Grant Thornton says Chancellor's Pre-Budget Report will offer
tax cuts to boost economy: yet what will really help get UK
businesses back on an even keel?
Faced with the turmoil in the global banking system, the
Chancellor has been forced to make difficult decisions using
taxpayer's money to prop up banks and pump money back into the
financial markets. The Chancellor's Pre-Budget Report (PBR) will
not want to stifle business competitiveness when the UK economy is
looking to attract investment back, but this could be at the
expense of a big rise in borrowing owing to the fall in tax
receipts allied to tax cuts, says leading business and financial
advisers, Grant Thornton.
Stephen Gifford, chief economist at Grant Thornton says, "The
economy will be the main focus of the PBR. The economic climate has
deteriorated sharply since the last Budget in the Spring. The UK
economy is now almost certainly in a major recession with GDP
growth expected to plunge by at least 1% in 2009. The Chancellor
may not admit the economy is in this bad a shape but he will
certainly have to radically downgrade his forecasts yet again.
"The public finances are taking some hard knocks at the moment
with both of the golden rules looking more than a bit dented around
the edges. Expect the Chancellor to quietly drop these from his
speech as he has already said himself that to apply them in these
economic times would be 'perverse'. He will instead focus on
substantive tax cuts of £10-20 billion to stimulate the economy.
Increased investment in public projects should also feature,
particularly in housing but, as these take time to develop and then
deliver, they are likely to play second fiddle to a tax cutting
agenda."
"Overall, the Chancellor has little room left for manoeuvre. The
extravagant spending decisions of his predecessor are now catching
up with us and the chickens are indeed coming home to roost. The
difficulty now is how to raise much needed revenue in the midst of
a recession. Public borrowing is expected to rise significantly,
hitting as high as £100 billion over the next 12 months."
"With the Conservative party announcing its package of tax cuts
to help small businesses and proposed measures such as a VAT
holiday and National Insurance breaks, the Government will have to
step up its actions to help UK businesses, setting out some serious
policies and not be seen to mirror opposition measures," concludes
Gifford.
UK taxation of foreign profits
According to Roopa Aitken, international tax partner at Grant
Thornton, the Government needs to state clearly what its intentions
are in respect of the current review of the taxation of foreign
profits which impacts on multinational companies (MNCs) with UK
holding companies.
“This is a ‘wait and see’ PBR for many multinational
companies who have been watching with great interest the recent
relocations of large UK based multinationals' parent companies out
of the UK to more favourable countries and who have this option
high on the corporate agenda. Ireland has been a favoured choice as
a combination of its business and tax laws creates an accommodating
environment for inward investment, parent company location and
European holding companies. Although the headline corporate tax
rate is low at 12.5%, compared to the UK's 28%, Ireland has other
attractions such as a reduced administrative burden and greater
certainty since there are no controlled foreign company (CFC) or
transfer pricing rules."
"UK corporation tax currently stands at 28%, which is higher
than the EU average of 25.8%. The Government has recently reduced
the rate of corporation tax in the 2007 Budget when it stood at
30%. Given the current economic crisis it is unlikely that the
Treasury can afford to go further. However, the Treasury will need
to provide a clear statement on the future of the corporate
taxation system, something up until now it has faltered on.”
“If the Government can provide clarity on taxation and
incentives to stay in the UK then the trickle of businesses out of
the UK may come to a halt. However, if the Chancellor does not
spell out his intentions on foreign dividend exemptions then other
large multinationals may follow suit, something that the Government
can ill afford.”
Arguably some strong incentives such as a dividend exemption,
should be announced which would allow UK holding companies to
repatriate cash from overseas subsidiaries as a priority without
being penalised by over-complicated tax rules. In the current
economic environment any announcement which would encourage greater
cash circulating in the UK would be welcome.
“A key concern for multinational companies with headquarters in
the UK is the taxes on the profits of their overseas subsidiaries.
The imposition of UK taxes on overseas companies owned by British
multinationals place UK holding companies at a competitive
disadvantage and the continuing uncertainty is also damaging UK
competitiveness."
The original proposals concerning the taxation of foreign
profits included largely welcome changes, which covered in very
broad terms:
- Some exemptions in relation to foreign dividend
income
- Significant changes to the Controlled Foreign
Company (CFC) regime (under which profits in overseas subsidiaries
can be taxed)
- Some restrictions on the deductibility of
interest expense
- An abolition of the need for Treasury
consent
Given the long consultation process already undertaken, it would
be unfortunate if the Government missed the opportunity to bring in
change which could provide a much needed boost to UK
businesses.
Reluctance to apply a windfall tax on energy
companies?
Ruth Dooley, corporate tax partner at Grant Thornton, says
"Windfall taxes may be a quick revenue earner but will do the
Government no favours in the long run so they would be wise to
steer clear of this option. The Government is committed to end fuel
poverty in vulnerable households by 2010 and therefore to tax
energy companies would make no sense as this extra tax burden could
be passed down to the customer."
At a time when the Government is looking into reliable,
sustainable and low emission methods of energy it would be unwise
to impose a windfall on the very companies that will assist in
meeting the Government's own manifesto pledge to reduce carbon
dioxide emissions by 30% by 2010. *
"A windfall tax on energy companies would look like a tax grab
on successful companies which is not a message the Government wants
to communicate to successful businesses in the current economic
climate. If the Government were going to impose a windfall on
energy companies they would have done so by now. "
Other issues
There are a number of other areas that require
clarification in the Pre-Budget Report.
Salary sacrifice: the end of the company
perk?
Salary Sacrifice Schemes allow people to give up part of their
salary for another benefit that might not be subject to income tax
and national insurance contributions (NICs).
