Insights

Last week, the new Conservative LibDem coalition government was announced amid a flurry of guarded excitement and scepticism. The coalition has been quick to stamp out suggestions that their political differences will be too marked to produce effective financial policy and so far, the speed with which agreements have been reached is impressive and very positive in terms of their quality.

As a firm of tax advisers, one of the biggest issues our clients experienced under the previous government was a lack of measured policies being introduced, which in some cases, amounted to a lot of ‘tinkering’. The fact that now, with a coalition government, any tax changes will need to be properly discussed and debated, is akin to our earlier suggestion of having an “all party tax committee”, whose job it is to ensure that all changes introduced are free from political bias and will really benefit the economy. So, we believe the coalition presents a great opportunity to focus legislation and change tax policy for the better.

With the Budget just a few weeks away on June 22nd, here are some of the key changes business owners can expect to see from the new government, with our initial comments on their likely implications.

• Details behind the promised £6m public sector cuts will be announced by the end of this month and are likely to include significant reductions to the costs of quangos and senior management positions;
• The unpopular “jobs tax” will be revoked. Although the increase in employee NICs will remain for the foreseeable future, the previously proposed increase in employer contributions, the most widely criticised aspect of this measure, will not now take place;
• An increase in the personal allowance to £10k for the lowest income groups will begin to be introduced, although this will be phased in over the duration of the next 5 years. How this will be funded has not been outlined, although the increase in capital gains tax (CGT) will compensate, as will the proposed reduction to the CGT annual exemption;
• CGT for non-business assets will be increased to a rate widely anticipated to be set at a maximum level of 40% in order to more closely align the taxation of capital with income. In addition, the current £10K exemption will be reduced in the coming years to around £2K, to help fund the rise in personal allowances;
• For business owners, the increase in CGT from 18% to 40% will effectively mean the end of entrepreneurs’ relief as we currently have it, and this was something we predicted in our recent articles, advising clients to use it whilst they still could.

The following calculation highlights why this is the case:
The way in which entrepreneurs’ relief works is that it reduces the chargeable gain on business assets by 4/9ths and charges the resulting gain to tax at the current rate (18%). This results in an effective rate of 10% on business gains of up to £2m, e.g.

Capital gain of £ 1,000,000
Entrepreneurs' relief: -4/9 - £ 444,444
Chargeable gain £ 555,556

Charged at 18% = £ 100,000 i.e. an effective rate of 10%

On an increase in the CGT rate to 40%, assuming entrepreneurs’ relief is not touched; the effective rate of tax on business assets will increase to 22.22%, e.g.
Capital gain £ 1,000,000
Entrepreneurs' relief -4/9 -£ 444,444
Chargeable gain £ 555,556

Charged at 40% = £ 222,222 i.e. an effective rate of 22.22%

• We are promised ‘generous reliefs for business assets’ and it is possible therefore that entrepreneurs’ relief will be abolished altogether and replacement incentives will be introduced to encourage the ownership of business assets, for example it is possible that an indexation or a taper relief system, based on the length of ownership of assets, will be re-introduced to incentivise business ownership, but nothing has been confirmed yet.

• The Tories’ pre-election plans to increase the Inheritance Tax (IHT) threshold will be postponed, along with the LibDem’s proposals for a so called “mansion tax” on property worth over £2.5m;

• Slightly incongruously, based on current practices, the reduction to the CGT exemption will result in many more taxpayers being required to complete tax returns, yet a key aspect of the election campaigning was an overall reduction to red tape and taxation bureaucracy. We anticipate some interesting announcements about tax returns and the possible modernisation of the system in the coming months.

• The retail industry is expecting a rise in VAT to 20% and it is widely acknowledged that this is a necessary increase to improve the Treasury’s longer-term financial prospects. Commenting on behalf of the retail industry about this change, Justin King, Chairman of Sainsbury’s, said that an unfortunate aspect of this anticipated VAT increase is the cost to retailers of introducing frequent changes – something the industry felt strongly after Labour’s recent reduction and reinstatement policy. Whether food and children’s clothing will continue to be exempt is not yet known and any change here will be controversial.

For more information, contact us at Las@rjp.co.uk.

Lesley Stalker is Head of Tax at Robert James Partnership