"A progressive Budget.....a progressive alliance"

In the Brave New World of coalition politics the Chancellor George Osborne has outlined tax and spending measures to eliminate the budget structural deficit by 2014/15. Public expenditure cuts will contribute 80% and tax increases 20% to the overall funding required to achieve this goal.

The austerity of the Budget proposals cannot be overestimated. With the exception of the NHS and Department for International Development, other government departments face cuts of up to 25% over the next five years. Steering the UK economy away from a sovereign debt crisis comes at a high price. The Office of Budget Responsibility forecasts flat growth of less than 3% of GDP p.a. Whether the Chancellor's proposals can induce fiscal stability in order to nurture and sustain recovery to offset the swinging cuts in the public sector remains uncertain.

A summary of the key tax measures are as follows:

Value Added Tax

The standard rate of VAT will be increased to 20% from 4 January 2011. Draft legislation includes anti-forestalling measures to cover the change in rate. There are no changes to the classification of supplies. The flat rate scheme limit and percentages have been recalculated.

Individuals: Capital Gains Tax

The capital gains tax rate increases to 28% for higher and additional rate tax payers but remains at 18% for basic rate tax payers. The change in rate applies from 23 June 2010.

There are no proposals to reintroduce taper relief or indexation. The prospect of alignment with income tax rates has not been ruled out and will be considered in next year's Budget.

The lifetime allowance for entrepreneurs' relief has been increased to £5m and the extended relief will apply to disposals made on or after 23 June 2010. Gains realised before 23 June 2010 will be subject to the previous 18% rate and will not be taken into account for the rate applicable on gains realised after that date. Deferred gains will be subject to the new rates and will introduce an element of retrospective taxation. Taxpayers who have previously sold assets for deferred consideration or who are considering claims for deferral should review what action can be taken to minimise capital gains liabilities.

The annual exemption remains unchanged for 2010/11 at £10,100.

Individuals: Income tax and National insurance

The personal allowance will be increased from 6 April 2011 by £1,000 to £7,475 for those under 65. For higher and additional rate tax payers this will be offset by a reduction in the basic rate band. The government restated its intention to extend the personal allowance to £10,000 in the longer term.

Proposals to increase employee NI contributions by 1% from 2011/12 have been retained for earnings above the primary threshold and the upper earnings threshold at 12% and 2% respectively.

For employers, the NI rate is also increased by 1 % to 13.8%. The level at which employers start paying NI is to be increased by £21 p.w. (plus indexation).

Businesses outside of London and the South East can claim a reduction in secondary Class I contributions of up to £5,000 for the first 10 employees.

A number of changes to the operation of child and working tax credits will be made including a cap on claims for those earning in excess of £40,000.

The government will review relief for pension contributions with a view to restricting tax relief from 6 April 2011. A reduction in the annual allowance to £30,000- £45,000 has been proposed but is subject to further consultation.

The maximum age at which members of a registered pension scheme must acquire an annuity is extended from 75 to 77 years. This change applies from Budget day.

Furnished holiday letting

The tax regime for UK furnished holiday letting will be retained. New legislation will include properties in the EEA. It is proposed that the criteria for qualifying properties and the way in which loss relief is given will be modified. Changes will be subject to consultation and included in the 2011 Finance Bill.

Corporation tax

The main rate of corporation tax is to be reduced from 28% to 24% by 1% per annum in the four years from 2011.

The small companies' rates of corporation tax will be reduced to 20%. The relevant profit limits for the small and marginal rates are unaltered.

Proposed reform of the corporation tax system will be announced in the autumn and are expected to include consultation on the taxation of intellectual property and the availability of R&D tax credits.

Simplification of the capital gains regime for groups for companies has been deferred until 2011.

A bank levy will be charged on bank balance sheets from 1 January 2011.

Capital allowances

The Annual Investment Allowance (AIA) will be reduced from £100,000 to £25,000 p.a. for expenditure incurred on or after 1 April 2012 for companies and 6 April 2012 for unincorporated businesses. Transitional rules will be introduced.

Writing down allowances will be reduced to 18% for plant and machinery main rate pool expenditure and 8% for the special rate pool and also take effect from 2012.

Anti-avoidance and other measure

Government will examine the feasibility of introducing a General Anti-Avoidance Rule. A paper setting out a new approach to tax policy proposes that a strategic approach to counter tax avoidance will be adopted in order to reduce specific anti-avoidance rules that create instability and uncertainty elsewhere in the tax system.

The taxation of non-domiciles will be reviewed.

Anti-avoidance legislation will apply from 2011 to prevent avoidance of income tax and NI through the use of Employee Benefit Trusts (including EFURBS), as previously proposed.

Government has restated its pledge to review the taxation of small business and IR35; details will be released shortly.

No announcements have been made on the status of proposals made by the previous government for dealing with False Self-Employment in the construction industry or anti-avoidance measures to counteract income splitting (first announced in the 2008 Budget).

Proposals to retain the inheritance tax allowance at its 2010-11 level of £325,000 are unaltered.

Click here to see the full Budget Report from HM Treasury.

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