Unlike the pre-election Budget in March, last Tuesday’s Emergency Budget will have very real consequences, not least with the rise in the rate of VAT and adjustments to corporation tax and national insurance contributions. As the dust begins to settle after this week’s announcements, reaction to the Budget has been mixed, with the Construction Products Association (CPA) expressing concern that the reduction in capital spending, which will fall to just 1.25% of GDP, will hold back the pace of the economic recovery. In total, capital investment will be cut by £100bn over the next five years.
The CPA welcomed the plan to reduce Corporation Tax and supported measures to help small businesses at a time when they are facing enormous pressures. The budget came in for some criticism due to the lack of measures to ensure credit is more widely available, especially from those banks that are substantially in public ownership. There was also disappointingly little in the way of incentives to stimulate the low carbon agenda.
You can read our Chief Executive Richard Lambert’s response to the budget here.
Here are the key points which will be affecting BWF members:
The rate of VAT will rise from 17.5% to 20% from 0.01am on 4th January, 2011
The government is hoping to generate over £13bn a year of extra revenues from the change. There will be measures to prevent very large prepayments made to avoid the change of rate. This may put many small firms with domestic or exempt customers under pressure and will increase the cost of many larger projects as not all customers of major projects can recover the VAT. The industry has had two changes of rate recently so will be experienced in how to cope with it. BWF members can expect detailed advice on how to deal with the change. Flat Rate scheme VAT rates will also change – from 4 January 2011 General building and construction is 9.5%, labour only building or construction is 14.5%.
Personal income tax allowance to be increased by £1,000 in April to £7,475
This will be worth £170 a year to basic rate taxpayers and is set to take 880,000 of the lowest-paid out of income tax altogether. Higher rate taxpayers will not benefit, but this will be good for ordinary workers. The higher rate income tax threshold will be frozen until 2013. From April 2011, the threshold at which employers start to pay National Insurance will rise by £21 per week, above indexation. This may be helpful in the construction industry, where many struggle to keep workers in employment.
Corporation Tax will be cut next year on 1.4.2011 to 27%, and by 1% annually for the next three years, until it reaches 24%
The small profits rate will be 20% for the Financial Year 2011, which will be useful for those who make profits. There will also be a full consultation to consider reform of the Corporation tax system.
Small companies tax to fall to 20%
This will help over 850,000 small firms.
Regional Employer NIC Holidays for new businesses
This tax break is for businesses in their first three years of trading in most regions of the UK except London, the SE, and E Anglia. Within this period employers will not have to pay the first £5,000 of employers class 1 NICs for each employee (up to 10) in their first year of employment. The government will address the issue of regional economic differences in Britain by publishing a White Paper later in the summer. A Regional Growth Fund will be created to help fund regional capital projects over two years.
Introduction of a bank levy based on the bank’s balance sheet
The only concern for construction is whether this will limit the ability or willingness of banks to lend for projects or to ease firms with cash flow problems.
Changes in capital gains tax for higher earners
Capital gains tax, currently 18%, will increase for higher earners to 28% from midnight on 23rd June 2010. Capital Gains will be taxed at two rates, 18% for those only paying tax at the basis rate and 28% for higher rate taxpayers. This may reduce the number of speculative redevelopment projects undertaken by individuals. The 10% Capital gains tax rate for entrepreneurs, which currently applies to the first £2m of qualifying gains made over a lifetime, will be extended to the first £5m of lifetime gains.
Capital allowances for the majority of plant and machinery assets to fall from 20% to 18%
The allowance for longer-lived assets will fall from 10% to 8% from April 2012. Capital Allowances. Writing down allowances for new and unrelieved expenditure on plant and machinery will be reduced from 1 April 2012.
From 20% to 18% in the main pool
From 10% to 8% in the special rate pool.
Landfill Tax
This will continue to increase by £8 a tonne each year to 2014. It will not fall below £80a tonne 2014-2020.
It may also be worth noting that: – The standard rate of insurance premium tax to rise from 5% to 6% and the higher rate to increase from 17.5% to 20%. – The Annual Investment Allowance which allows most businesses to reduce their taxable profits by the full amount of their annual capital expenditure on most plant and machinery will fall from £100,000 to £25,000 with effect from April 2012. The transitional arrangements have yet to be announced. – There will be a radical curtailing of many credits and benefits. These may drive many people back into work or from part time black economy work into looking for full time jobs. This may be useful for those contractors looking for labour, and in holding wage rates. – Government to work with local authorities to freeze council tax for one year from April next year. – The proposals to introduce a 50% tax for those earning over £150,000 remain unchanged. – 50p-a-month levy on phone lines to pay for the rollout of superfast broadband scrapped.
