The coalition Government plan to cut £6 billion in 2010 and 2011, which means June's emergency Budget is likely to focus on slashing spending and raising taxes as the economic recovery continues to take centre stage, according to Kingston Smith.
The Government has already announced plans to charge capital gains tax (CGT) on non-business assets at rates similar or close to those applied to income.
Andrew Shaw, a partner at Kingston Smith, said "The disparity between CGT and income tax rates means the chancellor may raise CGT from 18% to 25% or 30%. Raising CGT to 40% or 50% risks upsetting traditional Tory voters, but an uplift to 30% is in line with the CGT rate as it was prior to the introduction of taper relief and may be more palatable - especially if the CGT exemption is reduced from £10,100 to £2,000 as the Liberal Democrats proposed."
Exactly when the Government will introduce the new CGT rate is unclear although, historically, a new rate has never been introduced part way through the tax year. Instead, 6 April 2011 is more likely.
In 2003 an understanding was reached between the British Venture Capital Association (BVCA) and HM Revenue & Customs (HMRC) over the income tax treatment of managers' equity investments in venture capital and private equity backed companies. The agreement allowed managers of hedge funds to have their carried interests in the underlying investments taxed as capital gains and not as income.
This meant that they paid tax at just 10% on their carried interest. In 2007 this favourable treatment looked to be coming to an end after the famous quote from one City worker that he paid "less tax than his cleaner" sparked the reform of the CGT system so that carried interest was taxed at 18% instead of 10% but, importantly, it was still treated as a capital gain and not income.
Tim Stovold, a partner at Kingston Smith, added: "CGT makes up a small percentage of total revenues for HMRC and is only payable when the capital gain is crystallised. This suggests that by hiking up the CGT rate the government may really be targeting the profits of hedge funds and similar businesses that continue to rely on the BVCA agreement. However, rather than penalising everyone, HMRC should consider revisiting the understanding reached with the BVCA, although this would inevitably lead to more of these businesses leaving the UK."
But Julie Richardson, head of employee share ownership at ifs ProShare, said
"We obviously understand the need to increase tax revenue during these straitened times. However, it is imperative that the interests of workers who participate in all employee share plans are protected. We are not talking about short term speculators but staff of all levels, including front line employees in supermarkets and bank branches, as well as call centre staff - all of whom will have been investing in their company share plans for several years.
"ifs ProShare would like the Government to class shares owned by employees as business assets, as was previously the case. We want to ensure that the unique role that employee share ownership plays in helping the UK economy is protected under any new CGT regime."
The Government has also agreed the personal allowance for income tax will rise from April 2011 to help lower and middle-income earners. "The allowance is expected to increase for all taxpayers but will only reach the target personal allowance of £10,000 after a few years, while the threshold for the personal allowance being tapered down may be reduced from £100,000 to a lower earnings limit so that the benefit of the full allowance only goes to the lower paid," said Stovard. "To help fund the increase the National Insurance (NI) rate for higher earners is predicted to rise by 1%. The Conservatives have abandoned plans to increase employers' NI from 12.8% to 13.8% calling it a tax on jobs and anxious that it will increase unemployment."
The coalition Government has made it clear that reform of the banking system is essential to avoid a repeat of the banking crisis. "A banking levy is expected to be introduced in time although, similar to the Labour government's one-off bankers' bonus tax introduced in the pre-Budget report 2009, this is likely to be paid by the banks or added to bankers' salary," said Stovard.
