Ernst & Young comments on first Coalition Government budget
George Osborne delivered the first Budget of the new Coalition Government, emphasising the need to pay for the past and plan for the future. Given this was an emergency Budget, outside the normal cycle, there had to be enough in it to make it worthwhile, and whilst that proved to be the case, there was not really much in it that wasn’t expected, rather, more clarification of the detail which had not already been leaked.
In his speech he warned of the need for both spending cuts and tax rises, on a broad 80:20 basis. There will be more detail on the former in the autumn, but the planned budget cuts of 25 per cent over a four year period for unprotected Government departments are substantial. Can you imagine achieving that here?
There is the expected two year public sector pay freeze for all but the lower paid, with cuts in a number of benefits. Even the Civil List gets a mention, the Chancellor emphasising that everyone will have to pay something.
The main headline will probably be the increase in VAT from 17.5 to 20 per cent, with effect from 4 January 2011. This was no doubt designed to give the right signal whilst not damaging a fragile recovery, particularly in the run up to Christmas. There is nothing in that which should concern us, although captive managers will not welcome the increase in IPT from 5 to 6 per cent.
There are no other changes to duties, apart from reversing the additional duty on cider which was announced in the last Budget at the end of this month. The suggestion that this will be timed to celebrate England’s progress at the World Cup may be optimistic.
The other item that attracted most interest in the run up to the Budget was the possible increase in Capital Gains Tax (CGT). This has been increased from 18 per cent to 28 per cent for higher earners and trusts, effective from midnight tonight. For those on lower incomes the rate is unchanged. If ever there was an example of the compromise of the coalition at work, this was it.
Locally, this is perhaps a lesser raise than many were forecasting, and is less likely to fuel any exodus from the UK. However, the fact that CGT has not been extended to non residents, more than is the case now, is good. Fiduciaries in the Island will need to consider the impact of a change part way through a fiscal year on their UK resident beneficiaries. Fund managers should look to demonstrate the benefits of pooled funds being able to change assets in the fund on a tax free basis.
There is the possibility that inheritance tax (IHT) on trusts will be brought within the Disclosure of Tax Avoidance Schemes, which is something to watch for the future. The freezing of the threshold for the next few years, announced in the previous Budget, has been retained.
As expected, income tax personal allowances have been raised, and the Chancellor has committed to revisit the planned reduction in pension relief due next year; with this set to be withdrawn and replaced with a lower annual contribution limit. Perhaps to as low as £35,000 a year. Other savings products will be needed by some to fund retirement which is an opportunity for the Islands.
The detail behind the Budget includes an intention to review the taxation of non-doms, as promised previously, although there are no specific announcements beyond that. There is also a commitment to examining whether a General Anti-Avoidance Rule would be effective.
Again as predicted, corporation tax is being reduced, but slower than forecast, from 28 per cent to 24 per cent over four years. Capital allowances will be spread over a longer period, which could affect structures in the Island owning commercial property in the UK, and the announcement of yet more changes to the taxation of foreign profits may have some impact locally.
The “jobs tax” has been replaced by a modest incentive, as trailed over the weekend, to the penny.
From January 2011 the Government will introduce a bank levy, which will be based on their balance sheet values and expected to raise £2 billion per annum. There have been concerns that such unilateral action will damage the City of London, which is not good for us here. If, as suggested, France and Germany do the same, this will lessen any damage. There will be more work on controlling bank bonuses.
Amongst a number of items, on which more is to be done in coming months, is further work on a switch from air passenger duty being on a per passenger basis to a per plane basis, something first raised by the previous Government. This seems likely to favour planes with fewer empty seats, which could prove to be an issue for us here.
And his “da da” moment was the re-linking of state pensions to earnings, as part of a “triple lock in” the lower of earnings, pensions and a minimum 2.5 per cent.
So, overall an important and a tough Budget in a UK context but one that will have less direct impact here. This is to be welcomed, we have enough problems of our own to resolve.