Select Committee on Treasury Written Evidence

Memorandum submitted by Mr John Whiting, PricewaterhouseCoopers

  This paper gives a brief overview and commentary on the taxation measures contained in the Chancellor's 5 December Pre-Budget Report speech, associated press releases and other papers. It does not attempt a full analysis and cannot be exhaustive.

  As with previous Pre-Budget Report (PBR) speeches, the focus was on the current economic position. Although the tax changes were limited, some were significant.


  The PBR abolished the nil rate corporation tax band for small companies whilst increasing the first year allowance from 40% to 50%. The introduction and subsequent history of the nil rate has not been a happy episode. The predicted rush of self-employed people to incorporate led to the "non corporate distribution rate" to tax those who drew dividends. Now we are to go back to the beginning with small business probably feeling they would rather have been left alone from the start. It is noticeable that this move on "tax motivated incorporation" is scheduled to raise close to £1 billion over three years; in the same period the VAT and capital allowance changes for small businesses apparently return £100 million.


  There are some mixed moves on the administrative burden of taxation. These include:

    (i)  Form 42—the reduction in requirements to report this form relating to employment-related securities is welcome. However, it is questionable whether we should ever have got to the position where, for the last tax years for which we have figures, the 6,000 Form 42s submitted reporting the sort of things HMRC wanted to hear about had to be accompanied by 405,000 Form 42s relating to new incorporations, few of which contained relevant information for HMRC.

    (ii)  The abolition of the nil-rate of corporation tax will save some administration through the abolition of the non-corporate distribution rate whilst of course putting some more companies back into the tax payment net.

    (iii)  Notices—our tax system is primarily self assessment orientated these days. However, a number of provisions are creeping in which give HMRC power to issue a "notice" to the taxpayer, imposing a charge or denying a claim. Whilst these seem to be in avoidance situations (eg arbitrage rules in F(2)A 2005 and now capital loss provisions in the PBR), the use of notices creates uncertainty for the taxpayer and gives potentially arbitrary powers to the tax authorities. The procedures need to be introduced and used with care.

    (iv)  Loan relationships—the generally helpful rules on transitional issues involving loan relationships contain the option for companies to make an election for modified treatment (in relation to interest rate hedging). Whilst the option is welcome, it is surely unreasonable to expect a company to make this election (which is irrevocable) by 31 December 2005 when the final regulations are yet to be laid. Surely a longer period could be allowed?


  The range of specific anti-avoidance measures seems to indicate that the Tax Avoidance Disclosure (TAD) system is working. As previously noted, PricewaterhouseCoopers has no concerns in principle with the system: the firm and its clients have only ever operated on the basis of full disclosure. The announcement of changes to the TAD rules was also expected: the fact that these will be taken forward in discussion with those involved is welcome. It is to be hoped that the aim will continue to be to get practical rules that give the authorities the information they need whilst not imposing too great a burden on taxpayers and their advisers.


  The additional tax charge on oil companies will hardly be welcomed by the industry. Putting a further £2 billion annual charge on North Sea oil, in the wake of the additional money raised in the March Budget, runs the risk of squeezing a little too much. It is noticeable that the compensation via expenditure supplement is estimated to be of very modest impact.


  The anticipated reforms to the taxation of finance leases is to proceed, largely as anticipated, although we do not yet have the complete package. The changes—which will essentially move the entitlement for capital allowances from the lessor to lessee in most cases—are going to have a significant impact on many businesses. The "grandfathering" of existing leases is important to maintain fairness.

  It seems inevitable that the change here will serve to increase the cost of borrowing to some companies as the value of the capital allowances will not be recycled to them through lower leasing charges. The net result is likely to be that these changes are revenue raising but we have seen no indication of the revenue impact so far.


  The confirmation that Real Estate Investment Trusts (REITs) are to be introduced is welcome as will be the opportunity to comment on the draft legislation. It would be useful to have an indication of the intended starting date for REITs.

  The planning gain supplement clearly needs to be discussed at length. Whilst the aims of the proposed levy are understandable, it has to be said that the history of taxation on development profits (for example Development Land Tax) has not been overly successful.


  The announcement of additional taxes to be imposed on SIPPs when they buy residential property and "pride in possession" assets such as antiques is in many ways understandable. Similarly, the proposal to act against possible "recycling" of the tax free lump sum. However, it is necessary to sound the cautionary note that the overall intention of the A-Day reforms is to simplify matters surrounding pensions and these announcements do run the risk that complications are creeping back. We trust the new rules will be imposed with as light a touch as possible.


  The raising of the increased income threshold from £2,500 to £25,000 is a very welcome move which will make a considerable difference to the administration of tax credits, both for individuals and for HMRC. It does seem a little odd to see that changes to tax credits are an apparent tax raising measure of £200 million in 2007-08.


  A number of announcements concerned environmentally-related tax measures. They are not insignificant but they are disparate and do not seem to drive the environmental agenda forward significantly.


  As can be seen, there is quite a range of taxation measures in the PBR. Ideally there would have been a coherent theme in the measures, as with Budgets generally, aimed at improving the competitive position of the UK in the international economy. That does not seem discernable but perhaps it could be a focus for the future?

  We hope the above comments are of assistance to the Committee in its consideration of the Chancellor's 2005 Pre-Budget Report.

December 2005

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