Taxes will rise – but which?

HELEN SANT, head of tax at KPMG in East Anglia, looks at tax measures under consideration by the new Government in its bid to tackle the deficit

ACCORDING to the European Commission, the UK’s deficit in 2010 is set to hit 12% of GDP – more than any other country in the EU.

The priority for the new Government must, therefore, be to set out a clear and credible plan to tackle the deficit and to encourage economic growth.

Full details of what is planned are unlikely to emerge until the Budget, which is due on 22 June but perhaps the most eye-catching proposal so far by the new coalition Government is the plan to realign Capital Gains Tax rates towards Income Tax rates.

The plan is to seek “a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income”.

We take this to mean that the 18% rate of tax on gains on non-business assets could be increased close to the higher 40% rate of Income Tax or even the top rate of 50%.

This is a major issue for entrepreneurs and business owners. Individuals considering the sale of assets, and who are fortunate enough to have a capital gain, could be facing a doubling in the tax to be paid. Those in this position may well be considering planning to bring forward or trigger a capital gain in order to secure the current rate of 18%.

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We await more details, but there will apparently be generous exemptions for gains related to business assets which, together with the reversal in the rise of employer’s National Insurance contributions, will be welcome news to the business community.

Many businesses will breathe a sigh of relief at the confirmation that employers’ NI contributions will not be going up. However, the 1% rise for employees will go ahead.

Other measures unveiled include :

n Income Tax: There will be a “substantial increase” in the personal allowance from April 2011, with a longer term policy objective of reaching a �10,000 threshold. Whether this will apply to all taxpayers regardless of income or be clawed back in the case of high earners remains to be seen.

n Corporate tax: This is the area with the least clarity. The Conservatives pledged to reduce the headline rate of 28%, funded by changes to the capital allowance regime and perhaps to the rules around the taxation of debt. Such a move runs a risk of creating distinct winners and losers and is likely to be the subject of much debate.

n VAT: This remains the elephant in the room. As a quick revenue raiser it’s a tempting option and it had been widely expected that, whoever got in, it would go up post-election. A rise from 17.5% to 20% – the average EU rate – would raise around �12billion a year while keeping the UK competitive.

All in all we are heading for a period of change. But with uncertainty comes opportunity. Now is the time for businesses to be thinking about what they want from tax, and how to engage in and influence the debate in the coming weeks and months.