Osborne's Medicine not as Bitter as Expected in June 2010 Emergency Budget

Following George Osborne's Emergency Budget on 22nd June 2010 we now have a clearer picture of the balance between cost cuts and tax rises

Osborne property tax emergency budget capital allowances

The Right Hon. George Osborne MP sought to share the pain between Government cost cutting – aimed at being up to 20-25% of departmental budget allocations and a series of tax measures aimed at increasing tax competitiveness of the UK in global terms, as well as generating tax revenue for the Exchequer.  

With a target of a ‘balanced budget’ by the end of the Parliament, the details set out in the Budget statement certainly seem ambitious; but necessary in re-establishing some financial prudence and reducing the extent of Government spending as a proportion of GDP.  The precise details will follow in the next few days and weeks as the Budget ‘Red Book’ and the numerous press releases from HM Treasury and HM Revenue & Customs are digested and draft legislation released. 

There are some key changes that will affect the Property and Construction sectors along with many other sectors where property is a key business expense.   Irrespective of sector, it remains crucial that the available property taxation incentives must be fully optimised and not overlooked if businesses are not to be ‘saddled’ with a disproportionate share of the burden.  Alun Oliver, Managing Director and James Daniels, Property Taxation Analyst of Property Taxation Specialist E³ Consulting provide comment and analysis on the Finance Act 2010 and how the ‘Emergency Budget’ changes will impact on the Property sector.

Govt Receipts

Taking the chart of tax receipts (as extracted from Budget Report June 2010 Red Book, p.5) you will observe that over three quarters of all taxes are provided by Income Tax (IT), VAT, Corporation tax (CT) and National Insurance Contributions (NIC).  During Labour’s reign the tax code more than doubled in size and complexity and the new Conservative/Liberal Government has vowed to simplify the tax rules, whilst aiming to achieve their deficit reduction too… ‘the devil will be in the detail’ as to whether the Coalition Government can achieve this balancing act?  Only time will tell, but the new Chancellor has announced some plausible steps along the delicate path that raises tax receipts, whilst cutting Government spending and supporting key business sectors to ensure economic growth is delivered through the private sector.  Property is a fundamental part of the private sector and will benefit from the general reductions in corporation tax.  The Standard rate will reduce by 1% each year, starting April 2011, until the rate reaches 24%.  The Smaller Companies Rate, planned under Labour to increase, will also be reduced to 20% from 1st April 2011.

VAT

As widely speculated, the Chancellor announced that the standard rate of VAT will increase from 17.5% to 20% from 4th January 2011; a measure that should generate some £13bn by 2014/15.  VAT affecting property and construction has always been a potential minefield and unless proper tax planning is carried out in advance of any transaction, the VAT costs incurred could be very substantial and largely irrecoverable to the reckless.  In absence of specialist VAT planning advice, developers could find their projects become unaffordable or the pre-construction phase extended whilst value engineering or cost reduction exercises are undertaken to marry up the project costs with its increased funding and cash flow requirements.

Capital allowances

Over £20bn is annually available through one form or another of capital allowances.  However, in recent Finance Acts, we have seen significant changes affecting the capital allowances regime and these are now filtering through to transactions and project analyses.  Annual Investment Allowances (AIAs) were introduced in Finance Act 2008 to replace the pre-existing 40% or 50% first year allowances for investments in Plant & Machinery by SMEs.  Finance Act 2010 doubled AIAs to £100,000 from April 2010, providing 100 per cent allowances on this first slice of new capital expenditure.  Any additional expenditure over this level will be dealt within the normal capital allowances regime, at either the current 20% or 10%allowance rates as plant or integral features respectively.

The government maintains that 97% of businesses don't spend over £50,000 on capital assets and now confirmed that AIAs will be reduced back to £25,000 from April 2012.  We are promised, some transitional arrangements ‘in good time’ to help tax payers understand the impact of their project expenditure spanning this date.  Whilst there are many businesses that can and will benefit from the AIAs, even at this lower rate of £25,000; the recommendation to businesses is – if you have the ability to accelerate investment spend it now and claim the £100,000 as AIAs, rather than the lower amount from 2012.  That said for most in the property sector, the sum is too low to have a meaningful impact on decision making, and is really aimed at the SME sector.

It was reassuring that George Osborne seems to have been convinced by tax professionals and industry of the intrinsic value of capital allowances in supporting both business and property investment and only chose to reduce the main WDAs for Plant & Machinery from 20% to 18% and for the ‘Special Rate Pool’ (includes Long Life Assets, Integral Features and Thermal Insulation) adjusting the WDA rate from 10% per annum to 8%.  The net effect of these changes is to slow the rate of tax relief, whilst maintaining the overall eligibility of expenditure.  Coupled with the reduced rates of Corporation Tax (above) these measures seem to strike the right balance, with a relatively modest increase in tax take of £4.7bn by 2014/15.

