Budget Review

27th March 2012

continued on page 2

Riding the wavesI

t is unlikely that George Os-borne was expecting the Scot-tish political establishment to give his Budget an enthusiastic welcome, so he was probably

not surprised by the chorus of dis-approval which rang out from the SNP, Labour and the trade unions as soon as he sat down.

John Swinney, the Scottish Fi-nance Secretary, claimed that the Budget had failed the “growth and fairness test”, while Scottish Labour leader Johann Lamont accused the Chancellor of “balancing his Budget on the backs of the poor”.

Much of the ire from the left-leaning mainstream parties in Scot-land was directed at the general taxation changes - cutting the 50p rate for high earners, thereby giv-ing the rich a tax break, and taking away the current level of tax-free allowances enjoyed by pensioners, thereby taking money off the el-derly.

But Mr Swinney made it clear that he was also concerned about the lack of investment in capital projects. The SNP has long argued that the UK Government should in-vest more in infrastructure to help stimulate recovery. Mr Osborne refused to take this approach, stick-ing resolutely to his policy of pay-ing down debt rather than increas-ing borrowing still further.

In so doing, the Chancellor re-jected SNP demands for an ad-vance of £300 million for the Scot-tish Government, money which Scottish ministers claim could be spent on 36 “shovel-ready” pro-jects. The Chancellor did however announce tax breaks for companies investing in three Scottish areas: Ir-

vine in Ayrshire, Nigg in the High-lands and the City of Dundee.

He also announced a series of major new tax breaks for oil com-panies investing in deep-water de-velopments to the west of Shetland, along with new incentives to help the computer games and animation industries. And, according to the UK Government, tens of thousands of Scottish families will benefit directly from the core Budget measures.

Ministers claimed that the in-crease in the personal allowance by £1,100 in April 2013 will lift an additional 73,000 Scots out of tax, and that the raising of the individ-ual threshold for the withdrawal of child benefit to £50,000 (and taper-ing it to £60,000) will benefit 63,000 households in Scotland. This com-pares to the 10,000 or so wealthy Scots who will see their tax bills go down by the reduction in the 50p top-tax rate.

Mr Swinney acknowledged that there were some advantages for Scotland in the Budget, and that – as a result of spending increases for England announced in the state-ment – he would get another £20m to spend in Budget consequentials. But he insisted that none of these measures went far enough, because they did nothing to tackle the real issues at the heart of Scotland’s eco-nomic problems.

“This Budget fails the growth and fairness test,” the Scottish Finance Secretary said. “At a time when growth is very low in the economy and significant stimulus is required, the Chancellor has allocated next to no new resources and taken no ma-jor initiatives to support this effort.

“We needed to see a sustained, targeted programme of capital in-vestment to act as an economic stimulus.

By Hamish Macdonell

27th March 2012 | the times

Budget ReviewII

“Unfortunately, the Chancellor failed to deliver. The Budget delivers only £4m a year for Scotland, mere tinkering at the edges of what was required.

“The Chancellor talks about fair-ness, yet he is fixated on reducing the top rate of income tax and driving down public sector pay in areas outside Lon-don, which will only serve to exacerbate regional inequalities and undermine re-covery in the most fragile areas.”

For Labour, Johann Lamont echoed the words of her UK leader, Ed Mili-band, when she declared: “Gone is the talk of ‘we are all in this together’. This is a Budget riddled with unfairness which reflects the failings of George Osborne’s policies.

“He [the Chancellor] is putting mil-lionaires ahead of the millions. Scots will be furious to see a gang of Cabinet millionaires giving tax cuts to million-aires, but taking tax credits away from ordinary families earning just £17,000 and taxing pensioners more.”

Mr Osborne did get support from an expected source, in the form of Scottish Tory leader Ruth Davidson. Unsurpris-ingly, Miss Davidson championed the Budget as a boost for hard-working fam-ilies, focusing on the rise in the tax-free allowance for all taxpayers to more than £9,000.

“The Budget is something that should be welcomed across all political parties,” she said. “It emphasises the benefits we receive from being part of the UK and why we are better off in Britain.”

