Last year’s Budget, coupled with the Comprehensive Spending Review, was intended to get most of the unpleasant news out of the way – large spending cuts – in the Government’s efforts to tackle the public finance deficit.
Now comes what may be the harder part: encouraging sufficient private sector growth both to boost the tax take and to compensate for the inevitable slide in public sector employment.
The Chancellor, George Osborne has already offered appropriate acknowledgements of the need to rev the economy. But while manufacturing has turned in a sturdy performance in recent months, other areas of the economy, retail included where the effects of the VAT rise to 20 per cent are being felt, remain under the cosh of sluggish growth.
So what may Mr Osborne have to tell us when he gets to his feet at 12.30pm on Wednesday 23 March?
Much of the detail of the Budget is likely to stay in step with the measures set out in the draft Finance Bill 2011 as published last December.
But the Chancellor has already created one surprise by announcing that the levy charged on bank profits is to rise by an extra £800 million this year. This will take the amount of tax to £2.5 billion, and the levy is to set to become permanent. Changes to the levy were due to have been made public in the Budget, but the Chancellor said that stronger than expected performances from the banks had encouraged him to increase the levy sooner rather than wait until March.
So there may be other surprises in the offing.
Changes to tax
The suggestions so far have been to indicate that there will be no imminent change in the top income tax rate of 50 per cent.
However, Mr Osborne may well have some announcements to make on the proposals of the Office for Tax Simplification review, the final version of which was made public on 3 March.
In its review of over 150 tax reliefs, the OTS suggested that 54 remained unchanged and that 47 be scrapped. A further 17 should be simplified, while the remainder require further examination.
Of those that could be simplified, the OTS proposed that the rule which demands a 5 per cent shareholding in order for business owners to qualify for the 10 per cent entrepreneurs’ relief rate of capital gains tax be dropped. The report also suggested introducing a checklist for the four reliefs covering the enterprise investment scheme.
Will income splitting and the IR35 regime, both vexed issues for business and the tax authorities, be in for an overhaul too?
With petrol prices soaring, much debate has surrounded the increase in fuel duty planned for April. Mr Osborne, speaking after an ‘on the road’ cabinet meeting in Derby, hinted that he may use his annual statement to take action on petrol prices.
He said: “I am looking, of course, at fuel duty, particularly this increase in duty that the last Labour government planned for April. I understand how families are hit hard by the rising cost of oil around the world – but I can’t make any promises.”
It has been mooted, too, that the Treasury is examining ways of making a fuel duty stabiliser – he tax falls if fuel prices rise – a practical possibility.
Business tax and encouraging enterprise
The Budget may include news about improved tax reliefs for small firms. Entrepreneur, Sir James Dyson has said that he believes the Treasury is considering a boost to the R&D tax credit system. One possibility is the tax credit will be increased to 200 per cent for small technology businesses.
Mr Osborne, keen to increase the amount of funding available to firms while the banks are still shy of lending, may offer plans to deal with the shortfall in private investment for smaller enterprises. One possible policy measure may be to make the tax incentives available for business angels more attractive, and a beneficiary could be the Enterprise Investment Scheme (EIS) which provides private investors with relief on income and capital gains tax.
The Chancellor said: “Equity finance has been a weakness in the British economy for a long time. The Government can do things. One is to provide tax advantages for angel investors. We’ve got the EIS and VCT schemes. EIS is a scheme that is working well, but there are improvements that we could make to expand it.”
The outlook on the Venture Capital Trust scheme may not be quite so good, with the Treasury said to be reviewing the income tax and capital gains tax incentives in an effort to place greater emphasis on risk capital. The Chancellor added: “With the VCT scheme, there’s a question mark over whether it’s real venture capital, and risky in a good sense of investing in growth businesses.”
Reforms to the corporate tax system may be on the agenda too.
However, given the ever-growing emphasis on the greening of the economy, carbon taxes may be on the up, and the climate change levy may make an appearance in the statement.
What businesses are looking for
As with every Budget, business groups have been busy submitting their ideas to the Chancellor ahead of the announcement in the hope that he will incorporate some of the items on their wish lists.
Here is a brief summary of who has been asking for what.
British Chambers of Commerce (BCC)
In its submission, the BCC detailed a number of areas where policy needs to change.
On employment, the Government should make it easier for firms to recruit employees. This, the BCC said, can be done by delaying or scrapping the implementation of all new employment legislation, and by introducing a moratorium on additional employment regulations for the remainder of this Parliament.
