Budget 2013 looms: what are the predictions?

What can we expect?

On 20 March, the Chancellor George Osborne will deliver his Budget speech. As businesses and individuals across the country wait to see what is in store, partners from accountancy firms Saffery Champness and Crowe Clark Whitehill consider the likely changes and discuss the implications below.

Ronnie Ludwig comments: “George Osborne really needs to pull something special out of the bag this year. Stimulating the economy is imperative, especially given that we have now lost our Moody’s rating. The Coalition is hardly high on political capital, so the choices are likely to be tricky ones and are certain to be interesting.”

Inheritance tax

Tim Gregory says: “There are lots of very good reasons to leave this alone, not least of them political pressures. I can however foresee some tinkering here. The Coalition plans to fund the new £75,000 cap on elderly care costs with changes to IHT. So far, they have proposed to freeze the nil rate band for another few years. This seems unlikely to be enough to cover the care costs, and so something further may need to be done."

Capital gains tax

Ronnie Ludwig comments: “We may well see a reduction in the headline rate of CGT, bringing it down from 28 per cent to 25 per cent. This would be very nice little incentive to get people investing again. Recent evidence suggests that CGT has also raised less tax since it was increased to 28 per cent, so a return to 25 per cent would make sense on a fiscal level too.”

Incentivising business creation

Tim Gregory comments: “If this Government is really serious about creating a start-up economy, it should give some time to further reconsidering income tax loss relief restrictions for businesses. Not doing this just prolongs an unnecessary disincentive for people to start new businesses and dampens the entrepreneurial spirit we seem to be missing.”

First time buyers

Ronnie Ludwig suggests: “The housing market is still sluggish, but Government can have a hand in boosting it; especially with first time buyers. One way of doing this would be to re-introduce tax relief on mortgage interest. Another solution could be a Stamp Duty holiday for first time buyers. The housing market is a good economic indicator, so the Government would do well to try and give it a leg up."

Cutting corporation tax

David Mellor, Head of National Corporate Business at Crowe Clarke Whitehill, comments: “The big announcement in the Budget is expected to be that corporation tax for larger businesses is to be cut to 21 per cent from April 2014. When this comes into force it will be the lowest rate of corporation tax in G8 countries. This reduced tax rate will help to ensure that the UK remains a desirable destination for corporations and maintains its competitive edge in a time of global economic turbulence.

“However, more could be done. The tax system itself is complex and costly to administer, as well being difficult for taxpayers to understand and process. A simpler regime would lessen the red tape associated with compliance and reduce the cost to the government of verifying, enquiring into returns and collecting taxes. These savings could be used to reduce the headline rate of corporation tax further, which should be lower than 20 per cent if the UK really is set on being an inward invsestment direction. We know that the Chancellor has announced that the Office of Tax Simplification will undertake a review of employee benefits and expenses in December.”

Combating corporate tax evasion

David Mellor, Head of National Corporate Business, continues: “Given the recent media focus on corporate tax evasion, the Chancellor is likely to announce greater investment in resources to ensure that multinational companies pay more tax. The closure of tax loopholes, which combined with a crackdown on tax evasion through Swiss bank accounts should bring in £2bn per year.”

“Employee shareholders” schemes – risk of creating tax avoidance opportunities for owner managed businesses?

Director Susan Ball comments: “The Chancellor is expected to announce that the Government will be proceeding with the proposed ‘employee shareholders’ scheme. However, it is not obvious that this will have material tax benefits.

“The essential idea is to encourage employees to give up employment rights for a tax incentive. As the proposals stand, there are significant tax costs in connection with the issue of these shares and the tax saving only applies when the shares are sold, making it unlikely that many employees will wish to participate.

“On the other hand, if the Government increases the incentive, it runs the risk of creating an avoidance opportunity for smaller owner managed businesses (as the issue of shares presents no cash cost to the company but, in most cases, entitles it to a tax deduction). So the development of this policy is something to watch carefully. We know that the Chancellor has announced that the Office of Tax Simplification will undertake a review of employee benefits and expenses in December.”

