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March 23, 2011

UK Budget 2011 has come at a critical time with the UK economy starting to show signs of improvement despite the downward revision of growth forecasts. The UK Chancellor stated at the outset of his speech that this would not be “a tax-raising budget” and there are some favourable measures.

The income tax rate of 50 per cent for high-income earners was announced to be a “temporary measure.” The 50 per cent rate (introduced in 2010), while having a demoralising impact, should not lead to an immediate brain drain of executive talent from the UK – however, it is another reason for businesses and executives to consider relocating to other jurisdictions. The Government has unexpectedly extended previously announced corporation tax rate cuts to 26 per cent effective April, 2011 (phased reduction to 23 per cent in 2014). This is an additional 1 per cent reduction in the main rate of corporation tax. In addition VAT has been held at the recently increased 20 per cent rate.

As expected, the interim improvements to the UK CFC regime and the reform of the taxation of profits of foreign branches are to become law as part of the Finance Act 2011. There are changes to the draft legislation published in December, which have come out of the consultation process, and it shows the Government has listened. The Chancellor hinted that an additional partial exemption will be introduced in 2012 that results in an effective UK tax rate of one-quarter of the main corporation tax rate on profits derived from overseas group financing arrangements. This will result in a rate of 5.75 per cent on relevant income by 2014 (being 23 per cent divided by 4). The Government will be consulting on this measure.

The Office of Tax Simplification has recommended the abolition of 43 tax reliefs to simplify the tax system, and UK Tax Inspectors will be trained with a focus to tackle tax avoidance. Specific anti-avoidance legislation has become a regular feature of UK budgets as HMRC seek to close down tax-planning schemes that now need to be disclosed. Commercially based tax planning will continue to be unaffected by these regulations.

The levy on banks will increase from £800 million to £2.5 billion (announced last month) and will be extended further in 2012 to neutralise the above corporation tax rate reduction for banks. There has been no support for the transaction tax on banks, despite acceptance by other European jurisdictions.

Oil and gas companies have also been targeted with an increase in the surcharge – paid in addition to the basic corporation tax rate – from 20 per cent to 32 per cent. If, in future years, the oil price falls below a set trigger price on a sustained basis, the Government will reduce the supplementary charge back towards 20 per cent. The Chancellor announced this measure as a counter-balance to the fuel duty escalator which has been abolished. This represents the position while oil prices remain high. If oil prices fall then fuel duty will rise.

Author:
David Pert
Managing Director
London
Telephone: +44 207.715.5208

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