Growth a Priority in UK Chancellor’s Budget for 2012

Michelle Remo, “Big 4″ observer
March 06, 2012 /

With 21st March, Budget Day, approaching fast, Chris Morgan, head of tax policy at KPMG in the UK, looks ahead to what might be unveiled:
Growth is clearly a huge priority as we try to recover from the economic upheavals of the last few years.

But with public finances very tight, the Chancellor has limited room for manoeuvre.

The CBI have called for some limited, targeted tax breaks for business. We agree that focussed assistance for business, especially in the area of capital allowances for infrastructure investment, would be extremely helpful in the current climate.

In considering the business tax environment, it’s important to remember that there have been some significant improvements recently: the headline rate is progressively reducing. It is currently 26 percent (having dropped to 26 percent from 28 percent on 1 April 2011). On 1 April 2012 it goes down to 25 percent and it will then go down 1 percent in both 2013 and 2014 to reach 23 percent from 1 April 2014.

Additionally the way in which foreign profits are taxed (a key bugbear for business) has been radically reformed. Taken together, these reforms have made a large and positive difference to the attractiveness of the UK as a corporate location with the UK rated as attractive as it had been back in 2007, according to the most recent 2011 KPMG Tax Competitiveness Survey.

Nevertheless, the lack of allowances for infrastructure increases the effective tax rate in the UK, despite the reduction in the headline rate. If it is not possible to introduce some measure of relief in the Budget we would like to see consultation on this area announced.

As well as a competitive business tax regime consumer spending is a key ingredient for growth. Some increase in the basic rate personal allowance seems likely in the budget. How much it will go up and how that rise could be funded is the subject of much debate. The government has a long term of aim of raising it to £10,000 and some are calling for a large increase in this budget. The advantage with focusing tax reductions on increasing the threshold now is that it puts more money in the hands of lower earners who are being squeezed by the economic situation and who are in turn most likely to spend that extra rather than save it and so put it directly back into the economy.

However, despite uncertainty around the budget, there are some measures that have been trailed as they have been the subject of much consultation. We are expecting draft details of a new statutory residence test, a consultation on a “General Anti-Avoidance Rule” is very likely and an update on how much revenue the 50 percent tax rate is raising, among a number of other measures. There are also likely to be some targeted anti-avoidance measures in the budget with moves to combat residential stamp-duty avoidance looking very likely.

Budgets are always challenging. But this one, with the need to strike such a delicate balance between attempting to rebalance the public finances whilst providing an environment for growth, is set to be particularly testing.

One tax raising measure which has been floated is some kind of “wealth tax” on expensive houses, perhaps charged as a higher band of Council tax. A potential concern with this proposal is it is indiscriminate and could hit people who had owned a house above the limit simply due to having owned it for a long time.

An alternative approach might be to remove the tax incentives currently given to foreign individual investors in UK residential real estate. This would mean imposing UK capital gains tax on the sale of residential real estate by non-residents, and increasing the rate of tax on any rental income from the current 20% rate to either the marginal personal tax rate or the rate of corporation tax.

This would have to be carefully managed, particularly to ensure that it did not damage the significant overseas investment activity in UK commercial property, and would probably have to be phased in over time.


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