Grant Thornton expects tweaks not turns for business in
Budget 2007
19 May 2007
Corporate Tax rate continues to hurt UK Plc
competitiveness, but don't expect any large-scale changes from the
outgoing Chancellor
Business and financial advisers Grant Thornton are not expecting
many changes for business in this year's Budget, which is likely to
be the current Chancellor's last. The competitiveness of UK Plc
continues to slump and at the same time the UK tax burden is
expected to increase to, 37.8% for 2007/08.
National Insurance Contributions (NIC), income tax and VAT
revenues have all increased over the last two quarters and the
Treasury's coffers have swelled to the tune of a £8 billion
surplus. However, the Treasury would have preferred a bigger tax
take and forecasted as much in the Pre-Budget Report last December.
Corporate receipts were only up by 7.3% compared to an expected
13.2% and tax revenues in total were no higher than the previous
January. Therefore, it looks unlikely that business can expect any
giveaways in this year's Budget.
Stephen Quest, Grant Thornton Corporate Tax Partner, says, "The
Chancellor is at the helm of a healthy UK economy, but despite this
he is failing to meet the Treasury's own forecast of borrowing
£36.8bn this year and he'll be keen to claw revenue from business
taxes. He'll be particularly interested in the large profits in the
city and the huge individual bonuses paid out last year as these
have not translated into tax receipts."
Quest adds, "Elsewhere, the Chancellor won't be looking to rock
the boat too much. This is his last Budget before he hopes to take
control of the country when Tony Blair steps down so we don't
expect to see any sweeping changes. We expect announcements
regarding online gambling registering business onshore and possible
VAT exemptions that will cause a few ripples, but it'll largely be
a budget of tweaks rather than comprehensive changes. With the man
on the street feeling a squeeze on his pocket, large corporates are
the obvious target for Brown and, with big profits and bonuses
being widely reported, this is unlikely to elicit much voter
sympathy."
Corporate tax continues to erode UK competitive
advantage
The UK corporation tax rate last came down nearly 10 years ago
and, while other countries adjust their tax rates to encourage
inward investment, the UK's competitive advantage continues to slip
as corporate tax receipts rise by 7.3% for the year.
Although the 1% drop to a rate of 30% in 1998 kept the UK ahead of
the pack, it is now falling well behind. Countries such as Ireland
are showing strong economic growth, thanks in part to much lower
corporate tax rates, which have seen an increasing number of
companies setting up their operations there. With Germany currently
looking to reduce its corporation tax rate, pressure is growing to
keep the UK competitive.
Heather Self, International Tax Partner at Grant Thornton, says,
"The UK's rate is now unattractive compared with the average rate
across the 25 Member States in 2006 of 25.8%.. The corporation tax
rate is becoming a destructive force in the UK business environment
and once again we call for the Chancellor to lower the rate of tax.
I suspect the cries of business and industry will go unheard again
as, despite large profits being recorded for business this year,
corporate tax receipts only increased by half the 13.2% predicted
by the Treasury. The Chancellor will be more inclined to review
where he is missing out and maybe grab a little more for the
Treasury."
The implications of Varney
The Chancellor has previously promised that HM Revenue &
Customs (HMRC) will have a central point for business to obtain
statutory rulings and clearances by this year's Budget. HMRC will
also be working with business to develop an enhanced risk
assessment framework capable of taking into account how a company
assesses and manages its risks and the relative weighting of these
across the taxes. Details of this framework as well as a new
risk-based approach to employer compliance reviews are due to be
announced in the Budget. Much of this work stems from a review
undertaken by a past Chairman of HMRC, Sir David Varney.
Francesca Lagerberg, Head of Grant Thornton's National Tax
Office, comments: "It is admirable that HMRC has listened to
business to pull together a framework to simplify corporation tax
and compliance. However, this may be the only carrot available to
the larger business community in relation to compliance issues. The
offerings stemming from the Varney Review are likely to feature in
the Budget but it is unlikely that much more will be on offer.
Nevertheless, business will be looking forward with some
anticipation to see if the Budget delivers a system that will
provide them with some much needed business certainty in relation
to tax transactions."
Central government embraces gambling
There has been much speculation about how Brown will entice
online gambling firms to register in Britain.
Paddy Behan, VAT Director, says, "A remote gaming duty will be
introduced to apply to areas of gaming not currently subject to
duty.It is very likely that the scope of VAT in relation to gaming
will be extended which would incidentally bring some offshore
operators within the charge to VAT."
