THE FINANCE DIRECTOR’S VIEW
Neil Chisman, FD of hotel and casino operator Stakis, calls for simplified taxation rules
My overall reaction to the chancellor’s statement is a neutral one. On the one hand, I liked his optimism and focus on productivity and enterprise, but I am also a little sceptical about what you can do about it.
For me, the biggest issue facing the UK is the quality of management. So initiatives such as encouraging share ownership among company employees are only moderately useful. If you look at the difference between UK and US companies, it is the US management which has the skills.
We need more incentives for MBA courses.
It is almost impossible to say how the economy will turn out. But as Gordon Brown put his reputation on the line with his growth forecasts, it is worth taking on board.
The possibility of a further cut in corporation tax for small businesses will only have a marginal effect, and I do not think tax cuts are always a good thing. It could mean less public services and I do not believe a tax rate of 35% or 30% will make a great deal of difference to companies.
Tax credits are also a blunt instrument to encourage companies to invest in more research and development. There is a fine line between research and consultancy, although R&D is useful for moving a company forward.
An alternative approach would be to extend tax relief to consulting. The advantage of consulting, or business re-engineering, is that it provide quicker commercial hits. But the consulting costs can be huge and it has become a bit passe nowadays.
The emphasis on share ownership among company employees is a good thing, however. It is something in which our employees take an interest. Six months ago, I was verging on the evangelistic about it – but when shares drop dramatically, it can be traumatic for those involved.
The merger of the tax and contributions agency might bring some sort of cost saving, but the real cost saving would come if national insurance were abolished.
There is only really one tax here and that is income tax – national insurance and income tax are effectively one tax on employees and the money they earn.
Banks are an easy target for blame in a review of venture capital investment for startups. But you can argue that they are the best qualified to judge benefits and risks of a new investment. The stock market takes the risky part of the investment, leaving the banks to take less risk but get less return. You can not blame them for being unwilling to invest in risky venture capital projects, although I certainly would not advocate government subsidy of new start-ups.
My big hobby horse is that the tax system needs simplifying. If Brown wants to be a reforming chancellor then he needs to take dramatic steps to eliminate complexity.
The really radical reform would be to simplify corporation tax and levy it as a percentage of auditor’s profits, for example, at 35%. It would cut out the Inland Revenue and tax specialists.
Unfortunately, politicians have to have a lot of taxes and take small amounts from each. People do not like big taxes.
WHAT’S IN IT FOR THE MAN IN THE STREET?
John Whiting, tax partner at PricewaterhouseCoopers, looks at the impact on personal taxation
Perhaps predictably, there was little of immediate impact in the chancellor’s pre-budget report for the individual. The main message we were probably supposed to hear was that the economy was doing quite well really, and we should not talk ourselves into a recession.
Dig a little, and there were points of interest. Setting the personal allowance for 1999/2000 at #4,335 takes away a rabbit that is usually flourished from the March Budget hat. It helps the employer get systems organised – the driver for this early announcement was that this figure (translated to #83 per week) will be the threshold below which no employer’s NICs will be paid; after that, 12.2%. Employees will pay NICs on weekly earnings above #64. The chancellor wants to get all these thresholds in line – but, like introducing the 10% income tax rate, when he is able to do so.
The detail of the working families tax credit and disabled persons’ tax credit will be welcomed by many on low pay, particularly as the chancellor has upped the amount of guaranteed income from the October 1999 start date.
Amid all the euphoria over WFTCs, I just hope the poor employer is not forgotten. Large or small, they are going to have to run much of the WFTC/DPTC system. That is a considerable administrative burden, and is a fine example of the government helping with one hand – biting the Inland Revenue/Contributions Agency merger bullet – and imposing with the other.
Usefully, the chancellor told us the government is in favour of venture capital and wider employee share ownership. It does remain to be seen how in favour Mr Brown is and, in particular, how he is going to encourage twice as many companies than there are at present to offer share schemes.
My experience is that schemes such as SAYE share options continue to gain ground, but that there remains an in-built, almost cultural, disinterest in being paid in shares or options amongst workforces.
Arguably, we need a PRP replacement to appeal to everyman. One direction I would like to see pursued is to build on the interest there is in helping the R&D-orientated business, particularly those in early stages.
Could we make it easier to pay employees in shares? Ideally, with no tax charge at all that would help the cash flow of the newish business, give employees that stake in the company that Mr B wants, and arguably raise more money for the taxman in the long term (in that any tax forgone on the shares when given would come back significantly enhanced when the company grows).
