Taxing times for construction

The new Budget announced yesterday included higher taxes, significant reductions in spending and cuts in welfare as part of the government’s austerity package, which is designed to eliminate swiftly the UK’s record peacetime budget deficit.

The effect on the construction sector of will be mixed. It will suffer from the increase of VAT to 20% and the reductions in capital allowances, but on the positive side, there will be lower levels of corporation tax, no change in fuel duty and no further reductions in capital spending totals (other than those announced earlier this year).

A summary of the relevant key tchanges is as follows:

VAT

The standard rate of VAT will increase from 17.5% to 20% from 4 January 2011. This move, particularly when seen in tandem with the cut in corporation tax rates, marks another milestone in the transition towards a primarily indirect tax based fiscal system.

However, to put the change in a European context, the EU average is almost 21%, and only Luxembourg andCyprus have a standard rate lower than 17.5%. (The maximum permitted EU rate is 25%.)

A detailed guide on the consequences of the rate change has been published, as has guidance on the anti-forestalling legislation that aims to prevent arrangements to account for VAT at 17.5% in respect of goods and services to be provided after 4 January 2011.

Other than the rate change, there have been few other VAT changes of consequence. The abolition of Lennartz accounting on VAT input tax recovery on the purchase of, among other things, an interest in real property has been confirmed, as promised in the March 2010 Budget. This will ensure that VAT recovery is restricted to the business use of applicable assets, such as land.

Corporation tax

The chancellor says his aim is to have the “most competitive corporate tax regime in the G20”. There will be four successive annual reductions in corporation tax of 1% from 2011, with the main rate of corporation tax falling to 24% by 2014/15. The small companies rate reduces to 20% from April 2011.

On the flip side, the rates of capital allowances have reduced, with the main pool (writing down allowances on general plant and machinery) dropping from 20% to 18%, and the long life pool dropping from 10% to 8% with effect from April 2012. Also with effect from April 2012, the annual investment allowance will be reduced from £100,000 to £25,000 per year.

Capital gains tax

Capital gains tax increases from 18% to 28% from midnight tonight for higher rate taxpayers. Entrepreneurs relief remains at 10%, but it now covers lifetime gains of £5m (previously £2m). Neither taper relief nor indexation have been introduced.