The UK Chancellor of the Exchequer, George Osborn, presented the government’s budget on June 22, calling for a 77% cut in public expenditures along with 23% increases in various taxes in an attempt to lower the budget deficit from 10.1% of GDP to just 1.1% of GDP by 2015/16. The plan calls for increases in the VAT rate, an increase in the capital gain tax rate, and a modest tax cut for certain business and low-income individual taxpayers.
The plan calls for a 2.5% rate VAT increase, from a current rate of 17.5% to 20%, effective January 2011. There will be no changes to items that are currently zero-rated or exempt from VAT. The VAT flat tax rate, allowed for businesses with annual sales up to £150,000, has been adjusted to reflect this increase. That threshold remains unchanged.
An increase in capital gain tax rates to 28% for higher-rate taxpayers took effect midnight on June 22. Taxpayers who currently pay the basic income tax rate of 20% will continue to pay an 18% capital gains rate, while taxpayers with incomes above the upper limit will pay the 28% rate. The capital gains tax annual exemption will remain at £10,100 for 2010/11, increased thereafter for inflation. Capital gains from entrepreneurial activity (“entrepreneurs’ relief”) will pay a reduced rate at 10% on the first £5 million (as opposed to £2 million previously), effective June 23, 2010.
There is some good news for business taxpayers in this budget. Corporation tax rates will be reduced from a top rate of 28% to 27% effective on April 1, 2011. The rates will continue to fall by 1% per annum to a 24% rate by 2014/15. However, the rates for capital allowances have been reduced from 20% to 18% per annum for expenditures allocated to the main rate pool.
The taxation items in the budget will need to be approved by Parliament to be effective once the finance bill receives royal assent. Taxpayers doing business in the UK need to immediately assess the impact of these provisions, since most take effect for the 2011 year (or sooner in the case of capital gains).
Did You Know?
An ‘International’ Fun Fact:
In the United Kingdom, Chancellors are allowed to refresh themselves with alcoholic drinks during their speeches to Parliament. No other Member of Parliament can do this.
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