GAAR goes, but VAT clampdown will bite
GAAR goes, but VAT clampdown will bite
Accountants expressed relief that the threat of the general anti-avoidance rule had receded, but warned that other anti-avoidance measures introduced by the chancellor could impose significant costs on business.
Banks and other financial services companies will be particularly badly hit by a move to deprive them of VAT relief on outsourcing, at a cost of #75m a year.
Tony Lynne, KPMG tax partner, said: ‘Outsourcing costs will increase and existing arrangements may need to be restructured.’
Fears were also expressed about increased Customs & Excise powers to remove companies from VAT groups if it thinks revenue is under threat.
Experts warned the rules relating to this were vague, and could represent a dangerous extension of Customs’ powers.
All expressed relief at Brown’s statement that he would not be proceeding with the GAAR or a mini-GAAR for VAT on construction services.
Brown warned, however, that the GAAR remained an option if more targeted legislation proved ineffective in dealing with avoidance.
Bill Dodwell, tax partner at Arthur Andersen, said: ‘We are pleased about the GAAR because it would have been a real problem for companies. We prefer the focused anti-avoidance that has been done in this Budget.’
Brown unveiled a clampdown on organisations which have been avoiding capital gains tax by using a scheme involving sales of businesses to offshore companies.
A loophole, involving the sale and leaseback of North Sea assets, used by oil companies to avoid revenue tax and corporation tax liabilities was closed, as was one involving ‘reverse premiums’ in leasing arrangements.
A ‘reverse premium’ loophole in leasing transactions was also closed.
The chancellor hopes the measures will yield more than #1bn over three years and protect #3bn of future revenues.
CORPORATION TAX – New CTSA penalties The Inland Revenue has announced major changes to corporation tax self-assessment which both accountants and business leaders warn will hit medium-sized companies hard.
The measures include harsh new penalties that allow the Revenue to charge companies that miscalculate future profits and corporation tax instalments and then fail to produce records to support their positions when asked to do so.
Accountants warned the changes would be punitive, as missing the deadline could prompt a fixed charge which may then be followed by a daily penalty.
That penalty would continue to be charged until the information is produced.
PricewaterhouseCoopers London practice city and tax manager Alf Orban said: ‘It is not unusual for management to forecast results, but companies have never had to stand by their predictions to such an extent that they may pay dearly for these figures.’
He particularly pointed at the property and insurance markets which can suffer from short-term fluctuations which cannot be predicted and could lead such companies to disclose misleading profit figures which could then prompt a fine.
AXA Sun Life group chief executive Mark Wood said global companies like AXA could be vulnerable to overseas disasters which cannot not be accounted for in advance. He added: ‘It is more likely to be medium-sized companies which could be worst hit by being fined as the Revenue shifts the burden for corporation tax assessment to the company.’
Opposition MPs said Brown’s changes to the corporation tax regime would cost firms – especially small and medium-sized enterprises – more in accountancy costs than they would save in reduced payments.
Liberal Democrat Treasury spokesman Malcolm Bruce said: ‘This Budget contains a raft of complicated tax wheezes. Now the people have to calculate their own tax bills, it is madness to be making a greater mess of the tax system.
Colin Tourick, MD, Newcourt Automotive ‘We are delighted when a government does things to benefit the environment. It is, however, interesting that a Budget which is meant to be good for the family and incentivise people that go out to work, will also clobber hundreds of thousands of company car drivers.’
Gren Folwell, Deputy Chief Executive, Halifax ‘It’s a good Budget on the surface, but more neutral underneath. It gives the Monetary Policy Committee room to further reduce interest rates. We would have liked a replacement for Miras, but a possible interest-rate cut plus targeted measures to help lower income families and first-time buyers will protect the housing market.
Helen Kilpatrick, Treasurer, West Sussex Council ‘There are a number of tax increases which will affect local authorities. The increase in landfill tax is worrying. What is particularly difficult for us is the set three-year spending, but taxes are going up within the same period. The basic amount of money we have will be eroded by taxes we have to pay.’
Neil Goulder, Mayfair Entertainment Group ‘There are attractive opportunities for individuals, for example in education and share ownership. But these will only be realised by those working for large, generous employers. The Budget is good news for personnel directors in large companies – many share schemes will have to be reviewed.’
