UK: What Will The Pre-Budget Report Bring?

Last Updated: 23 November 2006

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions