In the initial Coalition Agreement of 11 May 2010, the final Coalition Programme released on 20 May 2010 and the Queen’s Speech given on 25 May 2010 (as well as the recent speeches given by George Osborne) a number of initiatives and changes have been proposed by the Government in relation to the tax system, which the Government intends will make the current tax system “more competitive, simpler, greener and fairer”. The key proposals of which we are aware are set out below.
- Corporate tax – Reforming the corporate tax system and reducing headline rates by simplifying reliefs and allowances, and tackling avoidance, with the aim of creating the most competitive corporate tax regime in the G20.
There is currently no detail on the proposed reduced headline rates, but the Conservatives’ manifesto proposed lowering the main rate from 28% to 25% and the small companies rate from 21% to 20%.
While it is not mentioned in the Coalition Programme, the Conservatives have pledged to reform the “controlled foreign company” regime (see note 1), and it is anticipated that the current consultation will continue. In addition, a general proposal to “protect manufacturing industries” has been seen by some to indicate that the rates of capital allowances may not be reduced.
- Banking – Introducing a banking levy (the Government will be seeking detailed agreement on implementation). In their manifesto, the Liberal Democrats proposed a 10% annual levy, disregarding brought forward losses while the Conservatives suggested they would proceed unilaterally with a UK levy, if necessary. There is also a reference to tackling unacceptable bonuses in the financial services sector, which could conceivably include tax measures (e.g. an extension of bank payroll tax).
- Tax avoidance – Making every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals in this area – the Liberal Democrat’s manifesto proposals regarding tax avoidance are summarised in the Appendix to this note.
- National Insurance contributions (NICs) – Increasing the employer NICs thresholds (i.e. the thresholds above which employer NICs are payable) in order to stop most of Labour’s “jobs tax” (i.e. the 1% rise in employee and employer rates which will take effect from April 2011 (see note 2).
However, the increase in employee NICs thresholds that was proposed in the Conservatives’ manifesto has been dropped in favour of an increase in the income tax personal allowance (see below).
George Osborne has also suggested that he will abolish employer NICs for new businesses in respect of the first ten jobs that they create.
In the Queen’s Speech, it was announced that a NICs Bill will be introduced to increase the main rates by 1% from April 2011 and “possibly make further changes that promote enterprise and fairness”, which may mean introducing the holiday for new businesses mentioned by George Osborne, and Liberal Democrat proposals to reform treatment of benefits in kind.
- Small business taxation – Carrying out a review of small business taxation (including “IR35” (being the anti-avoidance regime that can apply, broadly, to personal service companies) and small business rate relief) with the objective of introducing simpler measures that prevent tax avoidance but avoid undue administrative burden and uncertainty on the self-employed, or any restriction of labour market flexibility. The review of IR35 is likely to consider the Liberal Democrats’ manifesto pledge of allowing small businesses to be taxed on a cash flow basis.
- Research & development (R&D) tax credits – Considering implementation of the Dyson Review, which recommended refocusing R&D tax credits on high tech companies, small businesses and new start-ups. This may lead to a wider review, as both parties have previously promised reform of R&D tax credits.
- Environmental taxes – Increasing the proportion of tax revenue accounted for by environmental taxes, including replacing air passenger duty with a per-flight duty.
- Capital Gains Tax (CGT) – Seeking ways of taxing non-business capital gains at rates (according to the Coalition document) similar to those applied to income, with “generous exemptions for entrepreneurial business activities”.
In the Queen’s speech it was announced that the rate of CGT will increase to rates closer to those applied to income tax, on those gains that do not qualify for entrepreneurial exemptions.
The scope of the exemptions for entrepreneurial business activities will be key (e.g. the distinction between business and non-business assets, the application to shares in trading and non-trading companies, minimum holding requirements and the effect on employee equity incentives). In addition, it is not clear whether any form of indexation for individuals will be reinstated.
- Income tax personal allowance – Prioritising an increase in the income tax personal allowance for lower and middle income earners over other tax cuts (including inheritance tax) by means of a substantial increase from April 2011, with the longer term aim of increasing the personal allowance to £10,000.
- Non-domiciled status – Carrying out a review of the taxation of non-domiciled individuals. The Conservatives’ manifesto pledged to introduce a flat-rate levy on non-domiciled individuals and the Liberal Democrats proposed in their manifesto that non-domiciled status should be limited to a maximum of seven years.
- Stamp duty – Reviewing the effectiveness of the recent increase in the stamp duty threshold for first time buyers. This is a watering down of the Conservatives’ manifesto proposal to permanently increase the threshold to £250,000.
- Tax credits – Reducing spending on tax credits for higher earners, reforming the administration of the tax credit system to prevent fraud and overpayments, and planning to introduce transferable tax allowances for married couples (on which Liberal Democrats may abstain).
- Taxation of alcohol – Undertaking a review of the manner in which alcohol is currently taxed (which may also consider the recent calls for minimum pricing of alcohol).
- Council tax – Freezing council tax in England for at least one year, and giving residents the power to veto excessive increases.
- Holiday letting – Taking measures to fulfil EU treaty obligations in regard to the taxation of holiday lettings that do not penalise UK-based businesses.
The announcements to date have not included any reference to possible changes to the rates of VAT, stamp duty land tax or inheritance tax, nor to a number of other tax pledges set out in the respective parties’ manifestos, but they could still conceivably be included in the emergency Budget, which is due to be announced on 22 June 2010.
Liberal Democrats’ Manifesto Proposals – Tax Avoidance
In their manifesto, the Liberal Democrats proposed a number of tax avoidance measures. Key proposals included the following:
- Introducing a new general anti-avoidance provision for corporation tax
- Preventing avoidance of stamp duty land tax through the use of offshore business structures
- Allowing taxpayers to hold non-domiciled status for seven years only
- Funding additional HMRC staff time in order to tackle income tax evasion
- Combating NICs leakage by reforming the taxation of benefits in kind
- Aligning capital gains tax rates with income tax rates
- Giving tax relief on pensions only at the basic rate, so that everyone gets the same tax relief on their pension contributions
- Setting gift aid tax relief at a single rate of 23% (currently given at the donor’s highest marginal income tax rate)
 The “controlled foreign company” regime aims to prevent UK companies avoiding tax in the UK by directing income to subsidiaries located in countries with preferential tax regimes.
 From April 2011, broadly, the employer NICs rate will be 13.8% and the employee NICs rate will be 2% on earnings above the upper limit.