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| No gold star for Chancellor’s first Budget |
| Written by Helen Sant, Head of Tax for KPMG in Cambridge and East Anglia | |
| Tuesday, 18 March 2008 | |
 Helen Sant, Head of Tax for KPMG in Cambridge and East Anglia reviews Alistair Darling’s first Budget.We knew that the Chancellor had a tough job having been rather boxed in by his predecessor's rules at a time when the economic outlook is looking distinctly unclear. The global credit crisis, a slowing economy and public finances approaching their limits made for the most difficult budget backdrop since Labour came to power. Faced with the dilemma that tax cuts would support growth but blow the fiscal rules apart, while tax increases might improve the public finances but de-rail the economy in the process, the Chancellor opted for the middle course and presented a broadly neutral budget this year. Economic forecast The economic outlook is extraordinarily uncertain as no-one knows how long the credit crisis will last or how much damage it will do. Blaming the credit crisis, which he referred to on 14 occasions during his speech, the Chancellor downgraded his growth forecast but stuck to the view that 2008 will be the bottom, with growth picking up from 2009. If the Chancellor is right, this is hardly the stuff of crises. However, high inflation, weak income growth and a correcting housing market look set to depress consumer spending for an extended period – even if the credit crisis somehow evaporates magically overnight. Public finances Mr Darling acknowledged that slower growth means higher borrowing in the short-term, but promised to meet the golden rule over the cycle by donning the hair shirt later. Unfortunately, even after five years of solid growth – as good as it’s going to get – the government is still borrowing some 3 per cent of GDP in 2008-09. So the hair shirt will ultimately have to be pretty tight. UK Competitiveness The Chancellor took the opportunity to spend a great deal of time talking about the UK’s tax competitiveness but unfortunately, he failed to follow this up with any real action. Despite his comment that the UK has ‘the most competitive corporation tax regime in the G7’ and ‘a stable tax regime’, the fact is that since 2000, the UK’s corporate tax rate has fallen from the fourth most competitive in 2000 to around 20th in the enlarged EU - and has dropped from the eighth most competitive to 20th among OECD countries. A KPMG survey last year, just two percent of respondents thought the UK had the most competitive tax regime. In particular, the Chancellor implied that there had at least been limited tinkering with the system. However, immediately afterwards HMRC put out 107 separate budget notes containing new rules around financing structures and the way in which UK headquartered companies’ foreign profits are taxed. Many companies will face a hike in the effective tax rate they pay on their worldwide profits as a result. This global tax rate is much more important to multinationals than the headline corporate tax rate in any one country as it reflects the actual amount they pay.The effect of his announcement mean that being headquartered in the UK means, for many companies that their worldwide tax rate will be higher than if they were located somewhere else. Even in comparison to the US, a country with a high headline corporate tax rate, the measures arguably make the UK less competitive as a location for the world’s largest corporations. Despite the changes announced there was no formal update to the over-arching reform process to the way in which the UK taxes profits earned overseas. It is more than a year since the process began and business has been waiting for a full consultation document. Some may take the news as a signal that the consultation document is unlikely to contain any good news for them and decide that they will not bother to wait for it. Unfortunately, the Chancellor appears deaf to the growing concern that the UK tax system is becoming less competitive. Small and Medium businesses Yet again the Budget contained some very mixed messages for SME’s in the UK. On the one hand he made many references to how he intends to help and develop the entrepreneurial sprit in the UK with initiatives such as the Entrepreneurs Relief, and an increase in the Small Firms Loans Scheme which has been extended to all SMEs – which is good news. However, he failed to mention the fact that SMEs are going to be hit by a tax hike next year when their rate of corporation tax is increased by 3 per cent (from 19 per cent to 22 per cent) and didn’t address the issue of how an 18 per cent flat rate CGT will be bad news for many SMEs. Whilst his attempts to encourage entrepreneurial business in the UK was welcomed, the Chancellor also failed to address the fact that many entrepreneurs currently in the UK are also non-doms and his failure to back down on his proposed £30,000 fee will do nothing to encourage them to build their businesses in the UK. The government has previously stated that it wants to increase the number of small and medium-sized companies (SMEs) that will qualify for R & D tax credits but since this counts as EU state aid it is having to jump through a number of hoops in order to get approval. The effect of some of the changes announced by the Chancellor is that contrary to his stated aim of supporting SMEs, it will be particularly difficult for struggling firms to access this valuable incentive. SMEs whose most recent accounts are not prepared on a ‘going concern’ basis will not be able to claim the R & D tax relief. For some companies this could be the difference between just surviving and finally going under. This could potentially create tensions between businesses and their auditors. For example, the availability of an R & D tax credit might be enough to maintain the company as a going concern but until the accounts are signed as such, the credit would not be available – thus creating a circular argument. In addition, the Chancellor’s budget has introduced a cap on the level of qualifying expenditure for any single R & D project of EUR7.5 million. Whilst this is unlikely to be a huge issue for smaller SMEs, those at the larger end of the spectrum may have to monitor their spend more carefully. Unfortunately, where the SME sector is concerned, Chancellor failed to take hold of the opportunity to re-establish his credibility with them and could have done more to help. The non-dom debate Non-doms who have been in the UK for only seven years would have been pleased to hear that they may have been granted one year’s grace before the £30,000 tax charge applies – details published in the Budget last week suggest that the residency test before the charge