Coalition government unveils fuller set of business-related policies

 The Conservative-Liberal Democrat coalition government has published a broader account of the measures it intends to take in a number of areas.

The economy, employment, tax and business regulation all feature prominently. What follows is a brief summary of the latest coalition agreement document and previous announcements.

The economy

There will be an accelerated reduction in the budget deficit, with £6 billion coming this year (although the commitment contains a proviso that the level of the cuts will be subject to advice from the Treasury and the Bank of England). The main burden of the cuts will be felt in reduced government spending rather than tax increases.

An independent Office for Budgetary Responsibility will be established to produce new growth and borrowing forecasts.

A full spending review is to be held in the autumn, following a consultative process involving all tiers of government and the private sector.

The coalition has ruled out joining the euro for the duration of the next Parliament.

Personal Tax

Income tax

The personal allowance for income tax is to be increased, the first stage of which is to take effect from April 2011. There is to be a long-term policy of raising the threshold to £10,000, graduated across a number of years.

The threshold for the personal allowance that is tapered down may be reduced from £100,000 so that only those on lower incomes gain from the full new allowance.

Inheritance tax

This will take precedence over Conservative plans to raise the inheritance tax threshold to £1 million from its present £325,000. Liberal Democrat proposals for a ‘mansion tax’ on properties worth £2 million or more is to be scrapped.

National insurance contributions

The funds required for an increase in the income tax personal allowance will come from the dropping of Conservative proposals to raise employees’ national insurance contribution thresholds. The increase in employers’ national contribution thresholds, however, will go ahead.

Married allowances

Another Conservative manifesto commitment to introduce transferable tax allowances for married couples stays in place, although Liberal Democrat MPs will be allowed to abstain in the Commons vote on the measure.

Capital gains tax

Capital gains tax on non-business assets will, at some point, rise to a rate similar to that of income tax; perhaps 30 per cent, 40 per cent or 50 per cent. Exemptions, though, will be made for entrepreneurial business activities. A rise to 30 per cent would return the CGT to its level before taper relief was introduced. 

At present, CGT is only payable on gains over £10,100 in any tax year, chargeable at a rate of 18 per cent. The threshold at which CGT becomes payable may be lowered, perhaps to as low as £2,000.

No details have been released on when the new rate will take effect, although it is possible it may be from April 2011. backdating the rate to April 2010 would be an unusual move.

Council tax

Council tax will be frozen for at least one at current rates.

Business tax

Corporation tax

The government has committed itself to a “long-term” plan to reduce the headline rate of corporation tax, possibly from 28 per cent to 25 per cent.

A part of the promised changes will involve a streamlining of the present business reliefs and allowances.

Plans to increase small company corporation tax from 21 per cent to 22 per cent have already been postponed in the last Budget. The new government may look at reducing the rate instead.

National insurance contributions

The funds required for an increase in the income tax personal allowance will come from the dropping of Conservative proposals to raise employees’ national insurance contribution thresholds. The increase in employers’ national contribution thresholds, however, will go ahead.

R&D tax relief

The government appears willing to allow the research and development tax credit to remain in place, but the remainder of the present system of business reliefs and allowances is to streamlined and simplified.

Small business taxation

The small business taxation regime is to undergo a major overhaul. This may include corporation tax rates and the IR35, which could be replaced with a simpler system that clarifies the tax status of self-employment.

VAT

No pre-Budget announcements on VAT have so far been made.

However, speculation is rife that the Chancellor will give serious consideration to some sort of graduated increase, perhaps to as much as 20 per cent (the current level is 17.5 per cent, 2.5 per cent below the European average).

It seems unlikely that a 5 per cent VAT charge will be imposed on goods that are currently zero-rated, such as books and food.

Other tax measures

A switch to per-plane rather than per-passenger duty will be implemented.

The two parties have agreed to reduce the availability of child trust funds and tax credits for higher earners, those households, perhaps, on more than £50,000 a year.

A banking levy is also to be introduced.

The policy document indicates that the government plans to raise the proportion of revenue that comes from environmental taxes.

Business

The government is to focus on improving the flow of credit to smaller firms. This will include the possibility of establishing a loan guarantee scheme to replace the Enterprise Finance Guarantee programme and the use of net lending targets for nationalised banks.

Some backdated demands for business rates will be cancelled. Business rate relief is to be made automatic for all qualifying firms (currently, businesses must apply to their local councils for the rebate on their rates).

It is an aspiration of the government that 25 per cent of all government contracts – which will be published online and free – should go to SMEs.

There is to be a ‘one-in-one-out’ rule for business regulations, whereby no new regulation is introduced without other regulations being cut by a greater amount, along with ’sunset’ clauses that ensure existing regulations are reviewed for their relevance.

There will be and end to the practice of ‘gold plating’ EU rules so that UK businesses do not suffer a competitive disadvantage.

The ‘tick-box’ culture of regulation enforcement is to be replaced with a ‘risk-based’ approach that targets inspections at high-risk organisations.

Employment laws are to be scrutinised to ensure they maximise flexibility and competitiveness for the employer while also safeguarding fairness for the employee.

Regional Development Agencies are to be replaced with local enterprise partnerships between councils and businesses.

Employment

The right to request flexible working is to be extended to cover all employees rather than just parents.

The government has said it will take steps to “limit” the application of the EU Working Time Directive, from which the UK has an opt-out, allowing employees who agree to work longer than the 48-hour week stipulated in the directive.

The default retirement age of 65 is to be abolished on a phased basis.

The policy document sets out a general commitment to working with business and the pensions industry to support “auto-enrolment” in the new workplace pension schemes that are due to be introduced.

On pay, the new government has promised to “promote equal pay and take a range of measures to end discrimination in the workplace”.

All existing welfare-to-work programmes are to end and are to be replaced by a single welfare-to-work programme.

Those Jobseekers’ Allowance claimants who must deal with the most significant barriers to work will be referred to new welfare-to-work scheme at once rather than after 12 months. In the case of those Jobseekers’ Allowance claimants aged under 25 will be referred to the programme after six months.

There is to be a cap on non-EU migration.

Pensions

The default retirement age is to be phased out, and a review will be held to establish the dates at which the state pension retirement age begins to rise to 66. There is a commitment that, in the case of men, this will not be before 2016 and, in the case of women, not before 2020.

Rules requiring mandatory annuitisation at 75 are to be dropped. At the moment, people who establish a pension savings fund must use the money to purchase an annuity, or an annual income for life, when they reach the age of 75, preventing them from passing on the capital to their heirs.

The link between the basic state pension and earnings will be restored from April 2011 with a guarantee that pensions are raised by the higher of earnings, prices or 2.5 per cent, as proposed by the Liberal Democrats.

Thus far, the government has not offered a policy on pensions tax relief. The Liberal Democrats had been in support of abolishing all higher tax rate relief, capping relief at the basic rate of income tax.

The environment

A green investment bank will be set up, as well as green financial products to encourage individuals and businesses to invest in clean energy supplies.

The energy markets are to be reformed, which may mean some state intervention.

The government is to press ahead with a high-speed rail network but will reject plans for additional runways at Gatwick and Stansted.

A national planning statement will be drawn up to allow a process for replacing existing nuclear power stations with new ones, although Liberal Democrat MPs will be allowed to abstain on any vote on the plans.

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