Willie Rennie, the Scottish Liberal Democrat leader – representing the other part of the UK coalition Government in Scotland – was also enthusiastic about the Chancellor’s decision to raise the tax-free personal allowance, taking it to with-in touching distance of £10,000, which was a Lib Dem manifesto commitment.

“The Liberal Democrats are making this a fair government while getting the economy back on track,” Mr Rennie said.

The Scottish Greens were not nearly as complimentary because, they claimed, the Budget would undermine Scotland’s renewable energy ambitions. The Prime Minister, David Cameron, has already expressed his scepticism with the scale of subsidies being handed out to wind farm developers and Mr Osborne appeared to confirm these UK Government concerns about renewables by offering incentives for more oil production.

“Scotland has the lion’s share of re-newable energy resource in the UK,” said Green MSP Patrick Harvie, “but the Chancellor has shown himself stuck on the dirty fuels of the last century. By investing in Scotland’s renewable energy potential rather than old-fashioned fos-sil fuels, the UK Government could have given our economy the shot in the arm it needs.

“Tax breaks for big oil and gas corpora-tions do nothing for the environment or equality – Scotland needs this budget like a hole in the head.”

That was not the view of the oil indus-try itself. Senior figures in the industry went so far as to describe the Budget in delighted terms as the “turning point”

for the oil and gas sector. There is now a feeling within the industry that the tax breaks could unlock billions of pounds of investment in new areas off the British coast.

The reason for this new-found confi-dence was the £3 billion allowance an-nounced by the Chancellor for large new oilfields in waters deeper than 1,000 me-tres west of Shetland. Mr Osborne also announced the extension of tax breaks for smaller oilfields, while the Govern-ment will consult further on allowances for more expensive, high-pressure fields.

Chief executive of Faroe Petroleum, Graham Stewart, said the changes would “add value to the economics of the targets we’re drilling”, and Oil & Gas UK, the lobby group for the sector, claimed that £40bn of extra investment could be un-locked as a result of the Budget decisions. Malcolm Webb, chief executive of Oil & Gas UK, said the Budget would “ensure that the recovery of the country’s oil and gas resource is maximised”.

The whisky industry was not so en-thusiastic, however. The Chancellor gave the impression in his speech that duty on spirits was not going up, but it emerged soon afterwards that whisky duty is to rise by 5 per cent, the equivalent of 41p on a bottle of Scotch.

The Scotch Whisky Association (SWA) pointed out that this latest tax rise left only Finland and Sweden in the Europe-an Union with higher tax rates on whisky than the UK. “The Government needs to review the duty escalator which is harm-ing the Scotch whisky sector,” said Gavin Hewitt, chief executive of the SWA. “The

industry is vital to economic growth and supports about 35,000 jobs across the UK. It suffers at home due to the dis-criminatory tax regime applied by our own Government.”

Chorus of disapproval and the voices of support

The whisky industry is unenthusiastic at a rise

in duty of 5 per cent

From page 1

The Chancellor presented his “fiscally neutral” Budget last Wednesday, claim-ing it as a budget for working families and one that supports businesses. He drew on Adam Smith’s 200-year-old tax

principles in defining the central objectives for the current budget to make the UK tax system simpler and more competitive than other major world economises. George Osborne’s stated in-tention is that the measures stimulate businesses and consumption, and improve the UK’s current position as one of the top 10 most competitive places in which to do business.

The picture painted of the UK economy was different to that presented in the 2011 Autumn Statement. The Chancellor highlighted that UK borrowing for the current year at £126 billion is some £11bn lower than previously predicted, al-though growth is forecast to be only 0.8 per cent this year and is predicted to rise to 3 per cent in 2015. Inflation is expected to fall to the tar-get rate of 2 per cent but only by 2015, while the number of unemployed people is expected to fall by one million over the course of the next five years.

An increased reduction in the standard rate of corporation tax to 24 per cent from April 2012 was a welcome surprise for businesses - and, along with the plans to reduce this further over coming years, will result in a new low rate of 22 per cent by 2014. This will put the UK within touching distance of an extremely competitive

corporation tax rate of 20 per cent. The sting in the tail for banks is that the accelerated reduc-tion will be funded by an increase in the bank levy.

