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.
1. SMALL BUSINESS
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.
2. TAX ADMINISTRATION
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?
3. ANTI AVOIDANCE
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.
4. OIL TAXATION
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.
5. LEASING
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.
6. PROPERTY TAXATION
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.
7. PENSION FUNDS
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.
8. TAX CREDITS
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.
9. ENVIRONMENTAL
MEASURES
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.
CONCLUSION
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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