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Budget 2012: What's missing?

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Budget should have been braver on 45p

Francesca Lagerberg, Head of Tax, Grant Thornton

The business push to reduce the top rate of 50p for higher earners does make sense, especially given the small amount of revenue being raised from it. However, by keeping a top level that is 'under review' it still smacks of being a temporary measure. If it is going to be cut again to, say, 40p why not do it all in one go rather than take a political fall-out twice? Equally evidence suggests that slightly lower taxes do lead to higher revenues as taxpayers are no longer as energised about seeking ways to reduce tax. This coming tax year many taxpayers will simply be deferring income to wait for lower rates. A braver move would have been to go to 40p from 6 April 2012 which at least would get the money coming in quicker to the Exchequer.


The abolition of stamp duty

Mike Hardwick, Consultant, Linklaters

The abolition of stamp duty, with SDRT legislation being amended to incorporate the exemptions and reliefs currently contained within the stamp duty code, would simplify matters for practitioners. Stamp duty is an archaic and unsatisfactory duty, and does not belong in the modern world of e-commerce. HMRC will need to review the stamp duty and SDRT legislation in the wake of HSBC: this gives an ideal opportunity to do something radical to simplify the regime. At the same time, the stamp duty and SDRT treatment of debt instruments and derivatives should be rationalised and coherent principles applied to their taxation.


Degrouping charges (missed, again)

Pete Miller, Partner, The Miller Partnership

Finance Act 2011 changed the degrouping charge so that it arises in the vendor company, not in the company leaving the group. Any exemptions applicable to the disposal of shares, such as the SSE, also apply to the degrouping charge, and SSE was amended to permit the packaging up of trades for sale within a new company. However, despite repeated pleas during the consultation process, the new rules only apply to capital gains assets. Any degrouping of companies holding intangible assets leaves the degrouping charge in the company that is sold, so that the barriers to commercial transactions are still in place for companies with substantial post-2002 goodwill or other intangible assets. This is a fundamental mismatch between parts of the tax code that otherwise operate very similarly, runs contrary to the Government’s policy of encouraging technological innovation and sits uneasily alongside initiatives such as the new Patent Box regime and the improved R&D tax rules.

Gary Richards, Partner, Berwin Leighton Paisner

An opportunity was missed, when the s 179 degrouping charge was amended last year, to make similar amendments to CTA 2009 s 780 (IP degrouping charge) so that the gain arose at the shareholder level. Admittedly a corporation tax on income credit (or debit) would form part of a chargeable gains computation or be rendered non taxable by a chargeable gains exemption (SSE). However in large part the reasons justifying last year's change to s 179 – facilitation of transactions, and on M&A transactions enabling a company operating through a divisional structure not be at a disadvantage to a group operating through subsidiaries as regards SSE – apply equally.


Incentives for infrastructure

Heather Self, Director, McGrigors

The UK tax system remains deeply uncompetitive internationally in its lack of capital allowances for infrastructure investment. The government's National Infrastructure Plan identifies a pipeline of over £250bn of major projects in areas such as highways, rail, nuclear, offshore wind and broadband. However, much of this investment will get no tax allowance at all: the CBI calculates that some £11bn annually does not qualify. Reintroduction of capital allowances for major structures would level the playing field – the government has indicated there are State Aid concerns, but needs to work harder to ensure that tax is not a barrier to critical infrastructure projects.

Will Arrenberg, Senior Tax Associate, Herbert Smith

Substantive changes to the capital allowances regime; much has been made of the need to encourage investment in infrastructure, and many of the announcements in the Budget have the government's infrastructure investment targets in mind. But the measures tend to be piecemeal, with many of them targeted at individual projects or specific areas. Many of the changes in recent years (from removing industrial buildings allowance to the reduction in the rate of plant and machinery allowances to the introduction of special lower rates of allowances) have reduced the wider incentives to invest in infrastructure, and we would like to have seen a move back towards a more generous system of allowances for capital investment generally.

Nicholas Gardner, Senior Associate, Ashurst

The Budget missed an opportunity to advance the Government's objective of promoting investment in infrastructure by introducing a new infrastructure investment allowance. Since the abolition of industrial buildings allowances certain infrastructure projects have been denied tax deductions in respect of their capital expenditure which has given rise to high effective tax rates and reduced the economic yield for investors. A new investment allowance would alleviate this problem and make investment in these projects more attractive to tax exempt investors (such as pension funds).

Adam Renton, Associate Partner, KPMG

The Chancellor has missed an opportunity in the Budget to make investment in critical UK infrastructure more tax inefficient by introducing an infrastructure allowance. CAA 2001 s 22 prevents a wide range of expenditure on structures from qualifying for capital allowances. This lack of tax relief can add around 20% to the cost of some infrastructure projects, depressing the post-tax return on UK infrastructure projects compared with those in other countries competing for scarce capital from international investors. The competitive disadvantage this gives the UK needs to be addressed.


