Grant Thornton predicts Darling's pre-budget report will
raise the tax burden on business
Friday 05 October 2007
A cut in tax red tape but higher green taxes are also on
the cards
Leading financial and business
adviser Grant Thornton anticipates that Alistair Darling will have
little room for manoeuvre in his maiden Pre-Budget Report owing to
Gordon Brown having sewn up the Treasury's course of action for the
next few years before passing over the reins. Darling is likely to
follow Brown's lead by continuing to shake up the tax burden on UK
businesses with hints at a simplification of taxes and the
introduction of measures to encourage research and development
(R&D). He is likely to apply a renewed focus on green taxes to
improve the Government's environmental credentials and tackle the
thorny issue of private equity reform without damaging the
economy.
Market uncertainty means that Darling is unlikely to meet Brown's
'Golden Rule'. This will hamper the Chancellor's options in
offering any significant tax savings unless they can be recouped
elsewhere.
The issues likely to appear in the Pre-Budget Report include:
Green taxes as carrots and sticks to modify environmental
behaviour
As environmental taxation has become a key battleground between all
political parties, Maurice Fitzpatrick, a senior tax manager,
predicts that "Darling's first Pre-Budget Report will ratchet up
green taxes on UK business. I anticipate a 'tax on the polluter'
will be used to encourage companies such as retailers and
manufacturers to curb their use of excessive product
packaging".
Nurturing the knowledge economy and reducing carbon emissions
are likely to be high on the agenda despite a 1.7% reduction in
R&D spend and the yield from green taxes having fallen from
8.1% to 7.1%, or £34.7 billion, since Labour came to power.
Sam Vanags, R&D tax specialist, believes "the Chancellor
could introduce tax incentives on both R&D and green
issues to kill two birds with one stone: encourage the development
of alternative fuels to reduce our carbon footprint as well as
generate wealth and ensure the UK's ability to compete in the
global knowledge economy".
Once again the company car is likely to be under the spotlight. A
green initiative, launched by HMRC, to encourage the use of
environmentally friendly vehicles within company car fleets has
backfired although it offered significant incentives and tax
reductions. In spite of the best intentions, there was a
reduction in employees using company cars from 1.6 million in
1999 to 1.2 million in 2005 Report on the Evaluation of the
Company Car Tax Reform: Stage 2, Her Majesty’s Revenue &
Customs, 22 March 2006as employees found them less economically
viable due to changes in tax and employers found the cost and
complexity of running a fleet prohibitive.
In its place, many employees opted to purchase their own
vehicles under the 'Employee Car Ownership Scheme' (ECOS), which
saw large numbers of cars not deemed environmentally friendly being
bought. According to senior manager Anil Patel, "legislation is
likely to be reviewed on car ownership schemes facilitated by
employers as well as the mileage rates paid to employees to
discourage the use of gas-guzzlers and benefiting from a perceived
attractive rate of compensation from using their own car rather
than other forms of transport".
Tax reduction and simplification to increase UK
competitiveness
Following the cut to the headline
rate of corporation tax announced in the last budget, Grant
Thornton continues to call for an overall reduction in the tax
burden to ensure the UK's competitive position in Europe. According
to international tax partner Heather Self, "The UK's rate of
corporation tax ranks 19th in terms of competitiveness in the
European Union. We want to see neutral tax reforms and changes in
the core tax rates to give a boost to small and medium
businesses".
In terms of simplifying corporate tax, a change is expected to the
rules for calculating tax paid by associated companies. Despite
HMRC's dislike of film partnership style structures, there is
strong pressure to review the impact of taxpayers being treated as
'associated' with entities to which they have little real linkage.
An existing concession in this area is ripe for review and the hope
is that HMRC will announce some changes in this area.
One simplifying measure would be to tax commercially linked
companies on a consolidated basis, which would simplify claims for
loss relief as there would be an automatic offset and remove the
need to consider transfer pricing in a UK context.
Tackling private equity
The taxation of Private Equity has received a lot of press this
year and Alistair Darling has said that he will make a statement on
this area in the PBR.
Tax Partner Stephen Quest predicts that, "While there may be some
minor technical changes announced which will have limited
application, there should not be a substantive change to the
general Capital Gains Tax rules. It is expected that
the 10% CGT rate will remain and the time period of two years will
not be adjusted to gains made on monies invested to ensure the UK
retains a competitive tax environment for entrepreneurs and
financial investors alike."
Taxation of Foreign Profits and Family
Businesses
In June, the Government published a
discussion document: 'Taxation of the foreign profits of companies'
to ensure that the Treasury is receiving its fair share of tax on
profits from multi-nationals with controlled foreign companies
(CFCs) as well as ensuring the UK regime is consistent with EU law
on this issue.
CFC rules are designed to stop UK companies avoiding tax by
diverting income to subsidiaries (CFCs) in lower tax
countries by requiring UK companies to pay CFC tax equal to any tax
that would otherwise be avoided.
Heather Self anticipates that taxation of foreign profits is likely
to be addressed in the Pre-Budget: "the Government has a careful
balance act to perform; it wants to protect the tax system whilst
ensuring that complex legislation does not drive companies
offshore. There are lessons to be learned from the changes made to
the double taxation relief system introduced to make the UK more
competitive, which in fact proved complex to administer. With the
final legislation due for launch in the Finance Bill 2009, it is
crucial for the Government to listen to business in order to get it
right".
Following the Artic Systems case, the Treasury will be taking a
close look at family owned businesses as it perceives it is losing
a substantial amount of income from the way these arrangements are
currently structured. Her Majesty's Revenue and Customs views
income splitting as tax avoidance and according to Mike Warburton,
senior tax partner, "the most likely change will be the abolition
of ITTOIA section 626 concerning the tax exemption of outright
gifts between spouses which are not caught by the trust rules. The
reality for the average family business is that everyone gets
involved by picking up the phone or discussing strategy over the
kitchen table, which makes it difficult for the revenue to assess
these businesses with the basic rules as they are. Labour is likely
to make life even harder for businesses set up this way".
The outcome of Alistair Darling's Pre-Budget Report will show
whether he will make his mark on the Treasury or simply
rubber-stamp the path set out by Gordon Brown before his move to
number 10. Given Brown's notoriety to micro-manage, and the
necessity of keeping the economy on an even keel, the report due in
October is unlikely to set the world on fire.