With very uncharacteristic speed for governments, statements have been made, spending cuts announced and now a programme of legislation introduced through the Queen’s speech to parliament covering a multitude of policy issues.

Of course, those of us in the accountancy profession are really waiting with bated breath for the budget due on June 22^nd.  So far, the one common thread characterising this new coalition has been the speed with which everything has been dealt with.  The coalition itself was pulled together in record time and the spending cuts were identified unusually rapidly.   The saying, “more haste less speed”, does come to mind with all this rushing around.  If the same almost indecent haste is applied to the budget, it could end in tears.  History is replete with examples of legislation introduced without sufficient consideration.  Some of the areas being discussed could create as many tax saving opportunities as they do raise revenue which at the moment, has to be the government’s objective in tackling the deficit.

Proposals to increase personal allowances, or at least raise the level at which the poorly paid first start to pay tax, needs to be very carefully thought through.  How will they ensure that only the right people benefit from this situation?

What seems to be apparent is that this new government is determined to lower corporation tax rates.  Initial speculation has focused on the higher rate of tax with some commentators even speculating that it could be reduced from 28% to 25%.  As a small business advocate, I would of course be pressing for any Corporation Tax rate reductions to focus on the lower rate of 21% and we may well see such a reduction. 

What seems clear to me from this is that the benefits of operating through a limited company are, if anything going, to become even more clear cut and recent figures for company incorporations published by Companies House seem to suggest that people have cottoned on to this and are forming companies as if there is no tomorrow.  Year on year, company formations are up dramatically on 2009.  In the first 19 weeks of 2010, 147,821 companies have been formed compared with 125,978 for 2009, an increase of over 17%.  We have seen this demand at first hand through our company formation site www.companiesmadesimple.com and all the signs are that this is likely to continue.

How this new government, in its first budget, deal with certain key tax issues could shape tax planning for small businesses considerably and more importantly, provide certain tax breaks that were never intended.

We must all wait with bated breath.

HG

So Darling has delivered his budget and we are all now trying to open our bleary eyes and come to terms with some of the smaller print. As I am currently abroad, I haven’t had a chance to read all the press releases or discuss the finer points with colleagues.

What I do know is that the new Income Tax proposals have shocked many both in terms of the new 50% rate and the loss of personal allowances.

What I don’t understand is why the focus always seems to be on hitting the individual.

The government really had no choice in seeking to raise additional revenues. The economic mire that we find ourselves in has resulted in a massive fall in tax revenues and increased public spending and the bank bailouts have led to a massive level of debt.

However, perhaps there was an alternative strategy that could have been followed.

The current corporation tax system has a top tax rate of 30% which kicks in when profits exceed £1.5 million with a sliding scale between £300,000 and £1.5 million. The rate below £300,000 is currently 21%.

Many companies in the UK make far more profit than the £1.5 million level and some are making almost obscene amounts of profit. In some cases, profit levels of our top companies run to the many £billions yet they still only pay tax at the same rate as a company making £1.5 million.

This makes absolutely no sense at all to me.

BP is a fine example. There last reported pre-tax profits for the year to 31^st December 2008 were about £23.5 billion. That is an extraordinary amount swelled of course by high oil prices that you and I had to bear at the petrol pump. A higher rate of corporation tax of say 40% would raise over £2billion revenue and that is just for one  company. The same calculation for the whole of the FTSE 100 companies would easily have yielded more than the £7 billion that the new income tax hikes are likely to generate.

Now don’t get me wrong, I have some sympathy with higher taxes for the richer in society, but the level at which these new taxes and the reduction in personal allowances is going to have an effect is simply too low.

Corporate Britain at the higher end gets away with murder and the man in the street pays for it every which way.

A new corporate tax scheme with higher rates for higher profits together with higher income tax rates for people earning say over £300,000 would have been fairer and spread the burden more reasonably.

HG