Budget 2012: Winners and Losers

23rd March 2012

Budget rule number one: Losers make lots of noise while winners stay quiet. This year, there are not too many who've done well – they're mostly the lower paid who have been taken out of taxation, who are not a vocal group, and corporation tax winners who don't want to gloat.

Budget rule number two: Always read the small print in the voluminous material issued by HMRC and the Treasury. Here's some investment pointers that might have been overlooked.

Capital Gains Tax

The annual exempt amount – the sum investors can make each year without paying capital gains tax – is to be frozen for the coming 2012-13 tax year at £10,600. It's not inflation-linked. If it was tied to rising prices, the exemption would top £11,000 based on the past year alone. But this is not the first time the tax-free slice has been put on ice. The 2010-11 limit was unchanged from the previous year. When CGT was first introduced in 1965, it only applied to gains over £9,500 – equal to a six figure sum now.

Tobacco tax

It's intended to wean people off smoking. Now it will increase at five per cent over the retail prices index each year instead of the two per cent plus RPI that previously applied.  Assuming moderate inflation, a pack of cigarettes now costing £7.50 will easily top £10 by 2015. The current tax take is 79 per cent of the total retail price – a proportion that has remained almost unchanged for two decades. But it is unlikely to make much difference to tobacco company investors as most sales and profits are overseas – the year on year decline in UK cigarette consumption is already discounted in share prices.

The move to bring herbal cigarettes into  mainstream tobacco tax has been little noticed but it will have more impact than the abolition of the tax-free status of "black beer", a little known beverage mainly drunk by elderly men in Yorkshire.

VAT Changes

The Treasury is to remove a number of anomalies and loopholes. The only one to affect quoted companies is the decision to remove the zero rating from hot takeaway foods sold in food outlets rather than cafés and restaurants. It has minor impact on the supermarkets but it could hit sales at quoted baker Greggs where hot sausage rolls and pies make up a noticeable percentage of turnover.

VAT and private colleges

The government is planning to review VAT on education, particularly at university level, to ensure commercial universities are treated in the same way as others. This could boost investment opportunities in the higher education sector. 

Self Storage

There are a number of self-storage companies including some which are quoted. A number use a model where the space is leased (rather than a storage service provided). This is now to be brought within the VAT net, removing their advantage over competitors which already charge VAT.

Tax avoidance

The Treasury documents lists 12 esoteric and difficult to understand tax dodges which are to be legislated against. By their nature, avoidance schemes are not publicised but losers are likely to include some banks, certain life insurance companies and a number of others in the financial services sector.  The government intends to bring in a General Anti-Abuse Rule (GAAR) next year which should tackle "artificial" schemes – those that have no economic purpose such as complex loans to loss making companies in tax havens. However the government has to balance that with "maintaining the attractiveness of the UK economy as a location for genuine business investment."

Lawyers and accountants are usually partnerships so there are no shares. But if there were, these would still be a good buy as legal and accounting firms will be working extra hard (and charging extra high fees) to come up with new ways around GAAR.

Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS)

Both give investors a number of tax reliefs in return for investing in higher risk companies including those quoted on the Alternative Investment Market, and unquoted companies. They are intended to help these companies raise finance – most of the relief is given at an early stage. The two schemes provide capital for around 3,500 firms a year.

Under new rules, the £500 minimum investment level will be removed. More importantly, bigger companies will be included as the staff count is increased from 50 to 250 while the total gross asset limit doubles from £8m to £16m.

These changes could increase the attraction of the income tax and capital gains tax reliefs because companies can be larger and more stable. Around 10,000 investors use the schemes each year.


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