John Smith, FD, Bradford & Bingley ‘I expected more meaty issues. We were pleased to see Miras withdrawn because the benefits were so low, but we were disappointed to see stamp duty go up. After all, #250,000 is not as great a sum as it used to be. I am not sure the 10p personal allowance is as great a giveaway as it seems to be.’
TAX LOOPHOLE – Year-ends determine catch-up A loophole in the tax rules for accountants and other professional partnerships that were announced by chancellor Gordon Brown in last year’s Budget will enable firms to defer paying millions of pounds in extra taxes, experts warned this week.
Last March, Brown announced plans to abolish the ‘cash basis’ for calculating taxable profits of professional partnerships and change them to a ‘true and fair’ view. He said the significant extra tax charge resulting from this change of system could be paid as a ‘catching-up’ charge over ten years.
The rules apply to all accounting periods beginning after 6 April 1999 and require the catching-up charge to be spread over ten years starting with the 1999/2000 year of assessment.
But, due to the way the rules have been drafted, businesses with 12-month accounting periods ending 5 April 2000 will not have to start paying the catch-up charge until the 2000/2001 year of assessment.
BDO Stoy Hayward tax partner Mark Lee said firms with 31 March year-ends would therefore rush to extend their period-ends to 5 April to take advantage of the significant cashflow advantage arising from a one-year delay in starting to pay the catch-up charge.
TECHNOLOGY AND ENTERPRISE – The future view is blurred at the edges
Technology and enterprise were two of the chancellor’s key themes, with support promised for research and development, small business investment and computers in schools, but many beneficiaries were underwhelmed by what was on offer.
Trade secretary Stephen Byers was due to reveal details on Wednesday of measures that will take effect next year.
A 12% tax credit on R&D for tax-paying small and medium-sized enterprises, and a 24% cash credit for non-taxpaying start-ups amounted to a #150m subsidy that would ‘underwrite one third of the country’s research’, the chancellor said.
Ian Cameron, finance director at AIM-listed medical equipment producer AOR, said: ‘It sounds like just what we were looking for. However, we’ve already started #400,000 worth of research projects. Will the tax credits be retrospective?’
Brown also trailed a number of investment tax breaks including income tax relief on venture capital trusts, up to an annual limit of #100,000. Similar tax breaks featured in a new Enterprise Management Investment Scheme.
British Venture Capital Association chairman Clive Sherling was mildly supportive. ‘We asked for #250,000,’ he said. ‘But the focus should not be small businesses so much as fast-growing ones.’ Of the proposed #20m regional venture capital funds, he said: ‘There’s no way the government knows how to run venture capital funds.’
Baker Tilly partner Teresa Graham called for the government’s proposed small business service to provide ‘more than a payroll clerk to help businesses cope with red tape’. But she warned it created yet another organisational tier.
PREDICTIONS – Ernst & Young wins with 100% prediction success Ernst & Young has won the Accountancy Age Budget challenge, beating the rest of the Big Five and experts from five other business groups and professional institutes with ease.
The firm emerged as the top adviser after scoring an impressive six out of six in anticipating Gordon Brown’s Budget reforms. KPMG and PricewaterhouseCoopers were the next best performers, with four. The other two Big Five firms both scored three.
The English ICA, ACCA and CIMA also scored three, while the Chartered Institute of Taxation and the Confederation of British Industry fared worst, with two each.
The organisations were asked whether the chancellor would introduce inheritance tax reforms (yes), introduce a 10% tax band (yes), increase company car taxes (no), provide research credits for SMEs (yes), cut Miras (yes) and abolish the married couples allowance (yes).
An E&Y spokesman said: ‘It just goes to show that Ernst & Young has bigger crystal balls than the other Big Five firms.’
HOW DID THEY SCORE? Ernst & Young 6 PricewaterhouseCoopers 4 KPMG 4 Arthur Andersen 3 ACCA 3 CIMA 3 Deloitte & Touche 3 English ICA 3 CIoT 2 CBI 2
NATIONAL INSURANCE – Employers must pay NICs on benefits in kind to all staff
Employers are to be required to pay National Insurance contributions on benefits in kind to staff which are taxed but not currently subject to NICs.