The youth and development rates of the national minimum wage should be suspended in order to combat unemployment levels among young people. Failing that, employers should be provided with a National Insurance incentive to take on younger workers.
On the question of regional development, to help businesses expand their premises without falling foul of lengthy bureaucratic planning decisions, the Government needs to look at creating opportunity zones where high-value firms can grow with the backing of tax breaks and a relaxation of planning laws.
To bolster those firms that are struggling both to break into emerging overseas markets and to gain access to trade finance, the Government needs to make greater efforts to extend the work of the Export Credits Guarantee Department amongst smaller businesses.
On business investment, the BCC pointed out that since smaller firms will not be gaining from the phased reduction of the headline rate of corporation tax, they should be allowed to carry forward unused relief, helping them to invest in new plant.
The EEF, the group representing UK manufacturers, argued the Government must take action in four key areas: tax, regulation, access to finance and skills.
Each Budget, the EEF continued, should report on the following measures: the change in total tax costs faced by businesses; estimates of the net change in bank and non-bank external finance; the change in total climate and environment policy costs faced by businesses; all new and withdrawn regulations, and the change in the total cost of all regulation; the change in the proportion of companies facing skills shortage and hard-to-fill vacancies; and the change in apprenticeship starts.
In addition, the EEF put forward a series of recommendations on tax and employment policies. The R&D tax credit system should be reformed to take into account development costs; the capital allowances regime should be modernised so that it recognises the actual cost of re-investment; the burden of environmental taxes needs to be minimised; and the remit of the Office of Tax Simplification should be made more wide-ranging.
On business access to finance, the EFF argued the case for introducing independent monitoring of how banks stick to their lending principles; for increasing competition among banks; and for developing alternative sources of finance, such as non-bank debt and venture capital.
On improving skills, the EEF said that the future funding and demand for 14-19 diplomas must be reviewed with the aim of increasing support and improving delivery. Meanwhile, the Growth and Innovation Fund should implement a pilot scheme designed to support SME collaboration on industry placements.
Federation of Small Businesses (FSB)
Small business stability was the watchword of the FSB. As such, the group called on the Chancellor to work towards a consistent economic background as essential for allowing small firms to play their role in the recovery.
The FSB put forward the case for extending the National Insurance holiday for one year to existing businesses with less than four members of staff if they take on up to three new employees.
Plans to increase fuel duty from 1 April 2011 should be reversed, and a fuel duty stabiliser should be introduced to help to control inflation, the FSB added.
To tackle rising youth unemployment, the Government should provide finance for micro-businesses to enable them to offer places to apprentices and should extend the Graduate Internship Scheme, which is due to come to an end in March 2011.
Lastly, the Government needs to declare a moratorium on all new employment legislation for the 12 months following the Budget, allowing for a more predictable regulatory environment in which small firms can recruit staff, the FSB concluded.
British Venture Capital Association (BVCA)
The BVCA put forward the case for amending the rules on entrepreneurs’ relief. At the moment, the rules place a ceiling of 10 per cent on capital gains tax on the sale of business assets under set conditions.
The BVCA said that the relief should be extended from business owners to include all angel investors. The qualification of a minimum 5 per cent holding requirement should be removed, so that employees and investors with small equity stakes can take advantage of the tax break, and the limit of a £5 million lifetime cap should be abolished.
The BVCA went on to say that the Enterprise Investment Scheme (EIS) should include preference shares in order to offer an incentive to seed investments from early-stage backers.
Investments made though Venture Capital Trusts (VCTs) should be expanded to cover firms employing up to 250 workers, and the annual investment limit should climb to £5 million.
In its pre-Budget letter to George Osborne, the CBI said the Government should focus on three critical areas: boosting export performance, unleashing domestic investment spending, and removing barriers for high-growth firms.
The CBI’s specific proposals included creating a new corporate bond market for mid-caps to increase the supply of capital; speeding up the planning system to stimulate infrastructure investment; and encouraging companies to become more energy efficient by restoring the incentive element of the Carbon Reduction Commitment.
The letter also highlighted the need for changes to the tax system. It argued that the 50p income tax rate is discouraging entrepreneurship, as, too, is the narrow definition of business assets laid by capital gains tax law.
Other measures that the CBI said would boost exports and investment are: strengthening UKTI to provide more targeted support for exporters; improving the Enterprise Investment Scheme (EIS) to bridge the funding gap for larger SMEs; and ensuring the extra support announced through the Export Credits Guarantee Department (ECGD) reaches the firms at which it is aimed.