Select Committee on Treasury Memoranda

Memorandum submitted by 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 £1bn 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

·  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 (e.g. 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;

-  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

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