The Osborne book of cuts
As puzzled clients reach for the phone, partners have been scouring the budget small print in search of solutions. Solicitors Journal takes a look at some of the top concerns for the legal sector
Private client: don't delay
Described as the 'unavoidable Budget', spending cuts outweighed tax increases by 8:2 and in some cases, such as CGT, measures introduced were less harsh than many feared. So what does it all really mean for lawyers and private clients?
Income tax '“ the tax-free personal allowance on income tax for 2011/12 will be increased by £1,000 '“ to £7,475. However, the basic rate limit will be reduced, so higher-rate taxpayers won't benefit.
The higher rate (40 per cent) income tax threshold will be frozen until 2013/14, and the new top rate of 50 per cent will remain in place 'for the time being'.
Capital gains tax '“ from midnight on Budget day, capital gains tax was increased to 28 per cent for higher-rate taxpayers and trusts. Surprisingly though, the rate remained at 18 per cent for lower-rate taxpayers. The ten per cent rate for entrepreneurs will be extended to the first £5m of gains, but a reintroduction of taper relief for assets held for longer periods was ruled out as too expensive.
The annual ISA limit will remain at £10,200 and there was no change to the inheritance tax threshold of £325,000.
Pensions and retirement '“ from April 2011 the state pension will be linked to earnings, not inflation, and will rise by the greater of earnings, inflation or 2.5 per cent.
The already-planned increase in the state retirement age to 66 will be accelerated.
HMRC briefing notes suggest that measures may be introduced from April 2011 curbing the NI and income tax advantages currently enjoyed by employer financed retirement benefit schemes.
However, it remains to be seen whether this will be backdated and may not effect genuine retirement planning schemes.
National insurance '“ plans to increase national insurance by one per cent for employees and employers will go ahead in 2011, but the impact on employers will be reduced by a £21 per week increase in the NI threshold.
VAT and duty '“ there were no further increases in fuel, tobacco or alcohol duty. However, the higher rate of insurance duty was increased to 20 per cent, while the chancellor announced he would report back later on the possibility of changing air passenger duty to a 'per-plane' charge.
Finally, VAT will rise to 20 per cent from 4 January 2011, which, if nothing else, ought to provide clients with some incentive not to delay seeking advice on their personal estate planning position.
Nicola Plant is a partner at Thomas Eggar LLP
Commercial: a close call
Increased rates of capital gains tax and VAT, a levy on banking businesses, and reforms of corporation tax were the main messages in the coalition government's first Budget. However, the large across-the-board increases in tax which had been widely feared did not materialise in the 'tough but fair' emergency Budget. Restrictions on public spending to be announced in the spending review this autumn will be left to address much of the country's yawning public deficit.
The government has taken some big decisions to deal with the immediate situation, but is taking a more measured approach to changing the structure of the UK tax system. Although this creates some short-term uncertainty, many taxpayers will find the direction of travel encouraging.
Increasing tax rates '“ in addition to the changes detailed under the 'Private client' heading above, the entrepreneur relief lifetime limit, below which gains are taxed at ten per cent, has increased from £2m to £5m.
In relation to the VAT rise, the government has listened to retailers and the entertainment industry by setting the change to come into effect on 4 January 2011, allowing New Year hangovers to clear before systems must be altered for the January sales.
This should avoid the need to repeat the various concessions granted in response to lobbying by those sectors when the previous rate change took place at midnight on 31 December 2009. Anti-forestalling rules will be introduced to prevent artificial acceleration of supplies aimed at securing the lower rate of VAT.
In action coordinated with the governments of France and Germany, banking businesses in the UK will be subject to a bank levy from 1 January 2011. Banking groups with relevant aggregate liabilities exceeding £20bn will pay an annual levy of 0.07 per cent of those liabilities (with a lower rate of 0.04 per cent in 2011). The levies are intended to encourage banks to adjust their balance sheets to reduce the risk inherent in their funding profiles.
Corporation tax reforms '“ several consultations were also announced for later this year, including a general review of the structure of corporation tax; further reform of the taxation of foreign profits, including the UK's controlled foreign company rules; consideration of a general anti-avoidance rule; and proposals to reform the process of tax policy making.
In the meantime, the headline 28 per cent rate of corporation tax will decrease by one per cent per year from 2011, reaching 24 per cent by 2014.
However, capital allowance rates will fall from April 2012, reducing from 20 per cent to 18 per cent for most plant and machinery, and from ten per cent to eight per cent for long-life assets bought before April 2008 and integral fixtures.
The annual investment allowance, which gives immediate 100 per cent tax relief, will be reduced from £100,000 to £25,000, also with effect from April 2012.
Andrew Loan is a partner at Macfarlanes
Public sector: the biggest challenge
The Budget outlined the headline issues for housing and the public sector generally. However, more significantly for these areas, the announcement of the current year's cutbacks and the planned 20 October statement on departmental expenditure reductions will have more importance for lawyers specialising in these areas. Key issues included:
Housing benefit '“ changes to the system, which at £21bn per year is worth more than the combined budgets for the police and universities '“ will cap the size of weekly payments.
Pay '“ the planned freeze in public sector pay for those earning more than £21,000 will kick in, as will an in-depth review of public sector pensions.
Department cuts '“ the anticipated average 25 per cent reduction in budgets across departments was outlined, with health and overseas development exempted. Many areas are already involved with budget reductions this year which are likely to be continued for the next few years. These include the 'Building Schools for the Future', reduction in social housing grants for the Homes and Communities Agency and cancellation of various capital projects and grants. The whole environment for housing and local government in the future is to provide fewer services at far less cost, utilising a range of providers. While the budget epitomised the overall approach, the coalition government's manifesto sets out the detail. This, coupled with a range of Conservative party Green Papers, should be compulsory reading for all lawyers involved in housing and local government. There will be decentralisation of powers and responsibilities, adopting the 'Big Society' approach with expanded use of charities, community groups and cooperatives running public services.
The services most at risk are discretionary services such as arts, culture and leisure, where there is already a healthy charitable trust and private sector. However, further government plans predict further changes:
Academies '“ the move to convert existing schools into academies independent of local authorities and the creation of new free ('Swedish') schools, will make new charitable cooperative entities.
Cooperatives '“ the ambitious plan will enable public sector workers to join together as cooperatives and take control of their 'business'. This has been half-heartedly piloted in the health service, but could represent one of the most significant changes in the public sector if expanded.
Savings '“ local authorities will be at the forefront of service efficiencies and reductions such that there will be an expansion of sharing services within many departments and outsourcing to the private or social enterprise or charitable sector.
Housing '“ local authorities and housing associations will need to adapt new innovative ways of funding and providing more social housing without grants, bearing in mind the government's plans of new community-based local housing trusts. There will be a growing emphasis on better use of land, more shared ownership with perhaps specialist mortgage providers and expansion of the private rented sector. Lawyers engaged in the local authority and housing sectors will be at the forefront of the changes foretold in the Budget and outlined in the coalition government's public papers. Handling the hurdles of public procurement, innovate service provision and new corporate entities within decreasing budgets will be an enormous but exciting challenge.
Simon Randall is a consultant at Winkworth Sherwood