No pain, no gain says ACCA of the Controversial Budget

No pain, no gain: Chancellor's Controversial BudgetThe pressing need to grapple with the enormous financial deficit means the Coalition’s first Budget has still been a painful one, but with some softening around the edges, says Chas Roy-Chowdhury, head of taxation at ACCA (the Association of Chartered Certified Accountants).

“The UK has been living beyond its means, but the Chancellor’s solution is an exceptionally tough one,”

says Mr Roy-Chowdhury.

“The UK is the proverbial teenager waking up the morning after the night before: a raging headache, dehydrated, with mum and dad just arriving home to find the house wrecked. UK public spending will be grounded for at least the next parliament.”

“The state of the nation’s finances and the Coalition agreement means that some key Conservative and Liberal Democrat policies have been shelved. However, important policy promises remain: CGT is up, while tax credits for the rich have been scrapped.”

“This Budget will cause pain, but some parts of it will do so unintentionally. I’m disappointed that there has been no movement on simplifying the tax system – some measures, such as the regionalisation of National Insurance Contributions, could confuse issues for small businesses struggling under the burden of the system.”

Looking at specific Budget announcements, Chas Roy-Chowdhury offers comment on the following:

Value Added Tax (VAT)

“A rise from 17.5% to 20% has a significant inflationary impact – but at least New Year celebrations are safe as it is introduced on 4 January 2011. By raising it to 20%, the Retail Price Index (RPI) could well go over 6%. Tight finances meant a move on VAT was inevitable. While VAT rises hit the poorest hardest, the Government will probably try to argue that the Budget has protected those on low-incomes against the full impact with a rise in the personal allowance. But it is good that zero rated items remain so.”

“However, this VAT rise will hit pensioners and those who have to rely on benefits, as they will not gain from other tax breaks announced today.”

Capital Gains Tax (CGT)

“From midnight tonight, higher-rate taxpayers will pay 28% on their capital gains. This is smaller than feared. But the impact remains to be seen of a 28% rate and whether it deals with tax avoidance. However, the increased tax break for entrepreneurs was not expected, and shows that the Government sees this group as essential to economic recovery.”

Income Tax

“The 50% band remains in place as expected but is capped, but the pension restrictions are to be consulted on, and ACCA has lobbied extensively for this to happen.”

“With National Insurance increases, the retention of the 50% rate, and other tax issues, next year it’s likely that the UK will end up with an effective top rate of tax of 52%. This puts the UK well out of step with some of its closest competitors such as Germany and the US.”

“But it’s good news that the Chancellor has raised the income tax allowance; this takes some of the pain away from today’s Budget, but other measures have had to be introduced to pay for this.”

National Insurance Contributions (NICs)

“The regionalisation of the NICs allowance is a welcome move to kick start the economy, but I can see complications for small businesses. Previous similar measures, eg tax breaks for factories in Enterprise Zones, could be the model for administering this on a post code basis. But nowadays, labour is far more mobile, and need not be located where the business’s tax returns are based, so a Newcastle business employs ex-bankers living in Surrey who work remotely. It would have been better to introduce simple administration and benefits for all.”

Corporation Tax

“A cut in corporation tax was a given – the regular staggered annual cuts will see it reduced to just 24% in four year’s time. This will make the rate one of the lowest of the major global economies. Osborne has made this move to help UK plc with a phased cut. Capital allowance decreases are the most predictable way to pay for it.”

“Small businesses see a hand up too – the small business rate will change to 20% next year. Let’s hope the changes to Capital Allowances do not affect too many of them adversely.”

Tax Credits

“There are striking and considerable changes to this means-tested benefit – but they make sense; tax credits should be about a hand up, not a hand out for everyone. But the hit will be on people with small children due to tax credits reduced for families earning over £40,000 next year, then the baby element being removed for new children from April 2011, and finally with child benefit frozen for the next three years.”

Tax credits were always going to bear the brunt of the Government’s changes; both Nick Clegg and David Cameron indicated they wanted to see cuts during the election campaign. The changes see tax credits aimed much more at those on lower-incomes and there will be a steeper cut-off too.”

Duties – Sin taxes

“I’m really surprised by this – no new increases in this area are unusual as sin taxes always go up, in every Budget. The Government’s plan for fuel taxes will be interesting for remote rural areas.”

Chas Roy-Chowdhury concludes:

“The Government have been working hard to soften us up for this budget since it was announced. That doesn’t alter the pain we are going to share over the coming months and years.”

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