UK: Budget Predictions
Last Updated: 20 March 2007

Smith & Williamson, the accountancy, investment and financial services group outlines what might feature in the Budget on 21 March 2007

"The Budget is almost certain to introduce further layers of tax complexity. Whilst targeted anti-avoidance measures are likely – which could be applied retrospectively – other areas are left vague and open to interpretation. This lack of clarity makes it hard for businesses to plan for the future as they are pushing against a rising tide of uncertainty.

"Many businesses feel as if they are being forced to skate on thin ice – and they could find themselves unexpectedly in icy water. Inevitably, some businesses are considering moving to other, more predictable and cheaper tax jurisdictions."

Richard Mannion, national tax director at Smith & Williamson

Below is a round-up of measures which could feature in the forthcoming Budget:

More targeted anti-avoidance

UK plc is spending more than it is receiving. Meanwhile, the Chancellor has stated that he will outlaw tax ‘avoidance’ by 2008. In order to meet his own deadline, we should therefore expect some further doses of targeted anti-avoidance tax law.

"Areas for such attention could include schemes notified to HMRC under the DOTAS (disclosure of the avoidance schemes) process," said Richard Mannion.

For further information – Richard Mannion. Tel 020 7131 4252

Tax amnesty

It is thought that hundreds of thousands of UK residents have funds in offshore bank accounts on which they are not paying tax. This amounts to millions of pounds of lost revenue for HMRC.

"So far, the authorities have been working with just one bank to trace people with offshore accounts. However, this initiative has now been extended to four other banks – turning it into a massive operation which will demand substantial resources, at a time when HMRC is having to make redundancies," said Richard Mannion.

"As a result, HMRC looks to be taking a pragmatic approach. It may therefore offer an amnesty to all those people with offshore bank accounts to encourage them to come forward. A tax amnesty would be a first for the UK’s tax authorities."

"But let’s consider the human rights implications. It could be argued that an opportunity for a tax amnesty should not be confined to one type of misdemeanour and the authorities may therefore be obliged to extend this approach," said Mannion.

Penalties

Following the merger of the Inland Revenue and HM Customs & Excise, there has been a large-scale review of the various penalties charged for incorrect tax returns, both for businesses and individuals.

"I anticipate that we will see a tariff put in place that grades ‘offences’ and imposes penalties to ‘fit the crime’. So a low level of error may attract a 10% penalty whereas a deliberate misstatement could be charged at a substantially higher rate," explained Mannion.

Closing the loophole for managed service companies ("MSC's")

Many workers in sectors such as such as IT, construction, teaching and nursing have used such companies for administrative ease. They have typically paid PAYE on the national minimum wage and drawn the rest of their remuneration in dividends, therefore avoiding national insurance.

Following the December pre-Budget Report, proposals were announced so that from 6 April 2007, MSC's will be liable to deduct PAYE and national insurance contributions from all payments made to the worker by treating such payments as employment income.

"These proposals may adversely affect existing service companies established for sound commercial reasons and which have no particular focus on tax savings. As the new rules may penalise those for whom they were not intended, we urge the government to delay the new provisions for a further year, to allow innocent businesses and individual workers time to rearrange their affairs," says Mannion.

Green Ideas: car parking and congestion charges

Mr Brown might consider removing the tax free status of employer-provided car parking close to work. If such parking did become subject to tax it is likely to be Civil Servants and Local Authority employees, in addition to those working in out-of-town business parks, who are hit the most. Perhaps the tax advantage could remain for out-of-town sites as there is often no other means of getting there.

He might also consider removing the tax-free perk of the congestion charge paid for by an employer for an employee commuting in to London in a company-owned car. The congestion charge is attached to the car, not the driver, and therefore does not give rise to a taxable benefit. Even if the perk is removed, employees would still be able to claim the cost of the congestion charge tax -free if the journey was a business journey rather than normal commuting.

Residence and domicile

"For political reasons, and more so in a year when we see an incumbent Chancellor eyeing up an imminent promotion to PM, wholesale changes to rules on residence and domicile have for a long time been shied from and left to the next Chancellor(s) to lose popularity over.

"However, following recent cases that have been contested in the courts the rules on residence and domicile could still be changed or 'clarified'. For example it may not be difficult for a rule to be introduced for income tax similar to that which already exists for capital gains tax, whereby periods of non-residence lasting less than five tax years are not sufficient to sidestep income tax charges. Similarly, the ‘deemed domicile’ rule for long term residents for inheritance tax could be extended to cover income tax and capital gains tax as well," said Penman.

For further information – Andrew Penman Tel 020 7131 4379

Increase NI on bonuses and high earners

"Some City bonuses have been very substantial and attracted criticism as a result. The Chancellor may therefore be tempted to increase his tax-take without hitting taxpayers in general. He could do this by introducing a new NI charge on employees to apply to bonuses over a certain level eg for bonuses above £1 million, the rate could be increased from 1% to 10%. On a bonus of £2 million this would increase the employee's NI on the excess over £1million from £10,000 to £100,000. Alternatively the employer' s rate of NI on such bonuses could be increased above the current 12.8%," said Inez Anderson, tax director at Smith & Williamson

Smith & Williamson's budget guide will be available to download from noon on Thursday 22 March

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