George Osborne wants to turn Britain into Europe’s technology hub and has announced in-vestment in super fast broadband in the 10 larg-est UK cities including Edinburgh, as well an ex-tension of the current system of film tax credits to encourage greater UK activity in video game and TV production. This latter measure will be a welcome boost to the already strong presence Scotland has in the gaming industry.

There was also some welcome news for North East industries with the announcement of £3 bil-lion of allowances for oil exploration activities in Shetland, and a welcome end to uncertainties over complex decommissioning tax reliefs. Scot-land will also benefit from three new enterprise zones in Dundee, Irvine, and Nigg, where en-hanced rates of capital allowances will be avail-able.

As was widely expected, the Chancellor con-firmed a reduction in the top rate of income tax from 50 per cent to 45 per cent effective from April 2013. He consulted HMRC as well as the Office for Budget Responsibility in conclud-ing that the 50 per cent rate did more to harm the competitiveness of the UK economy than it did to raise tax revenues, raising only a third of what it was forecast to generate in tax revenues. In order to balance the books, a General Anti-Avoidance Rule (GAAR) is to be introduced from 2013 and a consultation on this will be published later this year. Owners of residential properties valued at more than £2 million and who try to undertake tax planning to mitigate stamp duty

land tax will also be hit hard with a tax rate of 15 per cent, effective immediately. A new rate of 7 per cent has also been introduced for normal transfers of residential property worth £2m or more. The anti-avoidance measures announced on Wednesday are expected to generate an ad-ditional £5bn of tax revenue over the course of the next five years.

Much has been publicised on the concessions the Liberal Democrats would be able to force through in relation to taking the poorest fami-lies out with the tax bracket altogether, and an increase of £1,100 in the personal allowance to £9,205 from 2013 goes some way to achieving their ultimate target of £10,000. Of further re-lief to taxpayers will be the announcement of a phased withdrawal of child tax credits for those earning over £50,000, with the complete with-drawal only applying to those earning more than £60,000.

After years of tinkering, there were thank-fully no further significant changes announced in this year’s Budget in relation to pension rules. Previously announced measures to help boost the competitiveness of the UK tax system will be introduced, including an above the line R&D [research and development] tax credit for com-panies, as well as a relaxation in the qualifying conditions under the EMI [Enterprise Man-agement Incentives] share scheme, and a new Seed EIS [Enterprise Investment Scheme] relief. There were no new changes to fuel or alcohol duties, and we can expect to hear more on the Government’s strategy to tackle the cost of alco-hol abuse later this year.

In his third full Budget since coming into power, George Osborne has at-

tempted to set out a framework for achieving a simpler and transparent tax system, and to cre-ate an environment whereby the UK is a com-petitive place in which to do business.

There were few surprises as he announced headline-grabbing measures including a reduced top rate of income tax, and a crackdown on own-ers of valuable property who plan to mitigate stamp duty land tax. At this stage it remains to be seen just how effective the additional tax measures will be in financing the tax giveaways the Chancellor has announced.

Budget: Unashamedly for business? It could well prove to be

Michael McCusker

Michael McCusker,,................................. tax partner, PwC in Scotland......

Budget Reviewthe times | 27th March 2012 III

There has been a muted welcome from Scottish business for last week’s Budget. The director of CBI Scotland, Iain Mc-Millan, outlined why last Wednesday when he said that “given the dire state of

the country’s finances, today’s Budget was never going to represent a bonanza for businesses or taxpayers. Yet, despite having his hands tied by difficult economic circumstances, there was a lot to welcome in the Chancellor’s statement.”

One key announcement was a series of meas-ures to boost investment in the North Sea oil industry. These included new tax allowances, in-cluding a £3 billion new-field allowance for large and deep fields to open up west of Shetland. Ac-cording to John Ritchie, tax director and oil and gas specialist at PwC in Aberdeen, “this will cer-tainly help to mitigate against the very high rates of tax borne by oil and gas companies and will allow some projects to proceed that would other-wise not be viable.