Mansion tax – damaging for business?

Partner Stacey Eden comments: “We can expect more changes to the taxation of property to be confirmed in the Budget. 

“The Government's focus remains on stamping out certain types of Stamp Duty Land Tax (SDLT) avoidance in a way that does not damage business by focusing on attacking high-value residential property transactions and investments, with wide-ranging exemptions if the property is part of a rental or development operation. However despite the reliefs these changes make it necessary for overseas holders of residential property worth £2m and held for “personal use” via a non-natural person (effectively a company) to consider significant restructuring prior to 5 April 2013.

“There is a further possibility of the Chancellor proposing an increase to the SDLT rates, or attempting to appease the Liberal Democrats in the Coalition by proposing a higher council tax for high-value residential properties. These measures, if introduced, could go some way towards taking some of the sting out of the prime residential property market in London, restricting the massive price hikes we have seen in recent years.

“The other possibility is the introduction of further anti-avoidance measures following on from the proposed wholesale re-drafting of the rules on sub-sale relief (transfer of rights). The existing rules have been the vehicle for widespread avoidance. Limiting them to the intended purpose of allowing purchasers to immediately sell on land surplus to their requirements without incurring a double charge is not going to be easy. It remains to be seen if the final rules meet the challenge.”

Limit on income tax relief – holding back start-ups?

Partner Laurence Field comments:  “Provisions in the 2013 Finance Bill are expected to limit certain income tax reliefs to the higher of: 25 per cent of total income or £50,000.

“The Government, having been forced to give ground by removing charitable donations from the scope of this restriction, are unlikely to make any further amendments. This is a revenue raising change. It seems likely that a significant part of that revenue will be from people starting new businesses.

“Businesses frequently make losses in their early years and the opening year loss rules have allowed those setting up on their own to recover significant amounts of tax paid while in their previous employment. The cap may reduce those recoveries considerably.

“The usefulness of income tax relief for lost investments in unquoted trading companies may also be significantly impaired by this restriction. Those who make larger trading losses will also be affected but, where able to survive, will be able set the losses against future profits. It will take time to fully appreciate the implications of these provisions.”

Further regulation (GAAR, FATCA)

Partner Laurence Field continues:  “The Chancellor announced in the Autumn Statement that the Government will be pushing ahead with a General Anti-Avoidance Rule (GAAR) in its attempt to counter perceived abuses of the tax system. The GAAR is intended to give HMRC broader powers in closing off abusive tax avoidance. The majority of taxpayers would argue they are not involved in abusive tax arrangements and it will be interesting to see how many people will be surprised by HMRC enquiries.

“Foreign Account tax and Compliance Act (FATCA) requires financial institutions outside the US to report information about their account holders to the IRS. The Chancellor’s is also expected to confirm that the Treasury will be allowed to make regulations to override data protection laws to allow compliance with this.”

International tax issues – ‘exit charge payment plan’ to alleviate cash flow issues

Partner Laurence Field continues:  “The Budget is expected to confirm some interesting proposals on international issues. Companies looking to leave the UK typically suffer an “exit charge” on the value of certain assets. The thinking is that UK Government should be able to tax gains that have arisen while the company was UK resident. However, it is not clear this is consistent with UK law.

“The Chancellor has proposed that where an European Economic Area (EEA) incorporated company ceases to be UK resident and takes up residence in another EEA state it can enter into an ‘exit charge payment plan’. Essentially, allowing it to defer payment of UK tax on exit for a period of up to ten years. This should alleviate cash flow issues for companies who give up UK tax residence.

“There will also be welcome changes that will allow non-UK resident companies to surrender losses from their UK branches to tax paying UK members of the same group. There are protections to ensure the losses cannot be used in both the UK and overseas.”

