Capital gains tax and VAT are two key areas Birmingham’s finance community will be watching intently for in the Emergency Budget.
Chancellor George Osborne will reveal the Government’s drastic proposals to slash spending and increase taxes in order to reduce the UK’s financial deficit on June 22.
Eric Williams, Grant Thornton UK head of private client and Birmingham head of tax, said there was growing speculation that a VAT rise would feature in the Budget.
“Whilst this increase was not mentioned in the Conservative election manifesto, the Liberal Democrats included a pledge to address the differing VAT treatment of new build properties with that of property repairs,” he said.
“The UK standard rate of 17.5 per cent is relatively low when compared to other EU countries and having now had an opportunity to review the country’s books, the Chancellor may face an irresistible temptation to increase it to 20 per cent – a figure predicted by many leading economists.
“The dilemma for the Chancellor though, is when to make the increase.”
A survey by KPMG revealed that if taxes had to rise to help plug gaps in the nation’s finances, most businesses would prefer an increase in VAT to any other tax rise.
But according to KPMG, this may miss the point on the potential impact of a VAT rise on the economy.
Simon Jonsson, head of tax at KPMG in the Midlands, said: “Despite the coalition’s silence on a possible VAT rise to date, it is surely a tempting target given its revenue raising potential.
“A rise from our current 17.5 percent to the European average of 20 per cent would, on current spending patterns, yield around £1 billion a month from the moment it is introduced.
“The big unknown, however, is the potential risk that such a move could stifle consumer spending and thus hamper the recovery, as it could cost the average household £425 a year.”
Meanwhile it looks certain that the capital gains tax (CGT) rate on the disposal of non-business assets will be increased in line with income tax rates, which could mean an effective tax rate on capital gains of up to 50 per cent.
In order to continue to encourage entrepreneurial activity, PwC is anticipating a lower CGT rate to apply to business assets which should include certain shareholding in private companies. The CGT rate on such assets could be set between 10 and 20 per cent, it believes.
Barry Smith, head of tax at PricewaterhouseCoopers, Midlands, said: “A lower rate for CGT on business assets would be welcomed by Midlands entrepreneurs.
“Again, the tax rate applied to such assets may vary so that assets held for the longer term enjoy the lowest tax rates. This would of course take us back to a similar position to taper relief.”