Perhaps everyman would not participate in that sort of scheme – not all of us can be involved in the next Apple – but it would be the type of imaginative scheme that might just make a difference.
Overall, we will have to await the detail in the ‘real thing’ in March.
Then, some of the dogs that did not bark – taxing child benefit, IHT reform, higher car taxes for instance – may wake up and bite. Meantime, keeping our eyes open, we see changes come in strange ways: Mr Straw’s paper on the family seems to presage what we had suspected for ages – that the married couples allowance is to be phased out.
THE BUSINESS TAX EXPERT
Bill Dodwell of Arthur Andersen examines the impact on corporate taxation
Much to everyone’s relief, the chancellor had no major corporation tax announcements in his 1998 Pre-Budget report.
After all the excitement last year, when Gordon Brown abolished ACT and introduced a new payment-on-account regime, companies will be relieved there were no major announcements to interfere with their planning for the introduction of self-assessment. We should not forget, however, that there is currently consultation on a possible general anti-avoidance rule and possible changes to double tax relief. We also await the result of the capital gains consultation.
This year, the chancellor raised a prospect of changes to the tax system for R&D and intellectual property. In the 1998 Budget, the government published a joint DTI and Treasury consultation paper, ‘Innovating for the Future’, exploring how best to remove barriers to R&D investment.
Many replies pointed out that R&D companies frequently have tax losses, so ways of getting benefit for them are needed. Two possibilities are helping companies to sell tax losses to third-party investors which do not meet the normal consortium relief rules, or providing a repayable tax credit to R&D companies.
The government’s initial response is that it is prepared to consider a repayable tax credit for small and medium-sized enterprises. SMEs are businesses which do not exceed two of three key thresholds: turnover must be less than #11.2m, net assets less than #5.6m and they must have less than 250 employees.
Many biotech companies have assets of more than #5.6m, as they have raised cash for their initial research programme. Generally, however, this type of company has less than 250 employees and many companies will not yet have started generating revenue from their R&D. As a result, a repayable tax credit system should be welcomed by many R&D companies.
The government plans to issue a consultative document in the 1999 Budget which could mean simpler IP taxation. This would allow IP buyers to receive tax relief, based on the accounting treatment. At present, unlike many other countries, UK relief is generally not available and any move towards opening up relief will be welcome. The only warning note is that the chancellor expects any measures to be revenue neutral, so perhaps companies should not get too excited at this stage.
The government will also look at relaxing some withholding tax obligations on royalty payments, so as to allow as many as possible to be made gross.
Reform to the UK’s antiquated legislation in this area would also be welcome.
THE IMPACT ON SMALL BUSINESS
A personal view by John Battersby, KPMG Personal Financial Services Partner
This year’s Green Budget contained more of interest for the tax practitioner than last year’s. Given that the chancellor’s overall economic message was essentially that he had set a course and saw no reason to deviate from it, there was little reason for him to trail major tax increases or reductions.
As a tax specialist, perhaps I have formed unrealistic expectations of what this event should be. The government should take the opportunity to set out tax policy ideas which are in development and seek informed contributions on them. Against those expectations, the effect of this Green Budget is like going to the theatre to see a long-awaited play and discovering the two lead players have been replaced by their understudies.
While the performance remains enjoyable, it is not as good as might have been hoped.
The chancellor certainly gave small businesses a star billing by concentrating most of the references to specific tax changes on them. A review is under way of the effective rates of corporation tax borne by such companies to be completed before the 1999 Budget.
Perhaps the government will allow growing businesses to retain more of their profits by introducing an allowance on which no tax is paid similar to the nil rate for inheritance tax. More profitable companies would welcome reductions in the marginal rate of tax as profits move from the lower rate to the full rate.
I welcome the introduction of a tax credit for R&D expenditure. This will allow companies spending heavily on such matters – and thus not making taxable profits – to obtain the cash flow benefit of a tax repayment before they can normally offset the losses against corporation tax. It would be helpful to have some indication of how large an incentive was envisaged, and what would count as qualifying R&D investment for these purposes.
The chancellor referred to the need to encourage investment in small and growing companies and said he would think about bringing forward proposals to do this, based on the enterprise investment scheme and capital gains tax changes in the last Budget. First, this is good news since any measures to encourage further investment into this important sector should be helpful. Against that, the complex CGT changes in the last Budget and the restrictions to enterprise investment scheme relief do not necessarily suggest that building further on them will bring the government’s desired results. Past experience shows how difficult it is to target such reliefs effectively.
The whole process would work far better if the chancellor specified his objectives, explained the tax reliefs he proposed to achieve those objectives, and invited comments on their likely success.
