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Monday, 10 March 2008
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As Chancellor Alistair Darling on Wednesday prepares to deliver his
first Budget, his estimates for growth and taxation in the coming year
will be keenly anticipated by UK businesses.
According to Bill Dodwell, head of tax policy at Deloitte, “The economic
backdrop to the Budget is less helpful than in previous years and there
is clear pressure on tax receipts for the forthcoming financial year.
Estimates of the key corporation tax yield have been revised downwards.
At Budget 2007, corporation tax in 2007-08 was estimated at £50 billion;
at the PBR in October it was revised down to £46.3 billion; and now it
is expected to come in even lower.
“One piece of good news for the Chancellor is that to date tax receipts
have held up well - in fact the January receipts proved better than many
had forecast.
“A significant part of this Budget will be devoted to dealing with the
responses to consultations and measures announced in the Pre-Budget
Report. We are eagerly awaiting further clarification on the non dom
proposals and strongly hoping for a deferral of the new regime until
2009.
“The other key items on our wish list for this Budget are that the
Government will limit the scope of its income shifting legislation;
issue a new consultation document on the taxation of foreign profits,
taking into account business concerns; and that there will be no hastily
implemented proposals on a new principles-based approach to financial
product avoidance.”
Bill Dodwell considers below the key consultations which closed in
February and on which the Budget will now set out the Government’s
response:
Income shifting
The Government wishes to prevent individuals from allocating income
between higher rate and lower rate taxpayers, following HMRC’s defeat in
the widely reported Arctic Systems case.
Our view is that the draft legislation is too wide in scope and too
uncertain for families to apply. We hope that the Government will limit
its scope to family-owned businesses and offer greater help to apply the
new law.
Residence and Domicile
Little needs be said about these proposals, save that considerable
clarification is still needed. We hope that the Government will defer
the proposals to 2009 to allow time for further consultation and also to
allow time for those affected (employers and individuals) to implement
them fairly.
Taxation of foreign profits
This is about the tax treatment for UK companies of their overseas
income from subsidiaries and associates. It is a vital part of helping
the UK to be a competitive place for multinationals to be headquartered.
Last June, the Treasury released a discussion document, which proposed
the introduction of an exemption from tax for dividends, in place of the
current system, whereby dividends from overseas are taxed, with an
allowance made for tax by the overseas company. However, they also
propose significant reform to the controlled company rules, which are
designed to prevent UK companies from diverting profits away from UK
into low tax locations.
The proposals last year were not well received, largely because they
looked to business as though they would raise significant extra tax. We
expect that the Treasury will release a new consultation document at
Budget, which we hope will take account of business concerns. If all
goes well, it is expected that there will be draft law by the end of the
year, with a new tax system applying from 1 April 2009.
A Principles-based approach to financial product avoidance
The Government launched a consultation last December into a new approach
to a complicated area. The intention is to have shorter,
principles-based law, in place of highly complex detailed rules. If
successful, the new law would be easier to follow and more adaptable to
different approaches. However, at present the boundaries of the new law
are too unclear for it to be ready for implementation.
We hope that the Government will continue its review and not implement
the proposals hastily - which probably means that there will be some new
anti-avoidance to deal with a small number of disclosed schemes. The
sort of arrangement affected here would be an investment by a company
where the return was untaxed.
Bill Dodwell expects the following new topics to be included in Budget
2008 are:
Tax Compliance - Varney review
HMRC has been implementing much process improvement, following the
Varney review, which reported in December 2006. The aim of the review is
to make it easier for business to meet its tax compliance obligations
and to allow HMRC to focus better on areas of the greatest risk to the
Exchequer. It is expected that the Chancellor will give an update of the
latest progress.
In particular, we expect an announcement of the start date for a new
system of business tax clearances, where taxpayers may ask HMRC for
their views, where the matter is uncertain and significant to the
taxpayer. Other areas covered by the review are risk ratings (a system
designed to aid HMRC to focus on high risk taxpayers and reward low-risk
groups with a lighter touch) and transfer pricing (again, a greater
focus on high-risk transactions with other group companies, with a
corresponding benefit for lower-risk transactions, which should be
agreed more quickly).
HMRC Powers and Penalties
Following the merger of the Inland Revenue and HM Customs into HMRC,
there has been considerable work on a new system of powers for HMRC and
a new penalty regime for taxpayers who don’t meet their compliance
obligations. The Government generally plans on increasing HMRC’s powers
to obtain information and make enquiries, as well as increase penalties
for those who are either careless or who make deliberate errors. Some of
the penalty rules were enacted last year, but the review continues and
further measures are likely to be set out. It is important to preserve a
balance between tax collection and taxpayer safeguards.
EU law - Conde Nast
Last month, the House of Lords decided that the Government had broken
European law when it introduced some restrictions on reclaiming overpaid
VAT. The European principle is that a National Government may indeed
introduce restrictions on taxpayer rights, but where it proposes to
reduce existing rights, it must allow a transitional period for
taxpayers adversely affected to file claims. We expect that the
Government will announce a transitional period for these old claims to
be filed and we hope that it will make a similar extension for direct
tax claims, which have similarly been restricted without a transitional
period.
Budget 2007 changes now taking effect
Finally, we should not forget that there are significant tax changes
announced by Gordon Brown in Budget 2007, which will take effect from
April 2008. The main changes are:
Corporation tax:
The main rate is reduced to 28% from 30%. The small companies’ rate is
increased from 20% to 21% and next year it will rise to 22%.
Business rates:
Empty property relief is being withdrawn.
Capital allowances:
Writing down allowances for plant and machinery reduced to 20% from 25%
(this means that the period over which 90% of the tax relief is given
his extended from eight years to 10 years). At the same time, there will
be a £50,000 annual investment allowance, giving businesses and
immediate tax deduction for qualifying costs. The long life plant and
machinery allowance is being increased to 10%. Finally, industrial
buildings allowances, agricultural buildings allowances and hotel
allowances are being withdrawn by 2011. Enterprise zone allowances are
also being withdrawn in 2011.
Personal tax
The 10% rate is being withdrawn and the basic rate reduced from 22% to
20%. Those who lose out here people earning less than £18,500 (unless
compensated through the tax credit system, where the withdrawal rate is
being increased by 2%) and charities, which will receive lower gift aid
refunds (since these are based basic rate). The Charities Aid Foundation
has estimated this could cost charities are to £90 million, unless
donors increase their gifts to compensate for the tax changes.
At the same time, the National Insurance upper limit is being increased
over the next two years, so as to align it with the higher rate income
tax threshold.
Overall, this package results in about £2 billion being given to people,
whilst business taxation increases by about £1 billion.
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