Capital allowances

James MacLachlan, Partner, Baker & McKenzie

Aside from improvements in a few specific areas (eg, energy saving technologies, gas refuelling equipment and low emission cars), there were no significant Budget measures to enhance the capital allowances regime. Given the policy choice to opt for lower corporation tax rates and current fiscal constraints, this is perhaps hardly surprising. However, the UK capital allowances regime does not look particularly competitive in a G20 context. If the government really does want to rebalance the UK economy by encouraging companies right across the economic spectrum (not just larger companies with surplus cash) to invest risk capital for growth in the manufacturing sector, then it is a pity that this Budget did not at least make a start in re-examining the role of capital allowances. All in all, this was very much a Budget for the services sector and another missed opportunity for manufacturing.


Tackling complexity

Nick Mace, Partner, Clifford Chance

Rate reductions hit the headlines, but the ever increasing complexity of the UK tax regime really needs to be tackled. There was a lot on SDLT relating to residential property held by corporate vehicles, but fears in some quarters that there would be similar rules for commercial property did not materialise. The timing of the reduction of the 50% rate of income tax (April 2013) suggests that warnings of individuals deferring income have been ignored – this would appear to be a trade-off between political difficulties associated with the rate reduction and further distortion.


Dividend imputation system

Craig Kemsley, Head of London Private Client, Grant Thornton

I would have liked to see a full dividend imputation system implemented in the UK to allow entrepreneurs and shareholders to obtain a full credit for tax paid at the corporate level. I think this structural weakness remains despite the reduction in the highest rate of tax to 45p.


Cash accounting

Andy Maxfield, Tax Investigations Senior Manager, Grant Thornton

It's intriguing that cash accounting for VAT is acceptable for turnover up to £1.35m but the threshold for income tax will be £77,000 meaning small companies are now effectively excluded. Clearly the Treasury will be concerned about potential evasion but if HMRC encounters abuse it has the weapons to tackle the rogues. I wanted to see a bigger, bolder lift to smaller business and consider a higher threshold. Also, the benefits of simplification should result in a simplified monitoring and compliance regime and this is not the case at the moment.


A targeted reduction in employer NICs

David Jervis, Head of Tax, Eversheds

A targeted reduction in employer NICs to encourage new jobs was perhaps an opportunity missed; also targeted reliefs for investment in infrastructure projects which would be a boost to the economy. Perhaps the most surprising opportunity though is the ability to defer discretionary bonuses to benefit from the lower 45% tax rate. It remains to be seen whether anti forestalling measures are enacted and how any deferral arrangements may be impacted by the general anti avoidance rule.


NIC holiday extension

Ellie Gamble, Employer Solutions Senior Manager, Grant Thornton

I would have liked to have seen an extension of the NIC holiday which exists in some enterprise zones. This would mean that if any employer takes on an employee who's been out of work for over six months, they would pay a lower rate of employer's NI, e.g. five per cent, for six months.

Many employers are saying that, at 13.8%, the cost of employer's NI is a deterrent to taking people on. Whilst the Government might lose some revenue with a NI holiday, they'd gain by not paying Jobseekers' allowance therefore benefitting the worker both financially and psychologically. Of course, this would also stimulate the economy.


Charitable lifetime giving

Christopher Groves, Partner, Withers

The introduction of the cap on tax reliefs to 25% of an individual’s income effectively reinstates the cap on gift aid that was abolished in 1998. This will be a disincentive to philanthropists to make significant donations during their lifetime, with donations on death becoming more attractive due to the reduced IHT rate now available.

The Government urgently needs to introduce measures to encourage lifetime giving by taxpayers to support charities. High in their priorities should be the introduction of ‘lifetime legacies’, which encourage lifetime giving by allowing individuals to make an immediate commitment to charity but retain access to an income stream.


A road map for the taxation of individuals?

Mary Monfries, Head of Tax External Relations and Policy, PwC

Efforts have gone into communicating a clear medium-term vision for business taxation, with aligned fiscal measures. What’s missing is a clear articulation of the same thing for individuals (the taxation of capital & income, spending & saving) - without this, people hear various short -term measures, with inevitable winners and losers, and no clearly understood consistent thread. Missing from the income tax reliefs limit was clarification of reliefs included (and real concern for charitable giving). CFC reform, reducing headline rates, Patent Box and R&D all underpin the ‘open for business’ agenda – to prevent damaging this with increased uncertainty safeguards for operating Aaronson's GAAR and retrospective legislation are crucial.

Chris Sanger, Head of Tax Policy, Ernst & Young

Despite the surprise cut in the corporate tax rate, the big news in this year’s Budget focussed on the personal tax system. The increase in the personal allowance, reduction of the 50p tax rate, a ‘mansion sales tax’, and the infamous ‘granny tax’, grabbed the headlines.

