Brown goes legacy shopping in his final Budget and heeds
calls for simplification of tax regime
21 March 2007
Overall tax measures are neutral in revenue as Chancellor
delivers wide-ranging final Budget
Today the Chancellor has responded to calls for simplification of
parts of the UK tax regime. However, the headline-grabbing tax cuts
will not result in an overall reduction in the tax burden, claim
business and financial advisers Grant Thornton.
Stephen Gifford, Chief Economist at Grant Thornton, adds: "The
Budget suggests that the public finances are in better shape than
last year. The 'Golden Rule' is now expected to be met with £11
billion surplus, against an estimate of £8.4 billion in the 2006
Pre-Budget Report. But these figures are likely to have been
calculated well before recent rises in UK inflation, with RPI
rising to 4.6% per annum (the highest since 1991) and the turmoil
in the US housing market. Both could have a significant impact on
the strength of the UK economy, as interest rates are increased to
suppress inflation. If tax receipts drop from a less prosperous
economy the next Chancellor would have more of a battle to meet the
Golden Rule."
Maximum corporation tax rate
reduction
Francesca Lagerberg, tax partner at Grant
Thornton, comments: "The cut in the headline rate of corporation
tax is welcome but long overdue. UK plc has been lobbying hard for
such a move over the past few years as we have fallen behind much
of Europe in terms of competitiveness. We had reached tipping point
with growing unrest amongst FTSE companies threatening to up sticks
behind the scenes."
The Chancellor's move to cut the main rate of corporation tax
rate will be welcomed by UK business but interestingly the overall
changes will not cost the Exchequer. This is due to tax rises
elsewhere, such as the small companies' rate which goes up (from
19%) to 20% in April 2007 and 22% by 2009. What's more business may
lose out because of the so-called modernisation of the capital
allowances regime. On closer analysis, this modernisation removes
many of the tax allowances that UK business has enjoyed for many
years as it brings the tax regime in line with accounting
rules.
Francesca Lagerberg continues: "The sugar that sweetens the
small companies tax increase is the introduction of the Annual
Investment Allowance which will benefit small business with a 100%
deduction for investment expenditure of £50,000."
But there is no help for labour-only businesses, like IT
consultants and hairdressers. In fact the Chancellor makes it clear
that incorporation solely to save tax is in his sights. Francesca
Lagerberg says: "The Government is monitoring the situation but it
will be no surprise if this veiled threat hits those who were
encouraged to incorporate just a few years ago."
Anti avoidance - Managed Service Companies
(MSC)
Another raft of anti-avoidance measures were announced targeting
individuals and large corporates. The most high profile of these
was the continued determination to shut down Managed Serviced
Companies. The Government is objecting to tax structures where
people use incorporation to extract dividends free of National
Insurance Contributions but in reality are akin to employees.
Lagerberg adds: "The Government is making it clear that MSC
structures are not welcome in the UK. The consequences of the
announcement in the PBR 2006 have been a logistical nightmare for
public authorities to date. Companies House for example has been
swamped with registrations as MSCs have tried to find a way around
the rules that will see PAYE and NICs hit their workers from April
2007."
Research and Development (R&D)
The Chancellor announced an increase in the rate of tax relief
available on R&D from 150% to 175% of investment. However, this
is limited to small and medium sized businesses (the limits are set
by the EU and changes to the relief are subject to EU
approval).
Stephen Quest, tax partner at Grant Thornton, comments: "The
further increase in the value of R&D tax credits will be
welcomed but there is no evidence that the £1.8bn spent on these
tax credits since 2000 has had any effect on the level of
innovation in the UK. What businesses want is an increase in the
availability of the payable R&D tax credit giving them cash in
their pocket rather than a headline-grabbing increase in rate of
enhanced deductions for their expenditure."
Enterprise Investment Schemes (EIS)
EIS tax relief offers individual investors tax relief on their
investments providing the company meets certain criteria. The rules
were overhauled in Budget 2006.
Further changes were announced today to the EIS regime. Two new
complicated tests were introduced, which include a limit on the
amount of cash that a EIS qualifying company can raise in a year
along with a limit to the number of employees. Grant Thornton
predict this will limit the level of interest in such
companies.
Varney Review
The Chancellor has delivered on his intentions set out in the
Varney Review of Links with Large Business by channelling HM
Revenue & Customs' resources on perceived higher risk corporate
tax payers. The Treasury outlined the risk assessment framework as
below.
Low risk companies
Risk reviews only
every 2 or 3 years, or longer
Far fewer interventions
Increased clarity and certainty through real-time working
Reduced compliance costs
High risk companies
At least annual risk reviews
Increased emphasis on significant risk
More real-time working and speedier resolution
Partnership working and support to reduce risk
Lagerberg adds, "This is a welcome change in working practice.
Actions must follow words now and let's hope this is the beginning
of a new dynamic."
Carousel fraud
On Monday, the government
also announced a positive development (dubbed the reverse charge)
to combat Missing Trader Intra Community (MTIC) fraud, which
includes carousel fraud.
Roger Burrows, head of VAT at Grant Thornton, states: "The
government will have been working behind the scenes to secure this
positive news in time for the Budget. Carousel fraud robs the
Exchequer of £2bn -3bn every year and so this EU-wide development
will be necessary as the fraud evolves and becomes more
sophisticated."
Conclusion
Francesca Lagerberg concludes,
"On closer inspection this was very much a neutral budget from the
Chancellor with headline grabbing tax cuts neutralized by more
social engineering, which is of little surprise to businesses and
seasoned commentators. With one eye on his legacy, he has left his
successor with little wiggle room as he strives to go down in
history as the tax-cutting Chancellor."