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
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
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
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 £5 million to £10 million.
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 £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)
carrying out research and development giving them a tax deduction of £2 for
every £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% *
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
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 £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.
addition the flat £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 £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
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-, Irelandand
Portugal-style bailouts to come and the Chancellor’s room for manoeuvre is
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
; [email protected] 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.