Statutory residence test – marginal cases will remain as difficult to resolve

Tim Norkett, Partner, comments: “The draft Finance Bill published in December 2012 contained a revised version of the legislation originally published that summer. It seems unlikely that any significant changes will be made between now and the 2013 Budget.

“There is no doubt that the statutory residence test is going to be an improvement on the current situation based almost entirely on case law. Nevertheless, the new provisions are disappointing inasmuch as they lack precision, and it will mean that in many marginal cases will remain as difficult to resolve as before.

“The most significant recent amendment has been to introduce a new minimum presence test when considering possession of a home. This has the laudable effect of meaning UK homes occupied for less than 30 days a year are less likely to make a person UK resident. On the other hand, an overseas home which is occupied for less than 30 days is also ignored so it cuts both ways.”

Annual Investment Allowance

Partner Laurence Field adds: “Although the Annual Investment Allowance (AIA) was increased tenfold from 1 January 2013 for a period of two years, the legislation is not yet been enacted and will actually be in the Finance Bill 2013. There are two key points to be made about the allowance now standing at £250,000 per accounting period.

“The first is that it is time apportioned over the two years to 31 December 2014 using complex transitional provisions. Unless you have a calendar year accounting period, care is needed in calculating the position in the accounting periods straddling either end of those two years, and careful thought given to the timing of capital expenditure.

“The second point is that the new restriction on income tax losses applies to losses generated by this relief. So individuals will need to consider their overall tax position, to ensure they will be able to utilise the relief.”

This article first appeared on Spears.

Photograph: Getty Images

This is a story from the team at Spears magazine.

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How the mantra of centrism gave populism its big break

A Labour insider reflects on the forces behind the march of populism. 

For just under a quarter of a century, British politics has been dominated by what might be called, paradoxically, a “theology of centrism” - the belief that most people were more concerned with what works than ideology, and that politics should principally be the art of improving the delivery of public goods. It was a theology that, for all their policy differences, united Tony Blair and David Cameron. Anyone who thought electoral success could be won anywhere but from the centre was either naïve or fanatical, or both... but definitely wrong.

Now, populism is on the march across the West. In Britain, as elsewhere, the political class is unnerved and baffled.

So what happened? Partly, as with all revolutions in politics, the answer is: “events”. Unsuccessful wars, economic crashes and political scandals all played their part. But that isn’t enough of an explanation. In fact, the rise of populist politics has also been a direct result of the era of centrism. Here is what has taken place:

1. A hollow left and right

First, the theology of centrism was the culmination of a decades-long hollowing out of mainstream politics on the left and right.

In the mid-20th century, Conservatism was a rich tapestry of values – tradition, localism, social conservatism, paternalism and fiscal modesty, to name but a few. By 1979, this tapestry had been replaced by a single overriding principle - faith in free-market liberalism. One of Margaret Thatcher's great achievements was to turn a fundamentalist faith in free markets into the hallmark of moderate centrism for the next generation of leaders.

It is a similar story on the left. In the mid-20th century, the left was committed to the transformation of workplace relations, the collectivisation of economic power, strong civic life in communities, internationalism, and protection of family life. By the turn of the 21st century, the left’s offer had narrowed significantly – accepting economic liberalism and using the proceeds of growth to support public investment and redistribution. It was an approach committed to managing the existing economy, not transforming the structure of it or of society.

And it was an approach that relied on good economic times to work. So when those good times disappeared after the financial crash, the centrism of both parties was left high and dry. The political economic model of New Labour disappeared in the first days of October 2008. And when a return to Tory austerity merely compounded the problem of stagnant living standards, public faith in the economic liberalism of the centre-ground was mortally wounded.

