City lawyers have given the 2011 budget a "guarded welcome" with small tax relief measures included in Chancellor George Osborne's speech today aimed at encouraging businesses to operate in the UK.

Most notably, UK businesses are set to benefit from a larger-than-expected cut to corporation tax, with rates to decrease to 23% in the next three years. The tax will be reduced by 2% from next month rather than the 1% previously intended and then fall 1% incrementally over the next three years, as the Government aims to stimulate growth in the UK economy.

Allen & Overy tax partner Patrick Mears commented: "They have thrown in a few surprises, including the news that the corporation tax will reduce by 2% this year. The Chancellor wants to signal that the UK is 'open for business' but they have a bit of an uphill climb having almost been pushing people away previously. For lawyers, the more we can encourage businesses coming to the UK, the more work there will be for law firms. The corporation tax news will not make a vast difference but could be helpful at the margins."

However, there was some concern among City lawyers over the news that the bank levy will be adjusted so that banks do not benefit from the tax relief.

Michael Wistow, head of tax at Berwin Leighton Paisner, commented: "The City will be disappointed that banks have been singled out for higher taxes at a time when the other industries are benefiting from reductions in their tax rates. The political temptation to hammer the banks through the banking levy has proved too strong – tax should not be a political football."

Meanwhile lawyers welcomed the indication by the Chancellor that the 50% tax rate on high-income earners above £150,000 was branded a "temporary measure" and is up for review.

Norton Rose tax partner Dominic Stuttaford commented: "Large international businesses will welcome the symbolic announcement that the 50% tax rate is a temporary measure. There has been some concern that it could become permanent. I think the new budget could potentially help to retain business in the UK, we give it a guarded welcome."

Plans to limit the use of 'no win, no fee' arrangements were also outlined, with the Chancellor indicating the recommendations in Lord Young's report on health and safety regarding the UK's 'compensation culture' would be implemented. The report recommended that conditional fee agreement (CFA) success fees and after the event (ATE) insurance premiums should cease to be recoverable from the losing party in litigation.

Less significantly, private client teams could see their clients adversely affected by a new levy on non-domiciles and possibly by the introduction of a new passenger duty for private jet users.

Law firms themselves could also be financially affected by the announcement that the Government will deductions currently available for costs of late night taxis, with lawyers as a group some of the most frequent users of the benefit.

Budget 2011: City lawyers react

"Any reduction in regulation costs is welcome, but financial firms' understanding of cutting red tape is a long way from Treasury proposals for a more complex regulatory regime to replace FSA."
Ash Saluja, CMS Cameron McKenna

"The budget holds nothing much that will affect lawyers individually but it will affect the businesses that we advise. My overall reaction to the speech is that the Government is signaling that it wants to improve conditions for UK businesses, which is encouraging. The cut in corporation tax is certainly helpful. My only concern would be that businesses crave certainty and the Government will want to make very clear what measures it will take to clamp down on tax avoidance so that it does not undermine that stability."
Nick Mace, Clifford Chance

"Overall we see this as a positive budget for corporates and entrepreneurs. The extension of EIS relief will be very attractive to higher rate taxpayers as a means of mitigating the temporary 50% tax rate. This should mean that a significant number of small companies should now be able to attract tax efficient financing. For larger corporates, it is also an encouraging budget with increased reductions in the corporation tax rate of an additional 1%. For those multi-national groups with foreign finance companies, the ability to enjoy an effective rate of 5.75% on their income from 2012 should help such groups avoid having to redomicile. It is, however, disappointing that the proposed 10% tax regime for the taxation of intellectual property still only applies to patents and there is no indication that this will be extended to other types of intellectual property such as know-how and trademarks.

"The Chancellor has shown some nifty footwork in relation to the taxation of non-UK domiciliaries. The increase for long term resident non-doms to £50,000 of levy is unlikely to have a significant behaviour impact. What is more interesting is the ability to repatriate foreign income and gains without a UK tax charge if such amounts are invested in British business. That may encourage an inflow of funds but the devil will be in the detail and in particular whether this would avoid falling foul of any EU discrimination laws."
Richard Palmer, Ashurst

"The Chancellor's announcement is very favourable to attracting leading entrepreneurs and businesses to the UK. He has announced tax changes to encourage non-doms to invest their offshore income and gains in to UK business without triggering a UK tax charge, he is bringing forward a statutory residence test to give far more certainty to people coming to the UK and he has said he will not change their tax system again for the rest of this parliament.

"George Osborne has clearly taken on board the representations of the City to maintain London as a leading financial centre. This budget will certainly encourage inward investment by resident non-doms and make the UK an attractive place to locate. The increase in the remittance basis election charge to £50,000 for people staying in the UK for 12 years ensures that those coming to the UK for the medium term are not hit further and those that stay longer are rightly paying a higher contribution for living in the UK for a substantial period.

"The proposed changes to national insurance to bring into line with the income tax regime, though difficult, will be a major simplification of our tax system which will be welcomed by most."
Ashley Crossley, Baker & McKenzie

"The government's proposal to incentivise non-doms by allowing income and gains to be brought in tax-free for commercial investment will be welcomed by those wishing to invest in the UK.

"The bad news is that although, currently, non-doms after seven years of residence have to pay £30,000 per annum to get the benefit of their tax status, this figure will go up to £50,000 once they have been resident for twelve years. We anticipate this will apply from 2012. Will this increase put people off the UK and either drive them out or discourage them from coming in the first place? Presumably the government think not.

"The fact that we now know where this government wants to end up on this issue helps to remove some of the uncertainty so disliked by the non-dom community. The government has also said that there will be no substantive changes until the end of this parliament – but how long will that be? The fact that there will be a period of consultation and reform to the current rules and better opportunities to invest in the UK without a tax charge on what is brought in must also be a good thing for non-doms as these people help generate revenue for the UK."
Anthony Thompson, LG

"Budget 2011 was painstaking in its efforts to tick the pro-business, pro-growth and anti-avoidance boxes. Business will certainly be pleased with a number of today's newly announced measures, including the headline grabbing reduction in the corporation tax rate."

"However, the focus on closing the 'tax gap' by some £1bn, necessary to make this a 'fiscally neutral' set of proposals, should be seen as a warning of tougher times ahead for those undertaking what the government views as undesirable tax planning. As for growth, we shall have to see, although the Office for Budget Responsibility remains to be convinced."
Martin Shah, Simmons & Simmons

"The Chancellors comment on plans to restrict "no-win, no-fee" legal services is hugely naive… The main impact… on solicitors is the pressure that will be put upon them to absorb the deductions made from their clients' costs. As it stands, the claimant is nearly always able to keep 100% of their compensation, exactly as it should be… No-win, no-fee works as the solicitor takes the risk on each claim – if they lose they're not paid, however if they win they are awarded a success fee. With this new system, there would be huge public pressure for solicitors to drop this fee as it would be the victims, not the insurance companies, that it would be punishing."
Nicholas Jervis, Loyalty Law and Samson Consulting