A related issue noted by the chancellor is the need to provide high-quality managers with equity-based remuneration to encourage them to contribute fully to the growth and development of businesses. The aim seems laudable, but at present there is no indication as to how the chancellor is thinking of doing it. There are many practical issues involved here with shares which may not be marketable. Perhaps the key point is to prevent the payment of tax before the shares are able to be realised.
Finally, the chancellor drew attention to the advantages for businesses of obtaining a ‘one-stop shop’ service for tax and national insurance from next 6 April. Since the merging of the Inland Revenue and the Contributions Agency had already been announced to take place on that date, this is not a surprising development.
What would make it more valuable would be the integration of VAT into the package to give something more truly like a single source of advice on all tax matters.
To summarise, the chancellor’s second Green Budget has certainly provided more encouragement than his first.
I urge Mr Brown and his colleagues to treat tax practitioners and small businesses as fellow stakeholders in a successful economy. If they will share their ideas with us at an earlier stage we can make a meaningful contribution to the development of policy which has the very important aim of improving the performance of the smaller grading business sector with all that means for jobs and prosperity.
ENERGY TAX: THE MARSHALL REPORT
Diane Cook and Derek Smith of Ernst & Young look at the implications for companies
The eagerly-awaited Marshall report (‘Economic Instruments and the Business Use of Energy’), marks a consolidation in UK policy thinking on the issues of how to tackle the complex problem of securing reductions in greenhouse gas emissions. The report confirms the potential use of well-trailed and long-debated instruments, and sets some markers for a longer and more detailed period of consultation.
It has concluded that economic instruments, notably an emissions trading system and a carbon tax, do have an important role to play in improving the business use of energy, and thereby reducing UK greenhouse gas emissions.
The report supports the case for a carbon-based tax, applied ‘downstream’ on supplies of energy products and electricity for final use in industrial and commercial consumers.
It is intended the tax will be charged by suppliers to industrial and commercial consumers. The rate of tax has not been set but calculations referred to in the report suggest that a #1bn overall tax take per year would reduce carbon dioxide emissions by around 1 million tonnes of carbon in 2010.
This is a substantial tax take and, for it to be effective, the tax ought not be passed on to the consumer in the form of higher prices; at the same time the report acknowledges the need for British industry to remain competitive. The report suggests the tax should be revenue neutral but, again, for it to be effective it must lead to real changes in energy consumption by industrial and commercial consumers.
The tax proposals are supported, at least in part, because of the need to introduce measures with broad industrial impact which can be implemented relatively quickly to help the UK meet its Kyoto commitments.
While there is theoretical sense in the view that a tax can provide a longer-term degree of certainty, while retaining the flexibility for adjustments to be made in the light of experience, there are still a number of very significant ambiguities, not least the rate at which the tax will begin to have an effect on profits and competitiveness, and on influencing relationships and energy choices within the supply chain.
On the other hand, there is a welcome acceptance – from an environmental standpoint – of the sense of recycling of at least some of the revenue generated by the tax towards other measures – such as energy efficiency investments – which would also contribute to improved environmental performance.
It is slightly ironic that to achieve success from a carbon tax the chancellor will be encouraging companies to indulge in tax avoidance by reducing their energy bills; although, arguably, for the more purer motive of saving the planet.
On emissions trading, the report sensibly acknowledges the fact that trading will play an important role in reducing greenhouse gas emissions, not least because continuing US support for the Kyoto process is closely tied to agreement on a workable emissions trading regime. There is also sensible emphasis given to the need for intra- and inter-firm trading, thereby recognising both the true location of where savings will be made and the potential for innovation and market dynamism.
Yet, while the theoretical economic benefits of trading are recognised, the report shies away from recommending the launch of a domestic trading initiative in the UK – probably not until well into the next century.
Given the keen interest in many of the key industrial players in the UK – in the electricity sector, and among market makers, financial and verification industries – including accounting firms – this is a disappointingly unambitious conclusion.
The practical and administrative complexities associated with trading systems outlined in the report – on issues such as coverage, permit allocation, and monitoring systems – are indeed complex, and unlikely to be resolved easily. But a protracted period of consultation is not guaranteed to solve the issues either, and the UK’s opportunity for first-mover advantage is likely to be lost unless more ambitious approaches are pursued.
The recommendation for a pilot trading system, involving a small number of players, is sensible, but is a small step forward, particularly given the development of innovative trading initiatives in the UK market already.
In short, the opportunities provided by emissions trading remain, but the private sector will need to take the lead.
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