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KPMG says PBR a mixed bag for the middle market

Tuesday, 09 October 2007

Article Index KPMG says PBR a mixed bag for the middle market Page 2 Page 1 of 2 Helen Sant, head of Tax for KPMG in East Anglia and Cambridge, assesses the impact of the Pre-Budget Report and comprehensive spending review Yet again the Pre-Budget Report was a mixed bag for the UK's Middle Market, the life blood of the UK economy. While we welcome the numerous simplification measures announced today – many of which will benefit small and medium sized businesses – we are concerned that they don't go anything like far enough. The Government's own figures state that their measures will save £100 million administration costs each year. However spread over 4 million taxpayers, this saves only £25 each on average! The owners of small and medium sized businesses will also have to contend with the changes to Capital Gains Tax. The abolition of business asset taper relief will penalise entrepreneurs and the owners of family run businesses by raising the headline rate of tax by 8 per cent. Coupled with proposed negative changes to the way husband and wife businesses are taxed (Arctic Systems case), the Pre Budget Report will not endear Alistair Darling to the UK's Middle Market. IHT The announcement to raise the IHT threshold to £600,000 – although likely to grab headlines – is, in practice, only giving to most people what they already have. Many married couples will already have drafted wills to allow each spouse to take advantage of their nil rate band through the use of a nil rate band discretionary trust. This was possible even for the family home. It is very disappointing to note that the proposals will not benefit unmarried or non-Civil Partnership couples, or siblings who have lived together as in the recent case of the elderly Burden sisters – who had lived together all their lives before one sister faced having to sell the house in her eighties when her sister died.” Capital Gains Tax The chancellor announced a flat capital gains tax rate of 18 per cent and the abolition of business asset taper relief from April 2008, PE bosses will indeed now pay the same tax rate as their cleaners. But entrepreneurs who have built up businesses over their lifetimes and were perhaps looking forward to selling up to fund retirement will find that unless they can do it before next April, they will pay eight per cent more tax than they were expecting to. True, the changes mean a single rate will be in force, but the playing field has not been levelled at all. UK private equity will be taxed at 18 per cent while non-UK domiciled private equity will be subject to a flat tax of £30,000 per year - and then only after seven years. Regarding how capital gains tax rules will affect employee shareholders, the PBR held a bizarre twist in so far as the Government has said it will no longer provide a favourable tax regime for employee share holdings. From April next year, employee shareholders will be eight per cent worse off when they dispose of their shares than at present whereas an investor who doesn’t work for the business, could be up to 22 per cent better off. Employee shareholders currently pay capital gains tax at an effective rate of ten per cent after two years. This will rise to 18 per cent from April next year as a flat rate of capital gains tax is introduced. Non-employee shareholders currently pay a maximum capital gains tax rate of 40 per cent in the first three years which then reduces to a minimum 24 per cent after ten years. So no matter how long they have held the shares, non-employees will be comparatively better off in tax terms. This peculiar mismatch seems at odds with the government’s stated aim of encouraging entrepreneurship and investment and furthermore, many listed companies will feel sore that there will be no incentive for them to encourage their staff to hold their shares.” NIC Alistair Darling withdrew national insurance contribution exemptions in relation to holiday pay from all sectors – a move which will hit the construction sector the hardest. There has been an exemption in relation to holiday pay for the construction industry and similar businesses for some time. In recent years there has been widespread abuse of this exemption across many sectors including retail and financial services. This has forced the withdrawal of the exemption, with transitional relief to 2012 for the construction sector. There will have considerable implications for the construction sector as this relief is embedded in various union agreements on working practices. Tax treatment of non-domiciles Far from simplifying things, these new proposals appear very complex and will require a number of computations to see which basis of taxation an individual wants to claim under. The proposals also seem to favour those people coming on medium term assignments rather than those coming to establish a long-term business here. Another complexity which the Chancellor has not tackled are the subjective tests used to determine whether someone is resident or not in the UK. Confirming that the Revenue will now include days of arrival and departure as days of presence in the UK for the residency test is mere tinkering and not grasping the real nettle - which is the requirement for a clear objective test to allow taxpayers to self-assess their status. People who regularly come and go between Britain and abroad in a tax year will be particularly affected by the new rules.” Prev - Next >>

 

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