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23rd June 2010

Emergency budget – an overview

Craig Blackmore, director at Ktsowensthomas

The Chancellor described the Emergency Budget as the Unavoidable Budget. He is not going to hide from the need to address the UK deficit and would target lower spending before tax increases to do it. Osborne’s plans are ambitious, he aims to eliminate the deficit completely within this parliamentary term – even achieving a surplus by the time of the next election.

To do this, our economy needs stimulus to grow and move out of recession strongly and quickly. The emphasis for business was on some much needed good news which came in the form of reductions in headline and small company corporation tax rates. The small companies rate cut though could be largely negated by the corresponding halving of the Annual Investment Allowance (AIA) which is the 100% tax allowance for companies spending up to £50,000 a year on assets. This will now be down to £25,000 from April 2012, a move which could result in a many small companies actually being worse off.

Encouragement of entrepreneurialism was also assisted with the introduction of regional support for businesses outside of London and the south-east of England. This includes national insurance breaks for start up businesses with up to £5,000 relief available for the first 10 workers employed.

But the public focus will undoubtedly be on the increases in VAT and Capital Gains Tax. How does that affect business? Will this impact on margins for businesses or simply see prices increase by 2.5% maybe affecting consumers and damaging confidence. The increase brings UK VAT rates in line with many European counterparts but only time will tell if this makes the UK a less competitive place to do business. Capital Gains Tax increased by 10% to 28% for higher earners. Not as bad as many were expecting and in reality I suspect this has been viewed as small change for the Treasury, so best left alone.

As predicted, the public sector did not escape attention from the Chancellor. A two year pay freeze on salaries over £21,000 and small increases for anybody below that level will not please public sector workers. The Chancellor will argue that they will undoubtedly prefer that to jobs cuts. The future, to 2014 at least, will also hold cuts in public sector spend of 25% so the autumn spending review will also be watched very closely to see how those savings are going to be achieved. In Wales, I would hope that this will this now encourage greater interaction with the private sector and stimulate indigenous trade and growth. With such a dependency on the public sector in Wales, there must be a Welsh focus in the Regional support White Paper promised for later in the summer to combat differentials in wealth and private sector stimulus.

It has been said many times that the way out of recession would be lead by UK businesses and the Chancellor appears to have taken that message on board. Tough but fair is probably right but realistic and effective? We can only wait and see.

 

ktsowensthomas is a firm of accountants, tax and business advisors with a head office in Cardiff Bay and a regional office in Aberdare covering Rhondda Cynon Taf, Heads of the Valleys and Mid Wales. For more information contact Kate Moore on 029 2082 9000 or visit www.ktsowensthomas.com

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