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Tough medicine from Osborne in maiden budget
TheBusinessDesk.com | 23rd June 2010

GEORGE Osborne delivered a dose of medicine to an unbalanced, debt-ridden economy in yesterday's Emergency Budget, but there were some positives for the private sector.

Despite hiking VAT - which will surely hit consumer-facing businesses when the rate rises to 20% next January - a 10% rise in Capital Gains Tax to 28% for high rate earners, was not as harsh as feared.

Martin Portnoy, tax partner at business advisers Ernst & Young in the North West said some had been expecting CGT to rise to 40%.

He praised the move to boost investment in the regions, with Mr Osborne announcing National Insurance relief for the first 10 employees in new companies.

Another positive step was the cuts in Corporation Tax over the next four years.
He said: "The Budget was a sombre read as the economy was given its medicine, with the largest rise in taxation and cut in spending since 1997.

"However, despite tax rises such as VAT from the New Year, there was a 'spoonful of sugar' for business with the announcement of a programme of tax rate cuts, leading to a corporation tax rate of 24% by 2014-15, the fifth lowest rate in the G20, only slightly funded by reductions in capital allowances.

"There will be some concern over the impact that the increase in VAT in January will have on consumer demand. While a bumper Christmas for retailers can be expected, there is likely to be potentially lower New Year sales to follow."

Mr Portnoy expressed concern over the "silent elements" of the Budget, adding:
"Having noted the focus of the Emergency Budget on the tax rises of VAT and the rate cut in Corporation Tax, businesses will now be looking for the detail.

"The Budget left open questions over the controlled foreign company regime, the taxation of intellectual property, foreign branches and R&D tax credits."

The public sector felt most of the pain as staff earning more than £21,000 were hit with a two-year pay freeze. Government departments will have their budgets slashed by up to 25%

Cuts and tax rises will save the economy £40bn over the next five years.

Len Collinson, leader of North West business group Private Sector Partners (PSP) said businesses would be "heartened" by the Budget.

He said: "The coalition Government has listened to business and outlined an encouraging road map for nurturing enterprise and cutting back on the bloated public sector.

"Nevertheless we should not forget this is marathon not a sprint. Mr Osborne and his team will need to show staying power and steel in the autumn spending review and beyond to deliver the change the UK and business so desperately needs."

Matt Dunham, North West regional chair of insolvency trade body R3 expressed concern over the impact of the VAT rise though.

"The increase in VAT will be a further blow to those struggling businesses that rely on consumer spend, making spending more expensive at a time when consumers are already tightening their belts.

"Retailers and restaurants especially will struggle to work out what will damage their bottom line more: taking on the extra tax burden or suffering a fall in consumer demand if they pass the tax on.

“Companies that work predominantly in the business to business sector are less likely to suffer as they can claim back any VAT they pay from HMRC."

Frank McKenna, chairman of Downtown in Business, which operates networking and lobby activities in Manchester, Liverpool and Lancashire, welcomed the NI initiative for start up businesses in the regions.

"I would have liked to have seen this extended to all SME’s with a turnover of £5m or less who are looking to grow their businesses.

"The really positive news is the go ahead for the Liverpool-Leeds rail link, and the Manchester Metrolink system," he added.