However, unlike the changes that have been taking place to the corporate tax system, the Government hasn’t set out a clear vision for what it is trying to achieve with personal taxation and each element at its disposal. The publication of the equivalent of the ‘Corporate Tax Roadmap’ would enable for more effective debate.


Clarity for banks

Vimal Tilakapala, Tax Partner, Allen & Overy

Banks (and other corporates) won’t be surprised that the GAAR is being proceeded with - the documents suggest the starting point will be Aaronson's proposals, although how that might change in consultation is anyone's guess. Interesting here to see the extent to which the proposal will change during consultation - some very significant potential problems have been identified already (especially in relation to certainty).

The banking sector may be disappointed to see that rates of bank levy are being tinkered with - quite a significant raise to 0.105% although at least it doesn't come in until the start of 2013) - although if seen in conjunction with the reduction in general corporate tax rates it is effectively a ‘balancing measure - ie less mainstream corporate tax/more bank levy.

Banks may also feel disappointed that there is still no clarity on how CRD IV compliant regulatory capital instruments will be treated for tax purposes - all the Government is doing is giving itself the power to introduce regulations to deal with this, and there's no clarity which way they will lean. This is exceptionally important at the moment and there are a lot of institutions waiting anxiously to see how the government intends proceed.

The government will be consulting on changes to the income tax rules on taxation of interest and interest-like returns, and re deduction at source - doesn't look like there's any clarity on what aspects they will be looking at, or why, at this stage.

Overall, reductions in additional rate IT and further reductions in CT likely to be welcome to the City, although the Chancellor is clearly determined to throw the book at those using companies etc. to hold property to avoid an SDLT charge. The implications of the measures there need to be digested.


Proportionate rules on debt buybacks and releases

Thomas Story, Tax Director, BDO

The introduction of further anti-avoidance taxing deemed debt releases ahead of the Budget was understandable, given clear indications from previous reforms to the corporate debt code that profitable, solvent groups ought to be taxed on commercial profits arising on debt buybacks. However, we now face practical situations where commercially driven solutions resolving unsustainable levels of debt in distressed businesses risk being thwarted by the corporation tax cost imposed by these new rules. It is disappointing the Budget did not address the need for a proportionate system preserving tax neutral treatment for debt buybacks and releases where commercially warranted.


A 27p a week NIC simplification

Richard Service, Mazars

From 6 April 2012, employer NIC is due on earnings above £144 a week, for employees it's above £146. Of course there's no statutory requirement that these be aligned. And as most payrolls are now computerised it's unlikely that this difference adds significantly to employers' administrative burdens, but this may not necessarily be so for non-business employers such as small charities or those employing a nanny. Chancellors regularly beat the simplification drum. This complexity appeared as recently as April 2011 - before then the starting points for primary and secondary contributions were identical.

How to realign? Increasing the starting point for employer contributions would reduce government NIC receipts by 27.6p a week per employee with respect to most employees. The number of persons in employment in the UK is just shy of 30 million, giving a top end estimate of consequential reduction in NIC revenue of £430m. The actual amount would be lower as the 30 million includes those with earnings below the NIC threshold. A revenue neutral alternative might be to consider reducing the employee threshold. A side effect of the above inflation increases of the income tax personal allowance is that the policy to align the NIC starting point to the single person's income allowance has been quietly dropped.


Reduced rate of VAT for all residential repairs and alterations

Marc Welby, VAT Partner, BDO

The government has discretion to introduce the reduced rate of VAT across a number of areas. Had it chosen to apply it to all residential repairs and alterations it would, with one stroke, have enabled a substantial simplification of the reduced rating provisions in Groups 6 and 7 of Schedule 7A (Residential Conversions and Residential Renovations and Alterations) as well as cushioning the impact of the removal of zero-rating for alterations to residential listed buildings. It would arguably also have given a large fillip to the building sector, encouraging smaller firms to take on more employees and apprentices to meet the domestic demand which would have been created. It would have been one for the growth agenda. Perhaps next year.


Progress on Islamic finance

Eloise Walker, Partner, Pinsent Masons

The government is keen to introduce many new measures but are falling behind on previous announcements – one notable example is Islamic finance: in the 2010 Budget, clarification of capital allowances treatment, and further input on alternative property refinance arrangements was promised; in the 2011 Budget, regulations for Shari’a-compliant variable loan arrangements and derivatives were to be made – some consultation has been happening behind closed doors, but no further details have yet emerged. This is especially disappointing because in the meantime the market is moving (especially on derivatives), and the UK tax landscape risks dropping ever further behind.


Loans to acquire shares in close trading companies

David Cohen, Partner, Norton Rose

The government could have advanced two of its key objectives – fairness and wider employee share ownership – by extending the scope of ITA 2001 ss 392–395. These sections provide that interest on a loan to a director or employee to acquire shares in a close trading company generally qualifies for tax relief only if the borrower spends most of his time ‘in the actual management or conduct of the company’. This is blatant discrimination in favour of senior management. The Budget should have extended this important relief to all employees.