In what was being touted as the toughest Budget for a generation there was still room for some positive tax measures but equally a lot of measures give cause for concern in the tax arena.

The UK Budget - Green for go

Northern Ireland specific proposals: Whilst this proposal has been on the cards for a while now, the good news is that a consultation paper will be published in autumn on ‘rebalancing the Northern Ireland economy’, looking at options including the creation of economic enterprise zones and changing the corporation tax rate for businesses in the province.

That aside, Northern Ireland will benefit in a similar fashion to other regions from the reductions in corporation tax and the NIC Start-up Relief scheme. The increase in the capital gains tax entrepreneurs’ relief which will help encourage SME owners to grow and ultimately sell their business at an effective capital gains rate of only 10%.

Entrepreneurs’ relief boosted: The 10 per cent rate of CGT that used apply to the first £2 million of entrepreneurs’ gains over a lifetime will apply to the first £5 million of those gains from midnight at the end of 22 June.

Good for investors and entrepreneurs at a time when the UK is keen to support and attract such activities.

National insurance (NI) contributions: Start-ups outside London and the South East will save up to £5,000 in employers’ NI contributions for each of their first ten employees.

This measure will be introduced no later than September this year, but the Chancellor has promised that any business set up from the date of the Budget onwards will benefit if they meet the regulations of the scheme (not published at the time of writing). In addition, the threshold at which employers start to pay NI will be raised by £21 per week above indexation in April 2011.

For business start-ups this will be a valuable relief to encourage job creation at the early stages of a new venture.

Lower earners to pay less income tax: Well touted in advance of the Budget, the personal allowance for under-65s will be increased by £1,000 in April 2011, to £7,475. The ultimate aim is to raise it to £10,000.

Again this will ultimately benefit individual taxpayers however it is also seen as another measure to encourage more people back to work and perhaps with more money in their pockets to encourage consumer spending, though the VAT rise may well put paid to that.

The UK Budget - Amber for caution

Corporation tax reduction: From 1 April 2011 the small company rate of corporation tax is to be cut from 21% to 20%. Larger companies are being treated more generously, with the current 28% rate to be reduced to 24% over the next four years starting from the financial year beginning 1 April 2011.

Whilst many will initially see this as a green light for business we recommend the measure should be regarded with caution and viewed in the overall context of the reduced rates of capital allowances (referred to below) which could counterbalance the rate reduction for many companies.

Capital allowances trimmed back: The rate at which tax relief is given for capital spending will be reduced from 20 to 18 per cent, meaning that businesses will still receive full tax relief, but over a longer time frame. The annual investment allowance will be reduced to £25,000. However the Government states that ‘over 95 per cent’ of businesses will still be fully covered for their capital investments.

This measure is effective for corporation tax accounting periods ending after 1 April 2012 and on or after 6 April 2012 for those within the charge to income tax.

It's disappointing to note that businesses who enjoyed up to £100,000 of immediate relief for capital spend saving tax at a maximum of £28,000 will now need to reconsider their future plans at a time when cash flows are so stretched and the need for investment in business is so crucial.

In the first year of implementation the reduced Annual Investment Allowance will be worth a maximum tax saving of £6,500 for those paying 26% corporation tax.

The auditors amongst us will no doubt be considering the accounting adjustments that may be necessitated by the potential for ‘big swings’ in deferred tax as a result of both the rate changes for corporation tax and the rate reductions for capital allowances.

Many will have not so fond memories of the post balance sheet events notes and calculations necessitated by the last big changes to the Capital Allowances regime introduced by Finance Act 2007!

Capital gains tax (CGT) increased: Those who pay income tax at the basic rate will continue to pay CGT at 18 per cent. However, higher-rate taxpayers will pay CGT at 28 per cent on all transactions from midnight on 22 June.

Undoubtedly there are many who would categorise this in the “red” zone however given that the Coalition Programme for Government mooted an increase in CGT to a rate ‘close to that applied to income’, the highest rate being 50% - this was one of the big surprises on Tuesday.