A Treasury statement, issued after the Budget, said there was no intention to levy employee NICs on the items, which will include the provision of private medical insurance and cheap loans. But employers will face new duties to report all benefits, as well as the new taxation.
At present, employers’ NICs are restricted to cars and tradeable assets, but the Treasury said that excluding items currently taxed had pushed up NIC rates elsewhere in the system. It denied the change would impose additional administrative burdens because it said benefits already had to be reported for tax purposes.
The change, which was not mentioned in the Budget speech, left a sour taste after Brown’s trumpeting of the alignment of the NIC and income tax thresholds from April next year.
He said NI reforms would take 900,000 people out of NICs and reduce employers’ NICs by #600m. The upper limit for NICs will rise to #535 in April 2000 and again to #575 in April 2001.
Employers’ rates of NICs will be reduced by half a percentage point from 12.2% to 11.7% in April 2001.
The government has failed to answer charities’ calls for radical reform of the tax system as part of this year’s Budget. Published as a consultation document, the long-awaited charity tax review outlined proposals for simplifying taxes, including exempting small charity business subsidiaries from direct taxation.
A new anti-avoidance measure has closed a loophole in controlled foreign companies rules, whereby UK companies will no longer be able to pay lower taxes by transferring ownership of a UK subsidiary to a controlled foreign company and then route dividends back to the UK parent. Existing rules mean that such dividends would have counted towards the right amount of tax being paid and protected the CFC’s profits.
Company car costs
Company cars will become more expensive as the discounts for business mileage reduce. The existing flat-rate income tax charge of one-third of the car’s price will be abolished from April 2002. For drivers who travel between 2,500 and 17,999 business miles per year the charge will be reduced to 25% of the car price. For business use over 18,000 miles the discount reduces to 15%. And for cars over four years old, the tax charge is only reduced by a quarter rather than the current one-third. The measure will increase tax revenue by #270m.
The Inland Revenue is seeking comments by 30 April on its proposals for ‘A New All-Employee Share Scheme’ announced in the Budget. The scheme will allow employees to use their pre-tax salary to buy shares in their company. Matching ‘buy one, get one free’ schemes will also qualify.
North Sea oil boost
The government has introduced three technical tax changes to boost the North Sea oil industry. The petroleum revenue tax (PRT) exemption, obtained by Britain in the 1970s, will apply to new companies that acquire North Sea oil interests while companies will also be able to deter their PRT tax returns. The government has also set up a joint industry taskforce to help the UK oil industry maintain competitiveness in the face of low oil prices worldwide.
Bare trusts closed The Treasury has closed the loophole where parents could set up bare trusts for children, taking advantage of the child’s tax allowance to avoid tax on the income generated by the investment. In future, all income entering such trusts will be treated as belonging to the parents for tax purposes.
Green incentives The Budget delivered a package of measures designed to help the government tackle pollution. Cars with engines of up to 1,100cc will pay a reduced vehicle excise duty of #100. The chancellor announced a further rise on landfill tax of #1 per tonne from April next year. In addition, businesses will be levied on their energy use.
Stamp duty upped New rates of stamp duty, due to apply to transfers made after 16 March unless contracts were signed before 9 March, will suffer a 0.5% rate increase for properties in excess of #250,000. For properties in excess of #500,000, the rate will be 3.5%.
Players’ tax break To help football clubs make the transition to the new FRS 10: ‘Goodwill and intangible assets’, the Inland Revenue will allow the tax treatment applied to players signed before 22 December 1998 to remain.
Payroll assistance Small businesses could get practical help with payroll services offered through a new Small Business Service announced on Tuesday. The SBS will bring together information from the Inland Revenue and Customs & Excise to help start-up businesses comply with all relevant regulations.
Mobile phone tax The annual tax on workplace mobile phones has been scrapped to reduce compliance burdens on business. Previously, employees faced a #200 annual tax charge on mobile phones provided by employers and were required to reimburse the cost of any private calls. The government has estimated that the reform will affect 350,000 employees and employers.