THE Chancellor began his Budget speech by introducing the idea of an aspirational nation and ended by modifying the great staple of British politics – the hard-working family – so we now have the aspirational, hard-working family.
Set against a very challenging economic backdrop including a further downward forecast in growth by the Office of Budget Responsibility, this was never going to be a classic give-away Budget. What will it mean for our mythical family?
It seems clear to me that the Chancellor’s belief is that he can best help families by focusing on business growth and private-sector job creation. The question is, did he get it right?
His first effort is a cut for firms in National Insurance Contributions (NIC), which are seen by most employers as a jobs tax. From April 2014, all businesses and charities should be able to save up to £2,000 NIC each year, a move which should ease the burden of taking on new people.
He also aimed for growth through lower corporation tax. With a further cut in the main rate to 20 per cent from April 2015, the UK will have the lowest level of company tax in the G7.
The reduction in corporation tax to such a competitive rate is clearly aimed at encouraging more inward investment and maximising the amount of tax collected from companies that are currently based here. The recent high-profile cases of multinational firms paying tax on their “British profits” in other jurisdictions could be stemmed, with many perhaps motivated to locate more of their business here in the UK. With the impending introduction of the new Patent Box as well, giving a 10 per cent tax rate for profits attributable to patents and similar intellectual property, should we really be looking at the UK as a tax haven?
The cut in the main rate of corporation tax also raises an interesting question for small, one and two-person firms: with a 20 per cent tax rate, what is stopping them from operating as a limited company?
From September 2013, a new arrangement to encourage employee ownership of business could also prove beneficial to economic growth. The measure will exempt the profit made by individuals on the disposal of employee shares from capital gains tax (CGT), up to a maximum of £50,000. Alongside this, the employee will not have to pay the income tax and NIC due on the first £2,000 of company shares when they are acquired by the employee. In essence, there is a real opportunity here to share in the growth of your company, completely tax-free.
Successive chancellors have sought to encourage greater investment in research and development activities and the scheme is to be improved. While many larger companies have had access to a regime that allowed them to reduce their tax bill through R&D expenditure, many SMEs without tax to pay have been frustrated by a technicality which excluded them from claiming cash repayments for their qualifying R&D. The new 10 per cent “above the line” credit should allow all smaller companies to secure cash support for R&D.
There are also measures that will help genuinely new businesses, which are vital if the UK is to generate serious economic growth. The new Seed Enterprise Investment Scheme (SEIS), set up last year to encourage new company formation, offered up to 78 per cent tax relief for a qualifying investor. This was by a combination of 50 per cent income tax relief and what was thought to be a one-off opportunity to exempt other gains – typically taxed at 28 per cent – from tax by reinvesting in the SEIS company. This additional capital gains tax reinvestment relief is now to be extended for a further two years, with up to half of the gain available for exemption.
In what seems to be a direct appeal to hard-working families concerned about a perceived lack of fairness in the tax system, new announcements on avoidance measures and consultations were also included in this year’s Budget. While many might welcome the principle behind this, we don’t yet know how these proposals will work in practice. For example, there was a reference to partnerships and how they are used to avoid tax. Unless measures are very carefully targeted, these could affect innocent family firms. This type of measure, if introduced, could run the risk of undoing some of the benefits to small business from the more positive proposals in the Budget.
As ever, the Chancellor had a difficult balancing act. Time will tell if he got it right and if voters from hard-working, aspirational families will support his party at the next General Election.
• Simon Burton is director of tax at Johnston Carmichael