After taking advice from Treasury on what would happen if the CGT rate were increased to much further beyond 28 per cent, the rate was fixed at 28% as that ‘dynamic’ analysis from Treasury showed the Chancellor that, as many analysts including ourselves were advocating, the much mooted rates of 40/50% would have resulted in smaller total tax revenues.

The Chancellor also considered in great detail the options presented for introducing tapers or indexation allowances, and concluded that the complexity and administration involved would have been self-defeating. There was also no change to the annual exempt amount of £10,100.

This tempered approach and the significant increase in entrepreneur's relief caused us to move this from red to amber.

However, it was tempting to move this measure back to red – when this proposal is looked at more closely it's obvious that many will still fall into the 28% band as the definition of higher rate taxpayer is judged by reference to income including any gains post 22 June!

The UK Budget - Red for stop

VAT increase: Tax on most goods and services will go up from 17.5 to 20% from 4 January 2011, but zero-rated items will remain so for the next five years.

Undoubtedly there will be many retailers on both sides of the Border with conflicting views on this measure. It should also be noted that the timing of the change has been deliberately delayed to give retailers their ‘bumper’ Christmas and a decent start to the New Year but without the New Year's day administrative and accounting headaches caused by the last increase from 15% to 17.5%. However, ultimately the pinch will be felt by many businesses and individuals.

VAT on food and children's clothes was not increased as expected and this will be welcomed by many in that sector.

Not quite a balance scorecard overall but Chartered Accountants Ireland is pleased to see that a number of the recommendations in our Pre-Budget submission made it into the Budget Announcements. Of course until we have a lot of these measures on the Statute Books it's difficult to categorise the impact these will have and there are many other proposals worthy of mention for both good and bad reasons which we have not addressed in any detail here.

Administrative Changes in the Budget

Almost of equal interest are those measures which impact on the way we do our work – the administration of the tax system and proposed anti-avoidance and anti-evasion measures.

Specific areas of avoidance are mentioned for attention – the use of trust mechanisms for example in employee remuneration. New measures are promised which will take effect from 6 April.

There is also a proposal for a General Anti-Avoidance Rule, or rather, a proposal about proposals – “As part of the approach to develop sustainable responses to avoidance risk, the Government intends to examine whether the option of a General Anti-Avoidance Rule (GAAR) should form one element of strengthened defenses. This informal engagement will be part of a wider consultation on the tax policy making process.”

The thing about GAARs is that, over time, they don't eliminate the need to introduce specific anti-avoidance measures. This is because they rely on the Revenue Authority's active pursuit, on a case by case basis, to trap the mechanisms which officialdom is uneasy with. It is also arguable that when the principle of form over substance is so well established in case law, a legislative encapsulation of the principle does nothing to further the interests of either the Revenue Authority or the taxpayer.

DOTAS (Disclosure of Tax Avoidance Schemes)

“Substantive changes to the descriptions of schemes required to be disclosed (hallmarks) will be worked up for 2011-12 in tandem with the wider development of tax policy in the areas affected.” This announcement sits uneasily with GAAR proposals. If either system works well, it makes the other unnecessary.

The paper to read, and from which the quotes in this article are taken, is available at http://www.hmrc.gov.uk/budget2010/enforcement-all.pdf.

Miscellaneous measures in the Budget

Amongst the mountain of Budget publications there was a raft of other interesting measures worthy of mention. Not the least of these was the news that 2010 will probably go down in history as the year in UK tax history were there will have been not just one, not just two but three finance bills for tax analysts to pour over and digest.

True to many of the tax ‘promises’ in the Coalition's Programme for Government the following additional measures also appeared:

R&D and innovation

The Government will consult with business to review the taxation of intellectual property, the support R&D tax credits provide for innovation and the proposals of the Dyson Review.

The Dyson review proposes that a 200% rate of credit for SME's be given serious consideration, which will need the necessary EU approval before implementation. It also discusses the possibility of the R&D system being more targeted for specific industries sectors e.g. start-ups, technology focused.

However it will be important to ensure that businesses which currently benefit from the relief do not lose out via specifically targeted measures.

The banks

A bank levy will be introduced from 1 January 2011 based on banks’ balance sheets at a proposed rate of 0.07%, though the rate starts initially at 0.04%. The Government will also explore the costs and benefits of a Financial Activities Tax.

