Smith & Williamson, the accountancy and financial services group, outlines what may be covered in the pre-Budget report
"The pre-Budget report is unlikely to bring the much wished-for certainty which small and larger businesses would like in their tax affairs. Instead, we expect the PBR to herald yet greater complexity and an increasingly harsh tax regime. This is unwelcome news for individuals and businesses alike."
Richard Mannion, national tax director at Smith & Williamson
The following is a round-up of views from Smith & Williamson’s tax team:
Buddying up with big business?
HMRC is currently reviewing its links with large businesses as regards the competitiveness, fairness and transparency of the UK tax system.
"Some conclusions should feature in the PBR, and we would like these to outline steps towards more effective dispute resolution, better consultation with HMRC and clearance procedures," said Richard Mannion, Smith & Williamson’s national tax director.
"Whilst the intentions of the review are laudable, we must wait to see how its findings are put into action. All businesses need certainty and clarity in legislation – and there is much to be done here. Unfortunately, the amount of tax legislation has grown exponentially since 1997."
Tim Lyford, head of corporate tax at Smith & Williamson added:
"We could even see a reduction in the headline corporate tax rate (currently 30%), which is no longer low by European standards. A little fiscal competition between EU countries is very healthy – for example, Eire has a corporation tax rate of 12.5% which has created a boom in financial service providers in that country."
Hedge fund industry
This wealth-generating industry has recently come under the Chancellor’s scrutiny and so it might well feature in the PBR. Essentially, HMRC’s stance appears to be that tax revenues arising from this industry are less than might be anticipated, given the volume of activity.
"So whilst the Chancellor has been courting the City, HMRC seems to be taking the opposite view and is tightening the tax rules - simply by making them more vague in some cases," said Tim Lyford.
HMRC has been looking at two key areas. First, the way fee agreements are arranged between the growing number of UK-based hedge fund managers who advise offshore based funds and their clients. A recent settlement has resulted in extra tax being paid by a UK-based fund manager because the income split between the UK and the offshore manager did not reflect economic reality.
Second, HMRC has been looking at investment manager exemptions which potentially protect UK investment advisers from being taxed on trading profits which are independent of an offshore fund. HMRC has produced a draft revised statement which introduces a lot of uncertainty, so it is difficult to be sure that a UK manager qualifies.
"Perhaps the difficulty, however, is that the hedgefund industry is led by a highly mobile band of skilled entrepreneurs who could take their skills and earnings elsewhere if the tax regime became too harsh," commented Tim Lyford.
Increased penalties for late filing
It could well be time to increase the late filing penalties for individuals and businesses, not least since the £100 late payment penalty for individuals has been unchanged for nearly ten years and each year hundreds of thousands of people miss the January 31 deadline.
"The late-filing penalty could be in the order of £250," commented Richard Mannion.
Indeed in April 2005, HMRC issued 1,017,566 late filing penalties (for individuals, partnerships, partners and trusts). At £100 per penalty, this would have generated £101,756,600 for HMRC. However, if the penalty was raised to £250, this would generate £254,391,500 (ie an increase of £152,634,900).
"HMRC is also expected to provide Inspectors with new guidelines on penalties regarding incorrect returns. At the moment these penalties are inconsistent and do not always reflect the relative seriousness of the ‘crime’. A more consistent approach would be welcome".
Legislation on car ownership could take on a ‘green’ tinge
Existing legislation on capital allowances means a car costing more than £12,000 is ‘an expensive car’ and so must be dealt with separately from all other plant and machinery employed in a business. HMRC has been consulting on revised legislation, and updated rules are expected to be announced in the PBR – probably with a green tinge and hopefully without too many complications for business.
"HMRC has also been looking at employee car ownership plans which are operated by many businesses. We still await the outcome of their consultation, but the authorities will probably try to stem the tax and NI loss arising on cars held via these plans.. Such a move could be billed as eco-friendly, but would doubtless hit the individual’s pocket," said Inez Anderson, tax director at Smith & Williamson.
Indeed, references to environmental taxes are likely to appear across swathes of the pre-Budget report. Hot favourites for ‘green’ treatment include, cars, buildings and cheap flights.
Merging HMRC powers
"Now that the Inland Revenue has merged with Customs & Excise to form H M Revenue & Customs, will all tax inspectors assume the extensive powers for criminal matters enjoyed by swashbuckling Customs officers of yesteryear? Word on the street is that HMRC would like the entire organisation to adopt the powers held by the former Customs and Excise. It is likely that all will be revealed in the PBR."
Increase NI on high earners
"City bonuses have reportedly been reaching new highs recently and the Chancellor may be wondering what he can do to increase his tax-take without hitting taxpayers in general. However, this could prove difficult at a time when he is courting the City. One solution might be to put an additional employee NI charge on earnings above, say, £500,000."
Closing down ‘flowering’ shares
On 21 August, HMRC was obliged to backtrack on the taxation of ‘flowering shares’ and ‘ratchet’ arrangements, (it had been announced previously that the rise in value of these shares attributed to the ratchet or flowering mechanism would attract income tax).
"As a result, HMRC is currently examining the taxation of management equity generally, leaving us to speculate when legislation settling the matter will be announced in a future budget," said Inez Anderson
Typically, ‘flowering’ or ‘ratchet’ arrangements are designed by companies to incentivise executives so that rights on the companies’ shares ‘flower’ or ‘blossom’ on certain events.
Greater regulation of the tax profession
Parts of the EU are considering how to regulate the tax profession and it is virtually inevitable that this idea will seep across the Channel. It would be reasonably easy for HMRC to grant authorisation to agents to file their clients’ tax returns by internet (FBI) and then subsequently have the power to revoke that permission if the agent failed to comply with the required standard. A higher level regulation system could see HMRC only dealing with advisers who are a qualified members of recognised professional bodies.
"This could be bad news for those agents who are qualified by experience and offering taxpayers a perfectly good service," said Richard
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.