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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