Clive Fathers, Head of Employer Solutions at Grant Thornton
says, "As it stands, HM Revenue and Customs (HMRC) has generally
accepted salary sacrifice arrangements that have been properly
implemented. However, it is believed that arrangements conferring a
benefit related to the employer's own trade, whilst not currently
excluded by the legislation as it stands, are likely to come under
attack."
In addition, there has been increasing concern that many
employers are looking to cut costs by providing tax free benefits
through salary sacrifice arrangements, which has meant that the tax
loss to the Treasury has increased significantly. There has been
talk that the concept of salary sacrifice arrangements for income
tax and NIC purposes is being looked at closely by the
Treasury.
A push towards employee share awards?
"This could be the right time for employers to issue employee
share awards as share prices are low. The introduction of further
tax incentives at this PBR could improve the uptake and
simultaneously have the benefit of buoying up the financial
market", says Clive Fathers, Head of Employer Solutions at Grant
Thornton.
Share schemes have recently lost some of their attraction from a
tax perspective as many employee shareholders will no longer
benefit from an effective 10% rate of capital gains tax on an
eventual sale owing to the changes in the Finance Act 2008 and the
qualifying conditions for the tax-advantaged Enterprise Management
Incentives (EMI) have become more restrictive.
Approved Mileage Rates & Employee Car Ownership
Schemes
The tax-free approved mileage rates for employees using their
own cars have remained at 40p for the first 10,000 miles travelled
and 25p thereafter, since April 2002.
"There has been growing pressure from employers and employee
groups to have these rates increased. Employees complain that they
are paying for business travel costs out of their own pocket," said
Stuart Hibberd, Manager, Employer Solutions at Grant
Thornton.
"Despite compelling evidence that the above rates have been, and
remain, less than the costs incurred by employees, the Government
appears to be unwilling to increase them. The current rates need to
be increased. Thus, whilst an announcement in the Pre-Budget Report
concerning HMRC's on-going review of Employee Car Ownership Schemes
is expected, recent pronouncements by HMRC suggest that any across
the board increase in the mileage rates for private car users are
unlikely. Any changes, if they are eventually made, may be linked
to the CO2 emissions of the vehicles and presented in a green
wrapper. A careful examination of the contents will then be
required to establish who will be the financial winners and
losers."
VAT increase is unlikely
"Despite recent market speculation it is unlikely that, in this
PBR, the Government will seek to increase VAT revenue," says
Lorraine Parkin, head of VAT at Grant Thornton. "VAT is a
transactional based tax and therefore if the Government raises VAT
rather than face increased reduction in profits, businesses will
seek to passthis additional increase in tax down to the consumer.
In the current economic climate this would only slow growth, add to
inflationary pressure and be unpalatable."
"Instead, the Government may introduce new measures to help
small businesses. For example, the Chancellor may consider
extending the VAT payment deadlines for SMEs and increasing
accessibility to the VAT cash accounting scheme. This would mean
that businesses would only account for VAT when they have been
paid."
"The Government may also look to change the VAT Bad Debt Relief
rules and reduce the current six month limit and make the claims
immediate if the customer has become insolvent. As it currently
stands a business can claim bad debt relief for VAT charged to
customers, which has not been reimbursed back to the business.
However businesses have to wait six months for this. All of these
initiatives would help businesses in a time of financial upheaval
and would present the government as championing businesses in these
uncertain times," says Parkin.
Throwing a brick at the Construction Industry: Taxation
Review?
When the Government introduced the new Construction Industry
Scheme (CIS), HMRC began to review CIS subcontractors compliance
with regard to all of its tax and social security obligations on a
12 month rolling basis.
"While the idea behind the CIS is to improve compliance in
relation to work done in the construction industry by
subcontractors, this is the last thing that the struggling industry
needs. Subcontractors will have to ensure that they comply with tax
payment and administrative obligations because if they do not, this
could lead to a withdrawal of gross payment status and could cause
greater cash flow difficulties and the inability to win new
contracts. Fines have already hit £180 million since CIS has been
introduced and some 227,000 gross payment status cancellation
notices have been issued by HMRC. This has crippled some
construction businesses," says Kathryn Hiddleston, Head of
Construction at Grant Thornton.
"With the 2012 Olympics approaching, an aggressive approach to
this scheme could have a disastrous effect for subcontractors and
the construction industry as a whole and therefore it is unlikely
that the Government would want to provide further hindrance to the
industry. However the Treasury may waive this compliance obligation
to help prop up the ailing property market. The Treasury has
already reviewed the stamp duty land tax threshold and so may also
review the strict compliance requirement regime for CIS
subcontractors. Whilst the Treasury needs to generate revenue
through clamping down on those that fail to meet compliance
standards, it may choose to take a lighter touch against the
construction industry during the current economic climate"
Hiddleston explains.
Empty Property Relief
The reform of business rate empty property relief introduced in
April 2008 to raise a forecasted £950 million tax revenues by 2009
has added significant woes to landlords. The reform was designed to
impose downward pressure on commercial rents and improve the supply
of property.
"Some landlords would rather demolish empty buildings than pay
the business rates imposed on them and at a time when the
Government is looking towards regeneration of its towns and cities
this tax policy seems to have had the opposite effect. Rates on
empty business properties were never welcomed and in this economic
climate it is one expense that landlords can do without," says
Clare Hartnell, Head of Property at Grant Thornton.
"Whilst this reform was supposed to be part of a regeneration
initiative, it seems to have got lost in translation largely
because the property sector has taken such a hit during the credit
crunch. The Government will have to keep a watchful eye on whether
more demolitions are taking place so that landlords avoid paying
business rates and then see whether they will review the
reintroduction of the relief. Given the current economic climate,
any initiative to boost the property market would be welcomed and
therefore a change in this relief may be wise", ends
Hartnell.
*Defra, January 31 2007