13 May 2010

"The new coalition government faces some difficult issues and some tough decisions. The key issues are centred on the UK economy, how to pay down the deficit and how to introduce greater efficiencies and better value for money from the public sector. Immediately, there is the considerable task of getting the public finances back under control and restoring financial stability. The new administration will want to draw up a detailed plan for balancing the budget and restoring financial stability - and so provide certainty for business and the financial markets." - excerpt from KPMG LLP Tax Advisory Service.

"At the same time, the new government will want to encourage signs of growth in the private sector and the renewed sense of optimism that a recovery - however small - is now underway. Across government and business, some key choices lie ahead - both in the short and medium term. The decisions are likely to be far-reaching. Some will be announced in the new government's first budget, others will need to wait for the outcome of spending and policy reviews.

Over the coming months, KPMG's specialists will be providing insights and commentary around these key issues - and the options and choices open to our political leaders. Here, Anneli Collins, Head of Tax Policy - KPMG LLP (UK) outlines their viewpoint."

"Here is what we know so far.

National Insurance: No National Insurance contribution increases for employers but the 1 percent rise for employees will go ahead. Business will welcome this but it will clearly have an impact on employees.

Income tax: The key Lib Dem pledge was to raise the income tax threshold to £10,000 and the government have agreed to announce a "substantial increase” in the personal allowance from April 2011 in the next budget with a longer term policy objective of reaching a £10,000 threshold. Whether this will apply to all taxpayers regardless of income or be clawed back in the case of high earners remains to be seen.

Capital gains tax: One of the most radical proposals is to increase CGT significantly (from 18 percent to rates "similar or close to those applied to income”) for non-business assets. The revenue from the tax rise will be used to fund a significant increase in the income tax threshold to help the low-paid.

Environmental tax: There is an agreement to switch to a per-plane rather than a per-passenger duty, with a proportion of any increased revenues destined to help fund increases in the personal allowance mentioned above.

Corporate tax: This is the area with the least clarity. The Conservatives pledged to reduce the headline rate of 28 percent, funded by changes to the capital allowance regime and perhaps to the rules around the taxation of debt. Such a move runs a risk of creating distinct winners and losers and is likely to be the subject of much debate between now and the budget.

VAT: Still no word on VAT, which means it remains the elephant in the room. As a quick revenue raiser it's a tempting option and it had been widely expected that, whoever got in, it would go up post-election. It still could. A rise from 17.5 percent to 20 percent - the average EU rate - would raise around £12 billion a year while keeping the UK competitive.

All in all we are heading for a period of change. But with uncertainty comes opportunity. Now is the time for businesses to be thinking about what they want from tax - and how to engage in and influence the debate in the coming weeks and months."