“The package shows,” Mr Ritchie said, “that the Chancellor has acknowledged the importance of the oil and gas revenues to Scotland and the UK economy as a whole and the need for fiscal certainty, which we highlighted in our Northern Lights report in November.

“Some very welcome reassurance around tax relief for decommissioning costs will undoubtedly help the investment climate in the oil and gas sec-tor. After all, we know that this area of uncertain-ty has been holding back potential transactions in the North Sea. These transactions are important to the future of the UK oil and gas sector as the region matures and further significant investment is required to maintain production.”

This view is shared by Dr Lesley Sawers, chief executive of the Scottish Council for Develop-ment and Industry. She welcomed the vision of a competitive, export-led economy, and said that the oil and gas industry was “key to economic growth — and, after the substantial and destabilis-ing increases in taxation in last year’s Budget, the measures announced to unlock billions of pounds of investment in existing and new fields, especially West of Shetland, are important.”

However, Dr Sawers was disappointed that capital investment in infrastructure was not sig-nificantly increased. Michael Levack of the Scot-tish Building Federation agreed, describing the Budget as a missed opportunity to create thou-sands of construction jobs in Scotland and to ac-celerate recovery of the Scottish economy.

“It is highly regrettable,” Mr Levack said, “that the Chancellor chose to ignore the Scottish Government’s plea to release funding for £300 million worth of shovel-ready infrastructure projects here in Scotland. The Scottish Govern-ment’s own estimate suggests that this invest-ment could have supported more than 4,000 jobs across the Scottish economy.

“The value of construction output from infra-structure projects last year was around £1.3bn, or 12 per cent of total industry output. Subject to how quickly these projects could be rolled out, we believe this additional funding could potentially have boosted direct employment in the construction industry alone by up to almost 5,000 jobs.”

However, the chief executive of the Scottish Chambers of Commerce, Liz Cameron, wel-comed “the Government’s continued commit-ment to essential infrastructure projects such as the new Forth Road Bridge, Aberdeen Western Peripheral Route, A96 improvements and M8 upgrade. Transport projects in particular,” she said, “will deliver long-term economic benefits to Scotland, and the Scottish Government’s con-tinued commitment to this investment, against a background of declining capital budgets, is very welcome indeed.”

There was a broad welcome both for the sup-port for manufacturing at the new enterprise zones in Dundee, Nigg and Irvine and for the assistance that tax credits for creative industries will offer to Scotland’s video games industry. In the view of Susannah Simpson, tax director at PwC in Scotland, “this wasn’t just good news for the gaming industry in Dundee, it was necess-ary news. They’re in a really competitive market because of incentives offered by other countries. It’s now ‘game on’ for Dundee.”

On business taxation, the Federation of Small Businesses in Scotland welcomed moves to simplify the system. The Federation’s Scottish

business convener, Andy Wil-lox, pointed out that “the move towards a simpler cash account-ing system for small businesses with turnover of up to £77,000 could make life a lot easier for over a third of our members in Scotland. Similarly, progress on the previously stated aim of inte-grating the Income Tax and Na-tional Insurance systems could free up small employers to do more business.”

However, Mr Willox was concerned at the lack of move-ment on the cost of fuel. “Busi-nesses,” he said, “that held hopes for some relief at the petrol pump will be bitterly disap-pointed – with a 3.02 pence per litre fuel duty increase to take ef-fect on 1 August as planned.”

The Scotch Whisky Association (SWA) was also less than enthusiastic about the Chancellor’s statement. Although Mr Osborne announced no change to duties on alcohol, the organisation pointed out that there was a “duty escalator” al-ready in place which meant that there would be a 5 per cent increase in spirits duty which would penalise the industry.

According to Gavin Hewitt, the SWA chief ex-ecutive, “by maintaining the duty escalator the Chancellor has undermined the Government’s objectives of encouraging economic growth and curbing inflation. The Government needs to re-view the escalator, which is harming the Scotch whisky sector. The industry is vital to economic growth and supports about 35,000 jobs across the UK. It suffers at home due to the discrimi-natory tax regime applied by our own Govern-ment.”

