How Businesses may be affected by Budget 2007 - Predictions

Business and financial advisers Grant Thornton are not expecting many changes for business in this year's Budget, which is likely to be the current Chancellor's last.

The competitiveness of UK Plc continues to slump and at the same time the UK tax burden is expected to increase to 37.8% for 2007/08.

National Insurance Contributions (NIC), income tax and VAT revenues have all increased over the last two quarters and the Treasury's coffers have swelled to the tune of a £8 billion surplus. However, the Treasury would have preferred a bigger tax take and forecasted as much in the Pre-Budget Report last December. Corporate receipts were only up by 7.3% compared to an expected 13.2% and tax revenues in total were no higher than the previous January. Therefore, it looks unlikely that business can expect any giveaways in this year's Budget.

Stephen Quest, Grant Thornton Corporate Tax Partner, says, "The Chancellor is at the helm of a healthy UK economy, but despite this he is failing to meet the Treasury's own forecast of borrowing £36.8bn this year and he'll be keen to claw revenue from business taxes. He'll be particularly interested in the large profits in the city and the huge individual bonuses paid out last year as these have not translated into tax receipts."

Quest adds, "Elsewhere, the Chancellor won't be looking to rock the boat too much. This is his last Budget before he hopes to take control of the country when Tony Blair steps down so we don't expect to see any sweeping changes. We expect announcements regarding online gambling registering business onshore and possible VAT exemptions that will cause a few ripples, but it'll largely be a budget of tweaks rather than comprehensive changes. With the man on the street feeling a squeeze on his pocket, large corporates are the obvious target for Brown and, with big profits and bonuses being widely reported, this is unlikely to elicit much voter sympathy."

Corporate tax continues to erode UK competitive advantage

The UK corporation tax rate last came down nearly 10 years ago and, while other countries adjust their tax rates to encourage inward investment, the UK's competitive advantage continues to slip as corporate tax receipts rise by 7.3% for the year.

Although the 1% drop to a rate of 30% in 1998 kept the UK ahead of the pack, it is now falling well behind. Countries such as Ireland are showing strong economic growth, thanks in part to much lower corporate tax rates, which have seen an increasing number of companies setting up their operations there. With Germany currently looking to reduce its corporation tax rate, pressure is growing to keep the UK competitive.

Heather Self, International Tax Partner at Grant Thornton, says, "The UK's rate is now unattractive compared with the average rate across the 25 Member States in 2006 of 25.8%.. The corporation tax rate is becoming a destructive force in the UK business environment and once again we call for the Chancellor to lower the rate of tax. I suspect the cries of business and industry will go unheard again as, despite large profits being recorded for business this year, corporate tax receipts only increased by half the 13.2% predicted by the Treasury. The Chancellor will be more inclined to review where he is missing out and maybe grab a little more for the Treasury."

The implications of Varney

The Chancellor has previously promised that HM Revenue & Customs (HMRC) will have a central point for business to obtain statutory rulings and clearances by this year's Budget. HMRC will also be working with business to develop an enhanced risk assessment framework capable of taking into account how a company assesses and manages its risks and the relative weighting of these across the taxes. Details of this framework as well as a new risk-based approach to employer compliance reviews are due to be announced in the Budget. Much of this work stems from a review undertaken by a past Chairman of HMRC, Sir David Varney.

Francesca Lagerberg, Head of Grant Thornton's National Tax Office, comments: "It is admirable that HMRC has listened to business to pull together a framework to simplify corporation tax and compliance. However, this may be the only carrot available to the larger business community in relation to compliance issues. The offerings stemming from the Varney Review are likely to feature in the Budget but it is unlikely that much more will be on offer. Nevertheless, business will be looking forward with some anticipation to see if the Budget delivers a system that will provide them with some much needed business certainty in relation to tax transactions."

Central government embraces gambling

There has been much speculation about how Brown will entice online gambling firms to register in Britain.

Paddy Behan, VAT Director, says, "A remote gaming duty will be introduced to apply to areas of gaming not currently subject to duty.It is very likely that the scope of VAT in relation to gaming will be extended which would incidentally bring some offshore operators within the charge to VAT."

"If offshore gaming businesses register onshore they will have to pay the new duty, but it is likely some will consider this move as registration in the UK will provide them with business benefits such as increased bandwidth, liberalised advertising regulations and generally better environment in which to operate. Therefore, the Chancellor's tax take from the industry will be greater than might have otherwise been expected."