The Government has also asked the FSA to consider a number of factors in its forthcoming review of its Remuneration Code. Alongside this there will be a consultation on a remuneration disclosure regime.

Reform of the controlled foreign companies (CFC) rules

A key priority for UK multinationals, new CFC rules will be legislated for in spring 2012 to allow time to consider carefully how to make the rules more competitive, to enhance long-term stability and to provide adequate protection of the UK tax base.

Consultation will take place over the summer on interim improvements, to be legislated for in spring 2011, to make the current rules easier to operate and where possible increase competitiveness.

The Budget also announced a move to a more territorial basis for taxing the profits of foreign branches, with a consultation to take place in the summer on options for retaining foreign branch loss relief as part of this and a reform of the rules in spring 2011.

Corporate tax reform

As part of the 5 year reform of corporate tax, the Government stated that it understands the importance of the whole corporate tax system to business and will set out a more detailed programme for reform in the autumn.

This is intended to allow a more considered approach to implementing tax reforms and to listen to the needs of business through greater consultation. In particular, the Government intends to develop its view that in general a broad tax base, a low rate and a more territorial approach will improve competitiveness.

With a view to achieving this, the Government will establish a business forum, chaired by the Exchequer Secretary to the Treasury, to consult with multinational businesses on the UK's tax competitiveness, including the long-term aims of reform of the corporate tax system.

IR35 review

The Government announced that it remains committed to a review of IR35 and small business tax and will release further details shortly.

We welcome the proposed review of IR35 which, since its introduction over a decade ago has led to uncertainty and a lack of clarity over the status of contractors and a resulting disproportionate administrative burden on many small businesses having to comply with these rules.

However, it is important that the outcome of this review produces a revenue neutral outcome; balancing this equation is an essential part of finding the right long term solution without simply charging all contractors more.

Greater clarity over contractors’ status should not come at the expense of more contractors paying more tax.

Environmental taxes

Alongside wider market reforms, the Government will assess how the energy tax framework can provide the right incentives for investment. In the autumn, the Government will publish proposals to reform the climate change levy in order to provide more certainty and support to the carbon price. Subject to consultation, the Government intends to bring forward relevant legislation in Finance Bill 2011.

There is undoubtedly world wide increasing pressure to increase environmental taxes. Note for example the commitment of the newly appointed EU Tax Commissioner Mr Algirdas Semeta to such measures.

The critical point for Government to remember is that an environmental tax is still a tax, a burden on business and ultimately on individuals. All taxes have costs, as well as benefits. It is therefore vital to balance all of these issues/concerns and ensure the total tax take of any new measures will not increase as a proportion of GDP.

Taxation of non-doms

As announced in the Coalition Agreement, the Government will review the taxation of non-domiciled individuals. This will assess whether changes can be made to the current rules to ensure that non-domiciled individuals make a fair contribution to reducing the deficit, in return for greater certainty and stability for those bringing skills and investment to the UK.

As there is no detail available yet as to what form the stated review will take or when it will commence it is difficult to comment further on this suffice to say however that it will be important to ensure that the review incorporates a thorough consultation period so that any changes implemented can be introduced in a more considered and coherent manner than the changes made in 2008.

Tax treatment of furnished holiday lets

The furnished holiday lettings rules (FHL) will not be withdrawn from 6 April 2010 (1 April 2010 for companies).

Since 22 April 2009 (Budget 2009), HMRC has applied the current FHL rules to UK taxpayers with qualifying holiday lettings situated elsewhere in the European Economic Area (EEA). Such businesses can currently choose whether to be taxed under the FHL rules or under the normal rules for property businesses. These arrangements will continue to apply for the tax year 2010–11.

The Government will publish a public consultation over the summer about plans to change the tax treatment of furnished holiday lettings from April 2011. The consultation will specifically look at a proposal which would:

• Ensure the FHL rules apply equally to properties in the EEA
• Increase the number of days that qualifying properties have to be available for, and actually let as, commercial holiday letting
• Change the way in which FHL loss relief is given

Full details about the proposed changes will be published over the summer. Draft legislation will be published in the autumn, with a view to inclusion within Finance Bill 2011.