2. Fatalism about globalisation

Second, Labour and Tory politics-as-usual contained a fatalism about globalisation. The right, obsessed with economic liberalism, welcomed globalisation readily. The left under Bill Clinton in the US and Blair in the UK made their parties’ peace with it. But globalisation was not a force to be managed or mitigated. It was to be accepted wholesale. In fact, in his 2005 Conference speech, PM Tony Blair chastised those who even wanted to discuss it. “I hear people say we have to stop and debate globalisation," he said. “You might as well debate whether autumn should follow summer. They're not debating it in China and India.” (I bet they were, and still are.) The signal to voters was that it was not legitimate to fret about the pace and consequences of change. No wonder, when the fretting began, people turned away from these same politicians.

3. A narrowing policy gap

Third, the modernising projects of Blair and Cameron ended up producing a politics that was, to use Peter Mair’s term, “cartelised”. The backgrounds, worldviews and character of party elites began to converge significantly. Both parties’ leaderships accepted the same external conditions under which British politics operated – globalisation, economic liberalism, sceptical acceptance of the EU, enthusiasm for closeness to the US on security issues. The policy space between both main parties narrowed like never before. As a result, economic and class divisions in the country were less and less reflected in political divisions in Westminster.

The impression arose, with good reason, of an intellectual, cultural and financial affinity between politicians across the main divide, and between the political class and big business. This affinity in turn gave rise to a perception of “groupthink” across the elite, on issues from expenses to Europe, and one that came with a tin ear to the concerns of struggling families. It may be misleading it is to depict all politicians as snug and smug members of a remote Establishment. Nevertheless, social and economic convergence inside Westminster party politics gave populists an opportunity to present themselves as the antidote not just to Labour or the Tories, but to conventional politics as a whole.

4. New political divides

Lastly, the populist moment was created by the way in which new electoral cleavages opened up, but were ignored by the main political parties. The last decade has seen a global financial crash that has restored economic insecurity to frontline politics. But at the same time, we are witnessing a terminal decline of normal party politics based fundamentally on the division between a centre-left and centre-right offering competing economic policies. 

Of course economics and class still matter to voting. But a new cleavage has emerged that rivals and threatens to eclipse it - globalism vs nationalism. Globalists are economically liberal, positive about trade, culturally cosmopolitan, socially progressive, with a benign view of globalisation and faith in international law and cooperation. Nationalists are hostile to both social and economic liberalism, want more regulation and protection, are sceptical of trade, see immigration as an economic and cultural threat, and have little time for the liberal international order.

The factors that drive this new electoral divide are not just about voters’ economic situation. Age, geography and education levels matter – a lot. Initially both main parties were tectonically slow to respond to this new world. But populism – whether Ukip, the SNP or Theresa May's Tories – has thrived on the erosion of the traditional class divide, and sown seeds of panic into the Labour party as it faces the prospect of sections of its traditional core vote peeling away.

Centrists thought their politics was moderate, pragmatic, not ideological. But signing up to free market liberalism, globalisation and an economistic view of politics turned out to be seen as a curious kind of fundamentalism, one which was derailed by the 2008 crisis. The exhaustion of the theology of centrism did not create populism – but it did allow it a chance to appeal and succeed.

Those on the left and right watching the march of populism with trepidation need to understand this if they are to respond to it successfully. The answer to the rise of populist politics is not to mimic it, but to challenge it with a politics that wears its values proudly, and develops a vision of Britain’s future (not just its economy) on the foundation of those values. Populists need to be challenged for having the wrong values, as well as for having anger instead of solutions.

But calling for a return to centrism simply won’t work. It plays precisely to what has become an unfair but embedded caricature of New Labour and Notting Hill conservatism – power-hungry, valueless, a professional political class. It suggests a faith in moderate managerialism at a time when that has been rejected by events and the public. And it tells voters to reconcile themselves to globalisation, when they want politicians to wrestle a better deal out of it.

Stewart Wood, Lord Wood of Anfield, was a special adviser to No. 10 Downing Street from 2007 to 2010 and an adviser to former Labour leader Ed Miliband.