Will the Chancellor sign off with a Budget for business?

With today's Budget expected to be Gordon Brown's last, the big question is whether he will go out with a bang, by setting out a strong plan for taxation policies to be adopted by his successor.

UK businesses will be looking for reductions to the tax base or the tax rate, as well as simplification of the tax system and measures to make HM Revenue & Customs (HMRC) easier to deal with. We expect to hear rather more about the latter area than the first two.

Bill Dodwell, head of tax policy at Deloitte, said: "The most interesting question for this Budget is whether we'll see the promised consultative document on UK taxation of international business. This was promised at the December Pre-Budget report and should cover the tax treatment of dividends from overseas investment in low tax countries (controlled foreign companies), together with any related measures to protect the UK tax base.

"UK business would like to see tax exemptions for overseas dividends and a reduced, simplified tax charge on controlled foreign companies. Protecting the tax base is thought to include restrictions on the deductibility of interest - which has been much in the news recently, in relation to Private Equity. There is no doubt that UK business would like to see a relaxation of the UK’s approach in this area, which is out of line with the approach adopted in the rest of Europe.

"The Review of Links with Large Business, launched in December, attracted a favourable reception from business. We expect the Budget to contain an update on the progress being made implementing the initiatives announced last year. HMRC is expected to publish a framework of risk, setting out the methodology and approach to ranking large groups of companies according to perceived tax risk. We may see more on HMRC’s approach to litigation and receive an update on how it plans to introduce clearances - something of value to business.

"We expect to see the final results of two long-running consultations: the introduction of new and higher penalties for tax return errors and the reform of the system for investigating and dealing with potential criminal offences. The key issue for tax payers in relation to penalties is whether the new regime has appropriate safeguards, as well as increased penalties for those that fail to comply with their responsibilities."

The most important measure announced in the Pre-Budget report was a consultation on Managed Service Companies. This is an area of growing importance in the UK, as the numbers of self-employed and potentially employed people on short term contracts increases. There is clear evidence of tax evasion and the difficulty for the Treasury is to set a regime which catches those who help tax evaders, discourages those who might not pay their fair share of tax, but does not act as an additional barrier for the genuinely self-employed.

"We expect to hear more on Budget Day but following considerable concern around the original proposals, which may not reach the real targets of the reform, we hope any new regime is delayed for six to 12 months to allow time for everyone to adapt" commented Bill Dodwell.

We are not expecting any significant anti-avoidance measures to be announced following several earlier this month. These included an ill-thought out proposal to restrict tax losses from investments in partnerships, which could affect many more activities than it was intended to restrict.

There has been considerable focus on the environment, with all political parties offering suggestions for restricting the UK’s carbon emissions. The difficulty with this area - at least in relation to tax - is how to achieve change, without simply putting up costs either for business or for the less well off. It is well known that over 90% of the UK's environmental taxation is raised from vehicles.

Bill Dodwell commented: "We expect no brand new taxes, but we may see some new incentives announced, to encourage investment in environmentally friendly technologies. At the Pre-Budget report, the Chancellor announced a very modest relief from stamp duty land tax, in respect of zero carbon homes. Hopefully any measures announced will have a greater impact than that one. It is equally possible that we might see the launch of consultation around potential new incentives.

"We are expecting measures to be introduced which will impact on fleet managers and motor manufacturers. It is thought the Chancellor will change the basis of taxation levied on employers providing company cars. We expect it will be changed to tax vehicles based on the level of CO₂ emissions. Businesses with a large number of high polluting vehicles in their fleets will face increased costs, whilst manufacturers will be forced to review their plans as those with high CO₂ emitting cars will lose out. In addition, we believe the Government will significantly raise vehicle excise duty on some high-polluting vehicles.

"One area attracting considerable attention is inheritance tax. This raises some £4 billion from - at present - just over 30,000 estates (about 5% of the deaths annually). We doubt if there will be additional significant reform in this area, despite the calls for additional reliefs for the family home, affected by the growth in house prices, especially in the South East. However we do expect to see some relaxation of the reporting limits for gifts and other transactions potentially liable to IHT. This would be a welcome administrative saving.

"We may see some changes to the residence rules for individuals, following a tax case last year, and possibly to the remittance basis (the rules which govern the taxation of money brought into the UK by those not domiciled here). If there are changes, we hope that they are narrowly targeted and do not make the UK a less attractive base for international business people.

"We expect no major VAT changes, although we must remember that the proposals to deal with so-called missing trader fraud have still not been enacted. The proposals have stalled, awaiting EU approval. Given that France introduced its own proposals in this area, it must be expected that the UK changes will be enacted soon.

"There will no doubt be some changes to stamp duty land tax, as HMRC becomes more familiar with the operation of this relatively new tax and seeks to clamp down on unforeseen planning opportunities. It is likely that any proposals will seek to charge tax on commercial property transactions. Many have pointed out that thresholds at which the higher levels of stamp duty land tax is charged have not been indexed, meaning that many more residential properties are now subject to the tax. However, we doubt whether the Chancellor will lift the thresholds in this Budget.

"The REIT regime was introduced on 1 January 2007 and many existing quoted property companies converted to REIT status. We expect further announcements in the Budget to enable new companies to join the regime and to deal with anomalies that have come to light.

"Finally, there will inevitably be the announcement of new tax and duty rates, which begs the question of whether the Chancellor will raise fuel duty, as part of his contribution to the environment?"