Pension capping rules

The Government will continue with plans to raise revenues from restricting pensions tax relief and is committed to protecting the public finances by introducing reforms that raise no less revenue than existing plans. However, as is the view of many commentators including ourselves, the Government believes that the approach legislated for in Finance Act 2010 could have unwelcome consequences for pension saving, bringing significant complexity to the tax system, and ultimately damaging UK business and competitiveness.

An alternative approach involving reform of existing allowances including a significantly reduced annual allowance is being considered. Provisional analysis by government suggests that an annual allowance in the range of £30,000 to £45,000 would raise the necessary yield. However the Government wishes to engage employers, pension schemes, experts and other interested parties to determine the best design of a regime.

Most importantly, the Government intends to introduce legislation in the Finance Bill after the Budget to bring in powers to repeal the measure legislated for in Finance Act 2010.

Stamp duty land tax

The additional five per cent rate of stamp duty land tax for residential transactions worth over £1 million, announced in the March budget, will go ahead from 6 April 2011.

In addition the Government is to undertake a review of the first time buyers relief to take into account its impact on affordability and value for money. So for those first time buyers out there, sooner rather than later may be the appropriate advice!

Company car tax reform

The Government will reform company car tax so that it continues to provide an incentive to purchase the lowest emitting vehicles on the market. From April 2011, the basic threshold for the 15 per cent band of company car tax will be reduced by 5 grams of carbon dioxide emitted per kilometer (g CO₂ per km), so that this band applies to cars emitting between 121 and 129g CO₂ per km.

The percentage of list price subject to tax will continue to increase by one percentage point with every 5g CO₂ per km increase in emissions, to a maximum of 35 per cent. The cap on car list prices used to calculate the taxable benefit arising from company cars will also be abolished on this date, as will discounts for early uptake Euro 4-standard diesel cars, higher-emitting hybrid cars and alternative fuel company cars.

From April 2012, the 10 per cent band for cars emitting 120g CO₂ per km or less will be removed, and the system of bands will be extended so that they increase by one percentage point with every 5g CO₂ per km increase in emissions, from 10 per cent. This 10 per cent band will apply to cars that emit 99g of CO₂ per km or less.

Review of powers

The Government is committed to maximising tax compliance by delivering a tax system that is predictable, stable and simple. Legislation will be in the Autumn Finance Bill to complete the harmonisation of interest charged by HMRC across different tax regimes, to modernise compliance checking powers for excise duties and to complete the modernisation of HMRC's late filing and late payment penalty regimes.

There was no mention in the Budget of the draft legislation published in February 2010 to deal with deliberate wrongdoing by tax agents however we are aware that the submissions made by various representative bodies including ourselves have caused HMRC to put this legislation on hold for now at least until further discussions are held with interested parties in July.

Tax policy

Tax competitiveness is not just about rates and incidence of tax. Predictability, stability and simplicity are also important. Alongside the Budget, the Government published proposals to improve the way tax policy is made to support these objectives.

Concerns identified with the current system include:

• A lack of clear strategy for the tax system
• Consulting too late in the policy development cycle
• Length and complexity of the tax code
• Uncertainty due to the volume and timing of tax changes
• Inadequate Parliamentary scrutiny of tax legislation

To underpin its commitment to improving tax policy in the UK, the Government also published a detailed discussion document setting out a number of proposals for improving the framework for developing, legislating and implementing tax policy. Over the summer, the Government intends to meet with interested parties to discuss its overall approach.

In addition, there are a number of specific areas where the Government will have more detailed discussions to help develop its thinking.

The Government also confirmed its intention to create an independent Office of Tax Simplification and will announce further details shortly.

That's all for now?

This is just the tip of the tax iceberg. There are many other smaller proposals and measures mentioned and it is recommended that practitioners take the time to scan the various documents published for other relevant matters – what is important to one practitioner may not be to another!

The Budget 2010 section can be found on HM Treasury at http://www.hm-treasury.gov.uk/2010_june_budget.htm and on the HMRC website at http://www.hmrc.gov.uk/budget2010/index.htm