Olympic boost?

The increasing budget for hosting the 2012 Olympics has prompted speculation that it is rapidly turning into another Millennium Dome farce. The realisation that the Olympic Delivery Authority will be subject to VAT on building costs due to EU rules on State Aid added further costs to the uncertain projections.

Clare Hartnell, Head of Grant Thornton's Property and Construction team, says, "It is difficult to see how the Chancellor could give 2012 a boost and announce an intention to hand back the VAT levied without encountering problems regarding the EU rules on State Aid.

"The 2012 Olympics is a massive opportunity for the UK to showcase its capability to host the world's largest sporting event. Business is set to benefit too, particularly in the construction and tourism industries, but the VAT cloud still hangs over the event's head and it would be great to see the Chancellor offer up some kind of assistance," says Hartnell.

ECJ - decisions bring change to UK system

UK legislation is increasingly feeling the impact of Europe and decisions of the European Court of Justice (ECJ) on the freedom of establishment and free movement of capital have had a huge effect on the UK tax regime. The Government is at the mercy of the ECJ on cases brought before it and has to react to amend UK legislation accordingly where it is found to be incompatible with EU law.

Joy Svasti-Salee, Head of International Tax, says, " No detailed changes are anticipated in this year's Budget but there will inevitably be further change throughout the year as cases brought by taxpayers claiming the UK is discriminating against them are heard by the ECJ. Wider consultation on the future of the UK's international tax system was also promised in last year's Pre-Budget Report."

Tax Avoidance

It is likely that the Chancellor will announce further legislation to reduce "unacceptable tax avoidance" by increasing penalties for non-disclosure of schemes and boosting HMRC's powers of investigation. Lagerberg believes that the Treasury will continue to tighten the net on schemes that it perceives to be "unacceptable" tax avoidance.

"It is expected once again that there will be new rules to counter tax schemes and a probable broadening of the requirements of tax advisers to disclose proposed plans. While it is reasonable to attack abuses of the tax code there is a big risk this will create more complexity in the tax system and adversely affect the ability of business to undertake commercial deals with the certainty that is needed. Business needs some clarification of what is acceptable tax planning and what constitutes unacceptable planning," says Lagerberg.

Company Car Schemes

HMRC's taxation of car benefits was launched as a green initiative to promote the use of environmentally friendly vehicles in company car fleets through incentives and tax reductions on compliant cars. However, many employees have opted out of their company car scheme and have opted for arrangements to acquire their own vehicles, known as Employee Car Ownership Schemes (ECOS), undermining the desired 'green effect'.

Clive Fathers, Tax Partner, comments: "The new Company Car Scheme saw a massive reduction in company car fleets and an increase in companies and employees moving towards ECOS. HMRC did not anticipate this shift in ownership and with large numbers of cars purchased through ECOS thought not to be environmentally friendly and, therefore, contrary to the environmental change to the car benefit rules, car ownership schemes facilitated by employers are now under the spotlight. It is already a complex system which can unexpectedly pull companies into unseen tax liability and it is possible that there will either be a tightening of legislation in this area or an announcement to consult on restructuring the system."

Reliefs for the film industry

Heralded as a headline announcement at last year's Pre-Budget Report, Film Tax Relief was introduced in final form in December 2006.
Terry Back, Head of Media and Entertainment, says, "The new Film Tax Relief has been welcomed by the industry and initial signs are very encouraging, but it is still too early to say what effect it will have on the UK Film Industry going forward. As for this coming budget, we are expecting some minor clarification with regard to the new tax relief's interaction with television, and perhaps a clarification of the March 2nd statement on GAAP Partnerships."

The so called "GAAP Partnerships" was another form of financing available to UK Films. On 2 March 2007, the Government effectively ended the use of these schemes by abolishing sideways tax relief for non-working members of Limited Liability Partnerships.

Back says, "This was a classic example of using a sledge-hammer to crack a nut. One of the most innovative structural business developments in recent years has been the introduction of Limited Liability Partnerships, which gave individuals the opportunity to invest in a flexible partnership type structure while affording them the protection of limited liability. One of the potential benefits for investors, the ability to obtain tax relief on losses incurred through this type of investment against their other income, has been removed not only for the Film Industry, but across all industries. In our view this was a regrettable knee-jerk reaction by the Government."