously planned, the Coalition Government will also reduce the basic rate limit for income tax by £2,500 and the upper earnings and profits limits for NIC by £1,650.

Bank Levy

A new levy on banks' balance sheets will be introduced from 1 January 2011 to reflect the "risks they pose to the economy". The proposed levy will be set at an initial rate of 0.04%, ultimately increasing to 0.07%. More details will be published soon.

Taxation of non-domiciled individuals

Although the Chancellor gave no clear indication as to what the Coalition Government has planned for non-domiciled individuals, he did reiterate that the taxation of non-domiciled individuals will be reviewed, so it's still a case of "watch this space" in this area.

Anti-Avoidance

We are no closer to knowing whether or not a general anti-avoidance rule ("GAAR") will be introduced. The possibility of introducing a GAAR has been mooted for some time, and the Coalition Government has simply undertaken to "examine the issue further".

A consultation on the taxation of employment-related shares and securities will take place this year. The aim of the consultation will be to develop proposals to ensure that income from employment related securities is subject to income tax and NICs.

The Coalition Government will also be considering ways to prevent attempts to avoid tax and NICs on earnings through the use of trusts and other vehicles that seek to avoid, defer or reduce liabilities to income tax and NICs on earnings or seek to avoid restrictions on pensions tax relief. Legislation to tackle such tax avoidance will be introduced and take effect from 6 April 2011.

New Businesses NIC scheme

The Chancellor announced a scheme, set to start in September 2010, to help new businesses outside the South East and East of England. This new scheme will benefit any new business set up from 22 June 2010 which meets certain criteria.

During a three year qualifying period, new businesses which start up in these targeted areas will not have to pay the first £5,000 of Class 1 employer NICs due in the first year of employment. This relief will apply for each of the first 10 employees hired in the first year of business.

Games Industry Relief

The tax relief for the video games industry proposed by the previous Government in the 2010 Budget has been scrapped by the Chancellor.

Contact Us

To find out more about how any of these changes affects you or to discuss the above in greater detail please contact Glen Atchison or David Scott of Harbottle & Lewis' Tax Practice.

22 June 2010