Predictions and wishes for Osborne’s 2013 Budget
By Nick Hostler, tax expert at BDO. The opinions expressed are his own.
Following the recent loss of the UK’s AAA rating, Chancellor George Osborne will be keen to show real progress and dedication towards eliminating the UK’s structural fiscal deficit, but must balance this with ensuring that the UK is a highly competitive and attractive location for multi-national businesses. The Budget should mark a watershed moment for the coalition government as Osborne, with an eye on the next general election, treads a fine line while demonstrating an understanding of the pressures faced by individuals and businesses across the country.
Whether he strikes this balance remains to be seen, but here is what I believe the Budget will have in store.
With the announcement in the Autumn Statement of a further reduction in the main rate of corporation tax to 22 percent from April 2014 and the promised cut to 21 percent from April 2015, I predict that there will be no firm commitments on additional rate cuts in the 2013 Budget. Nevertheless, I would not be surprised if there were to be a firm commitment to introduce a flat 20 percent corporation tax rate by the end of this parliament. This would enable the coalition government to demonstrate its commitment to creating one of the most competitive corporate tax systems within the G20.
This reduction in corporation tax rate has been accompanied by the introduction of a number of very favourable tax reliefs including the headline grabbing Patent Box Regime, aimed at attracting high tech industries such as manufacturing, electronics, pharmaceuticals, and defence which are considered to be of great importance to the economy. This regime will allow companies to secure a 10 percent rate of corporation tax from April 1 2013 on all profits attributable to qualifying patents.
Another recent tax break, which is likely to be of most benefit to medium-sized businesses, is the increase of the Annual Investment Allowance to £250,000 from January 1 2013 for two years. It would not come as a surprise if the Chancellor announces a further extension to this relief to encourage smaller and medium sized businesses to invest in new plant and machinery.
However, smaller companies are disappointed that the Chancellor has not matched reductions in the main corporation tax rate by equivalent reductions in the small companies’ corporation tax rate. Both medium and smaller businesses will look at the 2013 Budget for tax reliefs focussed upon entrepreneurial, owner-managed companies. One approach the Chancellor might take is to announce a consultation upon allowing these companies to elect for their taxable profits to be assessed on their shareholders, rather than the company paying corporation tax and the shareholders being taxed upon dividends received and capital gains as well. The cost to the exchequer would be manageable and is proven, having been available to companies in the USA for many years.
From a personal tax perspective, the Chancellor may wish to recognise that there is a pressing need for some tax reforms focussed upon middle-income groups. Clearly any package of reforms would need to be paid for by other measures given the Government’s determination to eliminate the structural fiscal deficit, but personal tax simplification and reform ought to remain achievable targets. Whilst a progressive measure such as raising the basic rate tax band might be considered too costly, other popular measures might include a reduction in the rate of inheritance tax (a tax increasingly unpopular in London and moderately affluent suburbs throughout the country) or reducing the capital gains tax rate from 28 percent to, say, 20 percent. Indeed, it is probable that a reduction in the capital gains tax rate would collect more tax revenue for the exchequer as investors are often unwilling to crystallise capital gains and lose 28 percent of the surplus in tax i.e. more tax would be raised by more transactions occurring.
The Chancellor has, of course, already announced that the personal allowance will be raised again to £9,440 for 2013/14; the pledge that no one will pay income tax until they earn £10,000 is the central personal tax policy within the coalition agreement and the Chancellor may well announce a £10,000 plus personal allowance for 2014/15. I do not, however, expect any further announcements concerning the income tax rate bands for 2014/15, but it is disappointing that an increasing number of taxpayers face a marginal tax rate of 40 percent on fairly modest incomes of less than twice median earnings.
From a political standpoint, the Chancellor must also be seen to be combating tax avoidance as the perception is that aggressive tax avoidance is increasing. In the longer term, the only satisfactory route through these conflicting pressures is a flatter tax system applied to a broader tax base. Whether we will see progress towards this in the consultations announced in the 2013 Budget remains to be seen. Overall the Chancellor will be keen to be seen as a reformer who has taken steps to actively combat tax avoiders whilst promoting the UK’s tax competitiveness to both entrepreneurial businesses and multi nationals investing in the UK.