30.03.2011

Israel thankfully tightened its budget process almost a decade ago when current Prime Minister Binyamin Netanyahu served as finance minister.

In Israel, we have grown accustomed to bi-annual budgets accompanied by much excitement within and between political parties. Coalitions have a difficult time holding together.

In the UK, there is a coalition government and an annual Budget Day, but in recent years the latter has become increasingly dull with anything remotely interesting or controversial often flagged months in advance.

The days when the Chancellor would pull a few tax and spending rabbits from the hat have passed into the history books alongside generous spending increases and swinging tax cuts.

Against this backdrop novice Chancellor of the Exchequer (=finance minister) George Osborne really had something of a high wire act to perform on this year‘s Budget Day on March 23.

Held back by sluggish economic growth, stubbornly high inflation, interest rates seemingly set to rise and the need to make sharp spending cuts to reduce the deficit, he decided the few weapons in his armory should be targeted at jump-starting the UK economy.

His two underlying themes for doing this were tax breaks for entrepreneurial investment and closing perceived tax loopholes.

Specific measures included the following.

First, it is proposed to expand the UK tax relief for individuals risking capital in growing businesses via Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) from 20% to 30%. This may help Israeli companies looking for UK investors, provided their structure has a UK element.

Second, it is proposed to double the lifetime limit for the 10% rate of capital gains tax for individuals selling businesses from GBP 5 million to GBP 10 million.

This will help some entrepreneurs sell up and retire to Bournemouth or Cornwall in the UK. But others will avoid capital gains tax altogether by first making Aliya to Israel. This involves making a ‘‘clean break‘‘ from the UK with the right timing, among other things. Specialist advice is needed.

Third, it is proposed to speed up plans to cut UK corporation tax rates.

The main rate for companies with profits in excess of GBP 1.5 million should fall from 28% to 26% for the financial year commencing 1 April 2011 with two further annual cuts of 1% scheduled for the next two years. The small company rate in the UK was also cut from 21% to 20%. In Israel, the current regular rate of company tax is 24%, but industry and high tech ‘‘preferred enterprises‘‘ may pay only 10%- 15% if certain conditions are met; these rates are legislated to decrease further in future years, assuming the budget situation permits.

Fourth, it is proposed to Increase the rate of UK tax relief for SMEs (small and medium enterprises) carry out research and development giving them a tax deduction of GBP 2 for every GBP 1 of qualifying expenditure. Given the maximum rate of corporation tax of 26%, that implies a tax saving of 56% of R&D expenditure (=28% * 200%).

By contrast, if R&D is carried out in Israel, the Office of the Chief Scientist pays cash grants of, typically, 50% of approved R&D expenditure, regardless of whether the company pays tax or not (due to start-up losses, etc).

Fifth, it is proposed to establish 21 new Enterprise Zones in the UK offering discounted local taxes for businesses setting up in these otherwise deprived areas. Israel offers income tax credits and exemptions in peripheral regions too, e.g. Eilat, the western Negev near the Gaza Strip, in the Negev, or in the North.

Although it is clear that the current UK government does not approve of the 50% income tax rate introduced on all incomes over GBP 150,000 by the previous Labor Government, the Chancellor cannot yet afford to do much more than aspire to repeal it although he did announce that its effectiveness was to be the subject of an independent review. Something apparently needs to be done to stop the financial brain drain from London to Geneva or Tel-Aviv…

On the opposite side there were some targeted UK tax increases. A number of specific tax structures that are designed to avoid Stamp Duty Land Tax on property transactions and pay senior staff bonuses without deducting tax and national insurance are to be shut down.

In addition the flat GBP 30,000 tax charge levied on UK residents who retain non-domicile status and wish to avoid a UK tax charge on income retained outside the UK has been increased to GBP 50,000 once an individual has lived in the UK 12 years. This may perhaps deter Israelis who depart from Israel to take up residence in the UK. It does not affect Olim.

As for pensions, the requirement to annuitize by the age of 75 is to be removed from April 2011.

There were also a number of less significant tax reliefs that have been abolished in the name of simplification. And there will, of course, be another drive against certain forms of tax avoidance…

The UK is about to enter a trying period. Fragile growth will be tested by the inevitable interest rate increases and the public spending cuts already announced. Add to that problems in Euro Zone economies amid fears of more Greece-, Ireland and Portugal-style bailouts to come and the Chancellor‘s room for maneuver is minimal.

That said, it is difficult to say that he did anything other than a good job in difficult circumstances.

Israel thankfully tightened its budget process almost a decade ago when current Prime Minister Binyamin Netanyahu served as finance minister.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

Barry.Soraff@raffingers-stuart.co.uk; leon@hcat.co

Barry Soraff is a Partner at Raffingers Stuart, Chartered Certified Accountants, in London. Leon Harris is a UK-Israeli accountant and tax specialist at Harris Consulting & Tax Ltd, in Israel.