Ahead of today’s Budget, Bill Longe, tax partner at business adviser Baker Tilly Birmingham, looks to what the Chancellor may have in store and the impact on businesses and individuals in the West Midlands.
The economic situation appears to be deteriorating at an alarming rate. Having attempted an economic stimulus in the autumn, the Chancellor is facing some very difficult options. How will he, and we, fare?
Increases in taxation are being considered and most would reluctantly agree that taxes will have to rise. We expect most increases to take effect from 2010 and beyond. In keeping with previous Budgets we can also expect notification of future increases to be made in advance. It is highly likely that the Budget will focus heavily on:
· enforcement of existing taxes;
· powers to combat avoidance; and
· consultations about the future shape of the tax system.
Foreign profits taxation A wide-ranging consultation process has been under way for a number of years partly as a result of concerns that the UK taxation system does not meet our EU Treaty obligations and partly due to the concern that the UK tax system is, internationally, uncompetitive.
The main areas identified as in need of urgent change are:
- Taxation of foreign dividends.
- Restriction on tax relief for borrowing – the ‘debt cap’ rules.
- Taxation of controlled foreign companies.
Significant progress has been made on the first two topics, much less on the third. There are, however, still major issues with the debt cap rules, which broadly propose to restrict tax relief on borrowing to base it on the amount of world-wide external borrowings. It is likely that a compromise will be put in place addressing many of the concerns.
Relief for foreign denominated losses UK tax is, unsurprisingly, computed in sterling. Profits and losses may, however, be computed in another currency. As exchange rates vary over time and as the losses in one period may be available for use in another, the value of the loss relief will depend on the exchange rate in the period in which the profit arises. This gives rise to uncertainty and the need to plan for the use of the losses.
The proposal is that the basis on which the losses available is to be computed is to be matched with the basis for computing the profits against which relief is sought.
Tax rates and thresholds It is known that the rate of Corporation Tax (CT) for small companies will not increase from 21 per cent to 22 per cent in 2009.
It is even possible that this will be reduced to 20 per cent, and the standard rate reduced from 28 per cent to 25 per cent, to make the UK more competitive.
One of the reasons for progressively increasing the small companies’ rate was to address the advantage offered for businesses to operate as companies and for profits to be extracted tax efficiently. This may be reason enough for not reducing the small companies’ rate.
Small companies’ relief UK anti-avoidance legislation is often extremely widely drafted and rarely changed even when it is seen to be misdirected.
Such is the case with the rules that prevent businesses being fragmented to take advantage of the lower rate of CT for companies with profits below £300,000. The legislation operates to require the rate thresholds to be reduced pro rata to the number of associated companies.
The problem is that the meaning of ‘associated company’ is too widely drawn and it was finally conceded that the legislation needed to be changed last year.
Extending the 15 per cent VAT rate Businesses, and particularly retailers, really struggled with the impact of making systems changes in the run up to last Christmas. To avoid similar problems there has been some lobbying in the sector for the date for reversion to 17.5 per cent to be pushed back so that systems changes do not interfere with the vital Christmas and New Year sales period.
We speculate that the government will listen to the views of businesses and announce that the 15 per cent rate will continue to apply into 2010.
Publication of the ‘VAT package’ measures The VAT package is the collective name for a number of measures introduced into European legislation last year. The measures must be implemented into UK domestic legislation and take effect from January 1 2010.
The fundamental change is to the default place of taxation for VAT purposes. Currently, VAT is due, on a business to business supply, in the place where the supplier is established.
This will change from January 2010 so VAT is due wherever the recipient is established.
More goods and services on the list of items subject to five per cent VAT
Agreement was recently reached between all 27 EU Member States on extending the reduced rate of VAT to some additional goods and services.
The UK will be able to apply the five per cent rate to books, audio books, restaurant meals, hairdressing, domestic cleaning, renovation and repair work to dwellings.
It is doubtful that the UK will allow all these goods and services to be taxed at the reduced rate, particularly given that the standard rate of VAT was decreased by 2.5 per cent only a few months ago.
However, it is likely that the UK will agree that audio books and the renovation and repair of dwellings should be added to the five per cent list, the latter in an attempt to boost the construction industry.
Tax avoidance through transfers of income streams The advantage for those who are able to sell income streams from property is that, when successful, they no longer fall within income tax at up to 40 per cent but within CGT at 18 per cent. This is an evolving area of tax law and it remains to be seen how an anti-avoidance rule that operates on the basis of principle rather than countering specific arrangements will work but if it is seen as successful similar arrangements are likely to follow in other areas.
Stamp Duty Land Tax (SDLT) The specific disclosure rules for notifying SDLT planning arrangements do not extend to identifying actual transactions that have taken advantage of the arrangements notified. Nor does the scheme currently enable indirect land transactions to be notified – for example, the sale of a company owning land rather than the land itself. There has been a suggestion that the scheme will be extended to cover both these gaps in the notification obligation.
The SDLT holiday for land transactions not exceeding £175,000 has proved to be rather ineffective and other options for helping the property market are being considered.
No scope for reductions The focus is unlikely to be on further tax relaxations. The government cannot really afford to lose any further revenue and it is doubtful that there would be scope for tax reductions on a scale that would have any appreciable effect in getting the economy moving.
The Chancellor nailed his tax colours to the mast in November’s PBR.
Rates of tax and allowances These are being increased above inflation to provide further fiscal stimulus. The addition to the allowance, over and above inflation, is £130 so this only equates to an annual tax saving of between nothing for the lowest-paid and £52 for the highest paid.
Tax credit restriction removed The restriction on tax credits on overseas dividends to holdings of less than ten per cent is to be removed, introducing a welcome element of consistency.
Inheritance Tax and Nil Rate Bands From April 6 the inheritance tax nil-rate band will be increased to £325,000 per person.
The band for the following year, 2010/11, is also already known: £350,000.
Holding the smaller companies’ rate of CT down to 21 per cent will provide a modicum of relief to those companies that remain profitable in the recession.
Relief for interest Tax avoidance will feature high on the list of announcements. There is one certainty – the proposed change to the rules for deduction of interest in Income Tax Act 2007. The new rules, announced on March 19, will disallow interest tax relief in any case where an arrangement is made that produces a ‘post-tax advantage’.