bites is to be extended to eight out of eleven years, rather than eight out of ten. And there is also an interesting concession of sorts on the 90-day-a-year residence test, where a day is now only counted from arrival in the UK at midnight. Overall though, non-doms’ prayers for an indefinite deferral of the changes have gone unanswered. The charge is coming in - albeit with some sweeteners on children and artworks - and some measures even apply immediately from today. The full impact on the attractiveness of the UK as a place to come to do business remains to be seen. I feel it will not be positive – and the net financial gain to the UK coffers will be relatively small. IFRS deferred The Chancellor announced that International Financial Reporting Standards would not be implemented in the Government’s accounts until the financial year 2009-2010. It’s important to remember that preparation is key to the successful implementation of IFRS - certainly, our experience of the introduction of IFRS into the private sector was that the companies that started the earliest fared the best. The extra year will be important in enabling central government to prepare thoroughly and to restate the previous year’s accounts for comparative purposes. It will be important, though, that momentum is not lost and that this deferral does not result in the foot being taken off the gas in the movement towards IFRS reporting. A year is not a long time in financial reporting, and there is still very little room for slippage Power to HMRC HMRC confirmed on Budget Day that new legislation regarding is powers to enforce tax compliance will be included in this year’s Finance Bill, following a period of consultation which ended two weeks ago. The key point will be whether HMRC has listened to representations made during this consultation period. For example, key business concerns include adequate rights of appeal against proposed HMRC action. One of the more draconian proposals would be the power to make unannounced visits to business premises to inspect assets and business records. While there is an appreciation that HMRC needs adequate powers to ensure compliance, business is concerned to ensure these powers would be used proportionately with proper oversight Good news for the oil companies? UK oil companies will be pleased that the Chancellor resisted the urge to increase tax rates on their profits despite very high oil prices. But the Government has stopped the offset of investment management costs against UK oil and gas profits. In doing so the Chancellor expects to raise an additional £150m per year. At the same time, long-life assets will now qualify for 100 per cent ‘first year’ allowances (up from 24 per cent) as will mid-field life decommissioning costs. There are further technical changes including a fairer system for tax deductions for the costs of abandoning North Sea fields and the possible opting out of fields that will not pay Petroleum Revenue Tax. Overall, these reforms increase tax overall whilst bringing some welcome relief. Bad news for the film industry The Chancellor’s announcement means that it will no longer be possible for individuals to offset losses from their film investments against their other income, unless they play an active part in the management of the film business. Similar legislation was introduced in last year’s budget to close down tax relief on losses incurred by partnership film businesses. The new legislation targets individuals seeking to shelter otherwise taxable income. The UK film industry has benefited a great deal in recent years from the flow of investment through tax-driven structures. While the Chancellor’s announcement won’t come as a surprise to the industry given HMRC has made no secret of their dislike of these types of arrangement, it will undoubtedly have a negative effect on the funding of the British film industry Bingo industry misses out on the jackpot The budget has failed to provide a much-needed boost for Britain’s beleaguered bingo halls, as the industry had hoped that VAT would be abolished on participation charges or a reduction or abolition of bingo duty, delivering some respite for bingo companies during a difficult trading period. In addition to being hard hit by the smoking ban, UK bingo halls have faced for several years faced ‘double taxation’ where they pay 15 percent bingo duty on gross profits, as well as VAT on their participation and session charge income of 17.5 percent - a situation not replicated across the rest of the gaming industry. The abolition of VAT could have saved the industry almost £100 million in revenue which could have been channelled towards encouraging players back to the halls, either through reducing participation fees or increasing the prize pools. The Government has missed an opportunity to show the bingo industry it has listened to its views and recognises the value it provides, not just as a tax payer, but also as providing a valuable social role for many communities. Going Green Despite lots of media coverage that the Chancellor would be delivering a “green budget” this year, the few announcements that he made last week will have only a marginal impact on UK carbon emissions. The Government has stated its intention to increase the UK’s carbon reduction targets from 60 per cent to 80 per cent but has it missed another opportunity to put any significant policy initiatives in place that will actually help achieve this. The limited measures that were announced by the Chancellor will only account for a reduction in carbon emissions of around 5 per cent by 2015 at the earliest. It is still very unclear from a personal and corporate perspective how the vast majority of carbon reduction will be delivered. Considering the Chancellor's promise back in December to put sustainability at the heart of the budget his announcements amounted to no more than minor changes, more reviews and a headline grabbing plastic bag tax in 2009. Green cars The Chancellor announced that tax relief will now be available for businesses who choose low carbon-emitting cars, but for most businesses, the employee already enjoys tax relief when choosing fleet cars with low C02 emissions and this has had a dramatic impact on vehicles selected. For businesses who provide a limited choice of cars, it would seem sensible for them now to choose cars which give them the greatest tax benefit. Overall, though, this change is unlikely to have as much impact on the environment as the earlier reform that linked the personal tax charge to CO2 emissions. Companies will also need to review whether they buy or lease their car fleet. Chancellor’s overall rating : not the huge debut that we were expecting. Could do better!
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