PBR 06: Corporate tax predictions

Chancellor Gordon Brown has come under increasing pressure from
HSBC, the CBI and the Investment Management Association
recently over the complexity and competitiveness of the UK system.

The 2006 pre-Budget report will provide the chancellor with the opportunity
to assure business that UK tax competitiveness is at the top of his agenda and
follow up on recent moves make tax easier to deal with for corporates.

It is with this background in place that experts have predicted the
chancellor will address the following corporation tax issues in the 2006 PBR:

The Varney Review and ‘Delivering a new relationship with
business’:
In many ways the chancellor has pre-empted his PBR speech with the announcement
of the Varney Review and the HMRC paper ‘Delivering a new relationship with
business’.

The Varney Review pledged to provide business with more certainty over their
tax affairs by providing a clearance service for all tax planning, while the
HMRC paper promised to make the administrative side of tax less onerous by
providing a single point of contact at HMRC for businesses.

Chris Sanger, head of tax policy at Ernst & Young, said the Varney Review
opened the door for the chancellor to set the direction of government’s
relationship with business in the PBR.

‘The Review has given the chancellor the opportunity to set an agenda for
making the UK more competitive and has set an expectation that he will be
providing increased certainty for businesses,’ said Sanger.

The European threat:
The recent European Court of
Justice judgement allowing Cadbury Schweppes and other companies to
establish a subsidiary in a low tax jurisdiction, as well as the forthcoming ECJ
hearing on the franked investment income group litigation order could cost the
Treasury billions of pounds.

Bill Dodwell, corporate tax partner at Deloitte, said the European challenge
to the UK tax system could see Brown announce a consultation on how the UK
should react to the rulings from the ECJ. Dodwell said it was also possible that
tax was increased on UK income to make up the shortfall.

‘It is quite possible that the UK will lose some of the tax currently paid on
overseas activities. Although this in itself would no doubt be welcomed by
business, the price may well be additional tax on UK income. It is possible that
the chancellor will start a consultation process in this important area,’ said
Dodwell.

Corporation tax and avoidance:
During his tenure as chancellor, Brown has overseen a drop in corporation tax
from 33% to 30%. Other countries have since caught up and even surpassed the UK
on this front, and Brown has been pressed to cut the rate further.

Advisers have mixed views on whether Brown will take the jump and cut
corporation tax, but one area where there is far more consensus is avoidance.

KPMG has predicted that the PBR will see a further tightening of avoidance
rules as result of the disclosure regime, as well as possible details about how
it will modernise HMRC’s powers, following the release of two consultations on
‘Modernising powers, deterrents and safeguards’.

Green tax:
Tory partner leader David Cameron has placed green issues on the top of the
political agenda, and Brown will be eager to prove his green credentials in the
PBR.

PricewaterhouseCoopers
believes Brown will definitely announce some kind of green tax on business
and consumers, but add that the chancellor must use the PBR to provide business
with certainty on what approach he will take to green taxes.

‘The chancellor needs to provide businesses with a coherent long-term
environmental strategy, which they can engage in and base policy decisions on
into the future. Comment on the Government’s intentions for tackling climate
change through the tax system would be welcomed by many,’ said PwC.

Further reading:

Read the Varney Review
here

Treasury faces tax rewrite as European challenges mount

UK companies cast envious eyes abroad