"If offshore gaming businesses register onshore they will have
to pay the new duty, but it is likely some will consider this move
as registration in the UK will provide them with business benefits
such as increased bandwidth, liberalised advertising regulations
and generally better environment in which to operate. Therefore,
the Chancellor's tax take from the industry will be greater than
might have otherwise been expected."
Olympic boost?
The increasing budget for hosting the 2012 Olympics has prompted
speculation that it is rapidly turning into another Millennium Dome
farce. The realisation that the Olympic Delivery Authority will be
subject to VAT on building costs due to EU rules on State Aid added
further costs to the uncertain projections.
Clare Hartnell, Head of Grant Thornton's Property and
Construction team, says, "It is difficult to see how the Chancellor
could give 2012 a boost and announce an intention to hand back the
VAT levied without encountering problems regarding the EU rules on
State Aid.
"The 2012 Olympics is a massive opportunity for the UK to
showcase its capability to host the world's largest sporting event.
Business is set to benefit too, particularly in the construction
and tourism industries, but the VAT cloud still hangs over the
event's head and it would be great to see the Chancellor offer up
some kind of assistance," says Hartnell.
ECJ - decisions bring change to UK system
UK legislation is increasingly feeling the impact of Europe and
decisions of the European Court of Justice (ECJ) on the freedom of
establishment and free movement of capital have had a huge effect
on the UK tax regime. The Government is at the mercy of the ECJ on
cases brought before it and has to react to amend UK legislation
accordingly where it is found to be incompatible with EU law.
Joy Svasti-Salee, Head of International Tax, says, " No detailed
changes are anticipated in this year's Budget but there will
inevitably be further change throughout the year as cases brought
by taxpayers claiming the UK is discriminating against them are
heard by the ECJ. Wider consultation on the future of the UK's
international tax system was also promised in last year's
Pre-Budget Report."
Tax Avoidance
It is likely that the Chancellor will announce further
legislation to reduce "unacceptable tax avoidance" by increasing
penalties for non-disclosure of schemes and boosting HMRC's powers
of investigation. Lagerberg believes that the Treasury will
continue to tighten the net on schemes that it perceives to be
"unacceptable" tax avoidance.
"It is expected once again that there will be new rules to
counter tax schemes and a probable broadening of the requirements
of tax advisers to disclose proposed plans. While it is reasonable
to attack abuses of the tax code there is a big risk this will
create more complexity in the tax system and adversely affect the
ability of business to undertake commercial deals with the
certainty that is needed. Business needs some clarification of what
is acceptable tax planning and what constitutes unacceptable
planning," says Lagerberg.
Company Car Schemes
HMRC's taxation of car benefits was launched as a green
initiative to promote the use of environmentally friendly vehicles
in company car fleets through incentives and tax reductions on
compliant cars. However, many employees have opted out of their
company car scheme and have opted for arrangements to acquire their
own vehicles, known as Employee Car Ownership Schemes (ECOS),
undermining the desired 'green effect'.
Clive Fathers, Tax Partner, comments: "The new Company Car
Scheme saw a massive reduction in company car fleets and an
increase in companies and employees moving towards ECOS. HMRC did
not anticipate this shift in ownership and with large numbers of
cars purchased through ECOS thought not to be environmentally
friendly and, therefore, contrary to the environmental change to
the car benefit rules, car ownership schemes facilitated by
employers are now under the spotlight. It is already a complex
system which can unexpectedly pull companies into unseen tax
liability and it is possible that there will either be a tightening
of legislation in this area or an announcement to consult on
restructuring the system."
Reliefs for the film industry
Heralded as a headline announcement at last year's Pre-Budget
Report, Film Tax Relief was introduced in final form in December
2006.
Terry Back, Head of Media and Entertainment, says, "The new Film
Tax Relief has been welcomed by the industry and initial signs are
very encouraging, but it is still too early to say what effect it
will have on the UK Film Industry going forward. As for this coming
budget, we are expecting some minor clarification with regard to
the new tax relief's interaction with television, and perhaps a
clarification of the March 2nd statement on GAAP Partnerships."
The so called "GAAP Partnerships" was another form of financing
available to UK Films. On 2 March 2007, the Government effectively
ended the use of these schemes by abolishing sideways tax relief
for non-working members of Limited Liability Partnerships.
Back says, "This was a classic example of using a sledge-hammer
to crack a nut. One of the most innovative structural business
developments in recent years has been the introduction of Limited
Liability Partnerships, which gave individuals the opportunity to
invest in a flexible partnership type structure while affording
them the protection of limited liability. One of the potential
benefits for investors, the ability to obtain tax relief on losses
incurred through this type of investment against their other
income, has been removed not only for the Film Industry, but across
all industries. In our view this was a regrettable knee-jerk
reaction by the Government."