Business Predictions
Corporate tax measures
What to expect in the Budget this year? Well for corporate tax it's a hard one to call. Many of the major issues for corporate tax are already under consultation - most notably the way in which the UK taxes foreign profits which has long been a key bugbear for business. But what would be truly refreshing would be if we could have a Budget which took the opportunity to take a fresh look at business tax and attempted to create a system that could really attract investment to this country.
Given the current economic position, it would be good to see the Government look at reducing the corporate tax burden to encourage growth. This could be done by reducing the statutory tax rate to bring us closer into line with other countries and as prompted by various interested parties such as the Institute of Directors. Or it could be by reducing the tax basis by expanding reliefs etc. The latter route might not be so headline grabbing but it could be used also to simplify our rules (e.g. by removing the various different categories of losses and the different rules for their offset) and to help encourage investment in the UK (maybe by actually increasing the R&D credit for example).
Of course, such changes need to be funded but there is a lot of economic analysis to support the view that corporate tax reductions should be self funding to some degree. To the extent that further revenue is needed, it would then be worth looking at whether this could be funded by other taxes such as indirect taxes. Of course, any proposals like this will have winners and losers and so a proper impact analysis would be required. However, the key point is that now is the time to be stepping back and looking at the bigger picture across all the taxes. It would be very welcome to see a Budget that was focused on using tax policy to help economic growth rather than simply a series of yet more complex anti-avoidance measures.
But what are we likely to see? There are a few specific measures that we are looking out for, some of which are outlined below. Despite comments above, we also expect to see the usual raft of measures announced to tackle what the authorities see as unacceptable tax avoidance but we would question the real value of some of these measures. In the current climate, many businesses are focussed on survival, not on tax planning. Additional measures increase the burden of complexity and run the risk of making the UK even less attractive.
Specific measures:
- Capital allowances: a temporary 40 percent First Year Allowance for expenditure on plant and machinery announced at last year's Budget is due to run out shortly. We would expect an update on whether this is to be extended.
- Senior Accounting Officer: revised guidance on the rules around the requirements for a "Senior Accounting Officer" to sign off on tax systems may be published at or around the time of the Budget.
- Debt cap legislation: Draft legislation to go in this year's Finance Bill to introduce changes to the debt cap legislation has already been published and we are likely to see the final version at the Budget.
- Life assurance companies: We expect an announcement on legislation to implement an apportionment of income and gains for life assurance companies (there was a written ministerial statement on 15 July 2009 which was then modified and mentioned in the Pre-Budget Report 2009).
- Tax framework for business: a consultation document on how tax policy can be developed for business was issued in February and it is possible that there will be an update in the Budget.
- Branch profit exemption: we expect there to be a formal announcement to confirm that the taxation of branch profits will be considered as part of the on going consultation on the controlled foreign companies rules.
Employment taxes
In addition, businesses, in their capacity as employers, are likely to be interested in any developments in two areas in the personal tax field. These relate, firstly, to the pension regime to restrict tax relief for those on higher incomes and, secondly, to the position on tax residence.
The changes to restrict tax relief for those on higher incomes from 6 April 2011, already in force in terms of the complex anti-forestalling measures, will impact employers of high-earning individuals as well as the individuals themselves. As highlighted in our article on Budget Predictions for Individuals, we have urged the Government to rethink the proposals in this area as we believe the sheer complexity of the proposals, particularly for defined benefit and non-UK schemes, is going to cause very serious practical difficulties for individuals, employers and indeed for HMRC themselves.
Any changes to the way in which an individual's residence is determined for tax purposes could also impact materially on employers. As discussed in our article on Budget Predictions for Individuals, HMRC have been considering the possibility of a statutory residence test to replace the current largely case law approach, and to help prevent uncertainty as to an individual's residence status. However, in this age of increasingly mobile workforces, we hope that the Government will take due account of the needs of businesses with employees moving to and from the UK in designing any such test, to ensure that it is as straightforward as possible for employers to operate
Indirect Taxes
Recent Budget and PBRs have seen a number of key VAT changes. Firstly there was the temporary reduction in the standard rate of VAT introduced as a fiscal stimulus in the 2008 PBR. This was followed in the 2009 Budget by the anticipated changes to the rules on where certain services are taxed for VAT purposes. These changes to the place of supply rules from 1 January 2010 were required to implement European legislation.
There has been further speculation about future VAT rate rises especially as other Member States have increased their rates or announced intentions to do so. With the current budget deficit and the average standard rate in the EU now in excess of 20 percent, a future VAT increase in the UK cannot be ruled out as this is a quick and easy way of generating revenue. This is more likely to be in the form of an increase in the standard rate as opposed to the broadening of the tax base by the removal of zero or reduced rates. However any such changes, which would be unpopular with the electorate, are extremely unlikely in this Budget given the proximity to the election.
The expected measures will probably include the usual increases in thresholds for registration and deregistration and fuel scale charges. Increases in alcohol and tobacco duty rates are almost a yearly occurrence and, whilst a Government seeking re election would be conscious of not introducing unpopular measures, it would do well to avoid anything less than inflationary increases. HMRC are continuing to seek ways to help simplify procedures for businesses. Whilst some partial exemption simplification measures for small businesses were announced PBR, HMRC may take the opportunity to announce an increase in threshold for the cash accounting scheme to £1.5 million. There has also been wide consultation on the tax treatment of gambling but any significant changes are still some time away.
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We are currently gathering our thoughts on the Budget 2010 and will
post our initial reaction to the Budget by 2pm.