The current spectrum of available capital allowances is vast but the principal areas of focus in 2010 for the Real Estate sector must be:

  • Energy efficient and water conservation plant and machinery allowances
  • Plant & Machinery allowances
  • Integral features allowances
  • Hotel Allowances and Industrial Buildings allowances

These allowances range from 1% per annum up to 100% depending on the dates of expenditure and the nature of the property and relevant use of the assets acquired.

Furnished Holiday Lettings

The 2009 pre-Budget report had confirmed the scrapping of all tax benefits applying to Furnished Holiday Lettings (FHL), after 5 April 2010, as HMRC considered that to continue on the expanded European wide basis would be too costly.  However, the Chancellor confirmed that FHLs and a new designation of ‘EEA FHLs’, for those properties located within the European Economic Area, would continue through to April 2011.  The Government had been concerned about the potentially detrimental effects of the proposed abolition of FHLs would have had on the UK tourism sector and rural economy.  A new consultation will take place over the summer to determine the longer term future of FHLs.

This means that owners of holiday lettings whether as private investors or large property companies, will, for the time being, continue to benefit from capital allowances on both the purchase and any subsequent refurbishment of their properties, as may be applicable.

Land remediation tax relief

Not subject to any changes in the ‘Emergency Budget’, LRTR remains an attractive, yet under utilised tax relief.  In the current economic climate developers and investors that have funding are looking to squeeze more value out of their projects and considering those sites that may have more issues in terms of contamination.  Land remediation tax relief, despite being available since May 2001, is still relatively unheard of by many companies involved in regeneration projects and even fewer of their accountants!  It is available to both traders and investors and on commercial and residential developments.  The relief is available at 50% or 150% of the qualifying land remediation expenditure, yielding tax savings of between 14% and 42% for companies, using the current 28% standard rate of corporation tax.  

As with all tax relief, there are various conditions that must be met to secure one’s entitlement to LRTR and the rules have tightened considerably since April 2009; which also saw the relief being extended to include tax relief on demolition of certain features involving long term derelict land.

Landfill tax exemption

Landfill tax (LFT) continues to rise and the ‘standard rate’ will increase from the current £48 per tonne to £56 from April 2011.  Furthermore there will be further rises of £8 per tonne in the standard rate of landfill tax through to April 2014, and a freeze in the lower rate in 2011-12.  It was also confirmed the standard rate will not fall below the £80/t rate in the future, providing some certainty for business investment.  Increasing the costs of sending waste to landfill will encourage investment in sustainable waste management options such as soil treatment centres, composting or waste to energy strategies.  There were some changes re-announced from the earlier March Budget, to the classification criteria for determining material eligible for the lower rate of LFT for material to be deposited on or after 1 April 2011.

Community Infrastructure Levy (CIL)

Again absent from the Budget, CIL was introduced by the last Government within the Planning Act 2008 and finally implemented by Statutory Instrument 2010/948 effective from on 6th April 2010.  This new indirect tax potentially affects all land owners intending to develop their land over the next 12 to 36 months and beyond.  CIL enables Local Planning Authorities (LPAs) to apply a levy (unique rates will apply to each LPA) to all projects within their area, gaining planning approval after they have introduced the relevant measures.  At present no LPAs have opted to implement the CIL (and put in place a CIL Development Plan setting out the local Infrastructure Needs), as CIL is seen as ‘optional’.  However, under the existing legislation LPAs will be forced to introduce the measures by April 2014 at the latest, as the alternative s.106 recovery will become impossible against any infrastructure costs, intended to be within the scope of CIL.  In due course it is likely that CIL will be modified to a “Unified Local Tariff” (ULT) – as the Conservatives had previously announced an intention to combine CIL and S.106 mechanisms to fund the infrastructure impact of new development in a simple and consistent manner.

In these uncertain times, following the ‘Emergency Budget’ the tax take is set to grow and contribute to the deficit reduction strategy.  The Government’s Spending Review is to be published on 20th October 2010 to set out the precise mechanisms by with the departmental cuts are to be achieved.  Undoubtedly some of these cuts will impact Property and Construction, but those redevelopment projects considered key to our future economic growth and international competitiveness, such as Birmingham New Street Station and rail lines in Sheffield, Leeds and Liverpool will gain strong and decisive support.

Change is often feared, but as Professor Michael Porter of Harvard Business School has previously proclaimed, change also brings opportunity – never truer with tax planning!  To some, tax is planning an ‘Art’ and not a ‘Science’, combining socio, economic and political policies in order to provide welfare, infrastructure and support; but you can not have one, without the other!

Only by taking specialist advice and planning properly for new projects or transactions can the relative cost of tax to future real estate projects be anticipated, controlled or managed, thus ensuring further profitable growth in the sector.  To optimise your property tax savings contact E³ Consulting on 0845 230 6450 when considering any significant property or project expenditure. 

This article was published in Property Forecast in June 2010.

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