Discussion Forum

The emergency budget is seen as a focal point from which business can move forward and perhaps decisions on capital spend can be made. Certainly, the direction the economy is taking should be clearer. Was it painful? To a degree yes, but more of a tightening of the belt and well spread throughout the economy. The spending review in the autumn will likely confirm reduced spending in the government sector so we can expect lower demand and a squeeze on profits as competition gets even tougher. Is this budget a taster for an autumn budget?

We have provided some commentary below from a number of sources; it is quite long, about four pages.

If you want to read the budget in full, it is here http://www.thebcfa.com/images/Publications/budget%202010.pdf it is strictly for the connoisseurs of detail.

If you would like an on screen/easy browse alternative, it is here

http://www.hm-treasury.gov.uk/junebudget_easyread.htm it is still a connoisseur’s version.

General Overview

Freedom: Enterprise and growth agenda

This Budget will create the conditions for enterprise and sustainable growth. The Chancellor wants to support business and make the UK more competitive. This means giving businesses more freedom by reducing regulation and providing targeted tax breaks, while ensuring that the economic opportunities for businesses are shared more evenly throughout the UK’s regions. This programme includes:

• A major package of reforms to reduce corporation tax rates including a reduction in the main rate of corporation tax from 28 per cent to 24 per cent over the course of four financial years from April 2011 and reductions to the main and special rates of capital allowances from April 2012;
• A reduction in the small profits rate from 21 per cent to 20 per cent from April 2011;
• A National Insurance Contributions (NICs) holiday for new businesses which start-up in certain areas of the UK over the next three years;
• An increase in the Enterprise Finance Guarantee and the creation of a new Enterprise Capital Fund.
• A Regional Growth Fund in 2010-11 and 2012-13 to support increases in business employment and growth, and a scheme in which new businesses in areas of the UK outside of the East, London and the South East will get a substantial reduction in their employer National Insurance Contributions (NICs).

• Compulsory employer sponsored staff pension schemes from 2012 confirmed
• Pension contribution annual allowance to be reviewed for higher rate tax payers
• Compulsory annuity purchase age temporarily increased to 77 pending a review
• A levy on the balance sheets of banks to be introduced in January 2011 – will raise £2bn pa
• Income tax threshold to be increased by £1,000 to £7,475 from 5/4/2011 – long term goal is £10,000
• State pension increases linked to earnings from April 2011
• Public sector pay to be frozen for 2 years
• Reduction of tax credits for families earning over £40,000 pa
• Child benefit to be frozen for 3 years
• Housing benefits system to be overhauled – cost to be reduced by £1.8bn over life of current parliament.
• Insurance premium tax to rise from 5% to 6%
• No extra tax on alcohol, tobacco or fuel - Proposed cider duty increase to be cancelled

VAT

The Budget announces a rise in VAT to 20% with effect from 4 January 2011. This will raise £13BN pa by the end of the current parliament, if it is retained.

Corporation tax

The Budget announces annual reductions to the main rate of corporation tax. The main rate of corporation tax will be reduced to 27 per cent in 2011-12, with further reductions to 26 per cent in 2012-13, 25 per cent in 2013-14 and 24 per cent in 2014-15.

The Budget also announces a reduction in the small profits rate of corporation tax from 22% to 20% from April 2011.

National Insurance Contributions

The Budget announces that the levels at which employers start to pay NICs will increase by £21 per week above indexation from April 2011. The value of indexation will be determined by data available in the autumn.

The Government will shortly announce a three-year scheme to exempt new businesses in targeted regions from up to £5,000 of class 1 employer NICs payments, for each of their first 10 employees hired in their first year of business. Subject to meeting the necessary legal requirements, the Government aims to have the scheme up and running by September, but any qualifying new business set up from today will also benefit.

The upper earnings limit and the upper profits limit will maintain alignment with the income tax higher rate threshold.

Capital Gains

The Budget announces that from 23 June 2010 capital gains tax will rise from 18 to 28 per cent for higher and additional rate taxpayers (non-business assets only)

 The 10 per cent lifetime limit for entrepreneurs’ relief rate will be extended from the first £2 million to the first £5 million of gains made over a lifetime.

The Economists View

This is the view from Roger Fagg and as usual, it gives some good background information and forecasts. He is also positive about the budget, the Chancellor and the present performance of the coalition.

http://www.thebcfa.com/images/Publications/the%20emergency%20budget%2022%20june%202010.pdf

Investment View, by the IDA Financial, Insurance and Pension Brokers RHG

Shares rose marginally over the course of the budget speech, helped by retail stocks and banks. There is an anticipation of a spike in retail demand before the VAT rise takes effect and banks had been expecting the levy to raise more than £3bn.

The pound was up on the day and U.K gilts were sharply higher, reflecting confidence that the UK deficit could be brought under control without over burdening growth projections.

While it is still early days, our initial reaction is that this budget is positive for the markets; reassuring the bond sector whilst encouraging enterprise. The reduction in corporation tax will have a direct boost on company profits, benefitting UK shares over the medium to long term.

Much will depend upon the ability of business to exploit the gap left by government spending cuts and there are many who will now predict a double dip recession.

So there we have it, onwards and upwards. It is time to rebuild the private sector and although we have never had it so tough, we certainly have the ability.

Kind regards

CCW