Memorandum submitted by Mr John Whiting,
PricewaterhouseCoopers
This paper gives a brief overview and commentary
on the taxation measures contained in the Chancellor's 16 March
Budget speech and associated press releases and other papers.
It does not attempt a full analysis and cannot be exhaustive.
The Budget was arguably "steady as she
goes" with few apparent tax changes. However, like so many
Budgets, there is something of the iceberg about the 16 March
statement, with much below the surface. It is also arguable that
some key issues—for example how the UK's tax system affects
its competitive position and the impact of European Court of Justice
decisions—should have been part of the statement.
1. STAMP DUTY
The increase in the threshold for stamp duty
from £60,000 to £120,000 is welcome, even though it
helps those buying properties below the threshold rather than
all first time buyers—there is no help here for those trying
to buy in London and the South East, for instance.
The tax cut has been paid for by the removal
of the disadvantaged area relief for non-residential buildings.
Although that was a temporary provision, there was a degree of
expectation that it would be made permanent. The relief was clearly
welcome as a contribution towards urban regeneration; if there
were concerns about its targeting, then surely the answer is to
refocus it rather than abolish it?
The withdrawal of relief will apply to all transfers
taking place after 17 March 2005; it is preserved for contracts
entered into before 16 March but not yet completed. The withdrawal
is harsh where transactions are in progress but contracts have
not yet been exchanged: an expected relief on what might be a
long-term project has suddenly been lost.
2. ANTI-AVOIDANCE
MEASURES
Anti-avoidance measures are an inevitable and
correct part of any Budget. In many ways, the measures introduced
in the Budget indicate that the Tax Avoidance Disclosure (TAD)
regime is working satisfactorily.
However, the range of blocking moves that were
announced raise concerns:
— The lack of definition in many cases
creates uncertainty.
— The target seems to be planning by
UK-based multi-national companies—is there an expectation
of similar action against UK inbound activities?
— There are cases where what was acceptable
planning (or even a relief) seems to have changed to be unacceptable
avoidance.
3. PRIVATE EQUITY
FINANCING
The prime example of the last point is not a
Budget measure, as it was (curiously) announced a week earlier:
the changes to the rules on interest deductions on certain private
equity transactions. This was unexpected, particularly as deals
were structured in line with an agreement made between the industry
and the Inland Revenue in 1998. What was particularly unwelcome
was the badging of the change as an attack on (implicitly unacceptable)
avoidance.
The changes even seem to have a measure of retrospection
about them, in the plan of the Inland Revenue to disallow interest
back to 1998 where the private equity company is controlled by
a single partnership.
Whatever the rights and wrongs of changing the
rules in this area, it does seem that the changes will make the
UK less attractive for such deals than many of our European neighbours.
Even if the Revenue offer clearances on specific deals, that may
not always be practical given the time pressures in the commercial
world.
4. NORTH SEA
OIL TAXATION
Although no additional tax will be payable,
the accelerated payment of corporation tax and supplementary charge
will bring in over £1 billion and, whatever the transition,
will feel in many ways like a further tax bill to the oil companies.
This is on top of the 2002 introduction of the supplementary charge,
something that can hit smaller, newer entrants to the North Sea
hard because of the lack of deduction for finance costs. It all
begs the question as to whether it will affect the exploitation
of marginal fields in the North Sea.
5. REAL ESTATE
INVESTMENT TRUSTS
(REITS)
The announcements on REITs show welcome progress
and evidence that the Revenue has listened sensibly to representations.
It is good that there is a consultative group involved in the
process.
Concerns remain over:
— gearing—the market should be
left to decide what is acceptable, rather than have rules imposed;
— conversion charge—any charge
must not be too high, otherwise existing companies will not convert
and there will be a bias towards newcomers to the market; and
— timing of draft legislation—this
should appear long before next year's Finance Bill.
The overriding message is one of good progress,
with a need to press on as our competitors (eg Germany and France)
establish equivalent regimes to the US model that we are trying
to emulate.
6. INSURANCE
COMPANIES
The December 2004 PBR included measures on Insurance
companies which were widely attacked by the industry and on which
the Treasury Committee commented adversely.
It is pleasing to record that the Inland Revenue
have listened during the subsequent consultations and some sensible
changes have been made to the proposals. The result is a package
that is broadly acceptable—with one significant exception.
The exception is that the proposals include
a power to amend the entirety of the Insurance company tax rules
by statutory instrument. This claimed to be necessary to conclude
the current debate but:
— there is no "sunset clause"
to the provision: no expiry date to the power; and
— the range of the power is not restricted
to matters of detail.
It seems inappropriate to have such a wide power
available to the Revenue to amend the tax rules for a significant
industry with minimal Parliamentary oversight. At a minimum there
should be Ministerial assurance that this is agreed to be an exceptional
power and it is envisaged that it will be rarely used.
7. SMALL BUSINESS
The measures to reduce administrative "red
tape" for small businesses and simplify tax payments are
welcome and appear to be promising. We applaud the deregulation
provisions and departmental targets for decrease in regulation.
The results could be significant. We look forward to the delivery
of these promises.
8. EUROPE
It is disappointing that the Budget failed to
make any progress on the issue of areas where the UK tax law seems
to be in breach of EU treaty provisions. It may be that some of
the Budget's provisions breach EU law, for example the attack
on temporary non-residence. Similarly, the proposed limitation
of double tax relief on foreign income within a UK trade may not
be consistent with European Union law if it results in limitation
of double tax relief for EU withholding or underlying tax.
9. CONCLUSION:
THE IMPACT
ON UK PLC
Many of the issues mentioned above raise the
question: does the Budget make the UK a more or less attractive
place for business?
The Budget highlighted a stable economy which is
attractive to business and outlined a number of provisions (for
example reduction of red tape and deregulation) which are welcome.
However, at the same time, there are changes
which seem arbitrary; give significant powers to the tax authority;
remove reliefs whilst tagging them as avoidance; even carry a
sniff of retrospection; and generally increase uncertainty.
Taking a wider view, isn't it time that the
UK's tax system was orientated more towards attracting and retaining
business? In the longer term, there is a concern that international
companies will seek to reduce their corporate presence in the
UK with adverse consequences for the country's tax revenues.
18 March 2005
| 