Iain McMillan of the CBI welcomed the Gov-ernment’s renewed commitment to its plans for fiscal consolidation in order to eliminate the public spending deficit — and, in turn, to con-trol the national debt. But he saw the Budget in part as an opportunity missed. “If businesses were looking for more from this budget,” Mr Mc-Millan said, “it was in the area of deregulation,

but many companies north of the border will be pleased with the Chancellor’s statement none-theless.”

Only the STUC found nothing of note in the Budget. Its general secretary, Grahame Smith, said that the Chancellor had “responded with a ‘millionaires Budget’, one that provides tax cuts for the wealthiest individuals and corporations.

“Predictably,” Mr Smith said, “the Chancellor seeks to boost profitability for his friends in the corporate sector; a sector which is currently sit-ting on a mountain of cash which it is refusing to invest. Why would it, when demand for goods and services is so weak? The cut in corporation tax will simply boost profitability – and the in-come of the wealthiest in society – while doing nothing to increase growth and jobs.”

However, Susannah Simpson of PwC disa-greed, saying that “the Budget lived up to ex-pectations for the Scottish economy. So much of what the Chancellor announced will have an impact on key sectors here. The R&D [research and development] credits, for instance will be re-ally good for Scottish innovation. And even the personal tax changes mean that we keep the tal-ent here rather than it going abroad. This was a good Budget for Scotland’s future.”

Muted reaction from business reflects difficult economic climateBy David Calder

The major changes announced in the Budget centre round the increased personal allowance, restriction of child benefit, removal of age-related allowances for pensioners and the re-

duction in the 50 per cent top rate of tax. Al-ready dubbed a “granny tax”, pensioners will see the gradual loss of their additional age-related allowance in return for the higher personal al-lowance which is being made available to all.

Whilst those on lower income will benefit from the higher personal allowance, the effect for some is cancelled out by the removal of their entitlement to child benefit. This starts to bite for those whose income falls further into the 40 per cent tax band, where a reduction in the threshold for the payment of 40 per cent tax cancels the positive effect of a higher personal

allowance. This may bring some added complex-ity for those whose earnings are around the top of the basic rate band, or at the bottom of the 40 per cent tax band.

One thing not addressed by the Chancellor was the effective rate of 60 per cent tax caused by the loss of the personal allowance to those who have incomes in excess of £100,000. Not only do they pay 40 per cent tax on income above this amount, but the gradual loss of their personal al-lowance creates and additional tax charge.

Despite widespread speculation in the run-up to the Budget that pension tax relief was to be reviewed, the Chancellor confirmed that no fur-ther changes were to be considered. An addition-al concern had been that the Government had been considering taxing pension lump sums. This uncertainty had been undermining confidence in the pension savings regime and causing some in-dividuals to make snap judgements about their retirement plans. The clarity provided on these matters should signal that going forward we have a long-term stable framework for pensions tax.

The reduction in the top rate of tax from 50

per cent to 45 per cent from April 2013 will obvi-ously be welcomed by very high earners. In the run-up to the Budget, however, there had been speculation of a “tycoon tax”. While the Chan-cellor did not use that language, the limit on income tax reliefs (to 25 per cent of income, or

£50,000 whichever produces the higher result.) could potentially have a similar effect. The de-tails will still need to be worked out, but raises some interesting questions such as whether contributions to charity are to be limited in some way.

Bruce Saunderson,.................................. head of wealth management at PwC in Scotland..................................

Budget – winners and losers

2012/2013 2013/2014

Single parent with two children on £442(increase) £220(increase) £25k salary

Young couple on £20k each £343 (increase) £440 (increase)

Couple on £20k and £30k, with £343 (increase) £440 (increase) two kids (not in childcare)

Couple on £50k and £60k, with £95 (decrease) £1079 (decrease) two kids(not in childcare)

Family, high earner on £155k, £518 (decrease) £1387 (decrease) two kids (not in childcare)

Pensioners with pensions of £30k £257 (increase £201 (increase) (69 yrs)and £20k (64 yrs)

source: PwC

27th March 2012 | the timesIV

www.pwc.co.uk/budget

The Budget means business

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© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member fi rm of PricewaterhouseCoopers International Limited, each member fi rm of which is a separate legal entity.