Paul Falvey, Tax Partner at BDO LLP in Bristol, commenting ahead of the Chancellor’s Budget 2015, said:
“UK tax policy over the last decade has largely ignored the UK’s mid-market businesses despite this section of the economy being a significant source of tax revenues and widely regarded as the engine room for future economic growth.
“This needs to be addressed with more targeted reliefs and incentives aimed at stimulating this part section of the UK economy.
“The Chancellor may find it hard to resist some form of general tax giveaway to sweeten the public mood ahead of the election.
“Apart from this, however, I do not expect to see any significant tax announcements in this Budget, bearing in mind that the Coalition parties are likely to keep their powder dry for the election and a hoped for post-election budget thereafter.
“I do however anticipate more knee jerk reaction to tax evasion and avoidance as this will no doubt be seen as good political capital.”
Predictions
1. Further moves on tax evasion and avoidance
George Osborne has pointed towards introducing a new offence of aiding and abetting tax evasion and aggressive tax avoidance in the Budget, which will be aimed squarely at professional service firms.
This is likely to be outlined for consultation and include proposals for stiff penalties.
2. Diverted Profits Tax
This legislation, aimed at preventing multi-nationals from diverting profits out of the UK, was hastily introduced in last year’s Autumn Statement as a result of lobbying and strong public and political opinion. Currently due to be introduced from 1 April 2015, we expect this to be deferred until next year.
3. Transfer pricing and Country by Country Reporting (CBCR)
It is likely that further announcements will be made about how the UK Government is going to introduce the OECD Base Erosion and Profit Shifting (BEPS) proposals in these two areas.
This should lead to more transparency around how multi-national businesses report where their profits are made, allowing tax authorities to make enquiries and better calculate the correct levels of tax owed.
4. More resources for HM Revenue & Customs
With all of the media and political attention surrounding tax evasion and avoidance and further legislation either being introduced or mooted to clamp down on offenders, HMRC is under considerable pressure to deliver.
The Government may recognise this by increasing the budget available to HMRC in order to help it reduce the tax gap.
5. A tax give away
Tax receipts are up and confidence in the economy is gaining momentum so the Chancellor may be tempted to deliver a mini tax giveaway in order to create a feel good factor ahead of the election.
Middle earners are likely to be the target with, for example, a 1p reduction to the higher rate of income tax likely to cost in the region of £1bn.
6. Business Rates
The business rates review announced in the Autumn Statement was long overdue. The rates multiplier currently uses 2008 property values and takes no account of the post recessionary fall in property prices in many areas.
However, there was very little detail given beyond this or a commitment to when a review might take place so we will be looking for more information in the Budget.
7. Relief for offshore Oil & Gas investment
The industry currently faces particularly high taxes rates and this, coupled with the significant fall in oil prices recently, is placing particular pressure on North Sea operators.
The Government may therefore announce a drop in tax rates, perhaps a further cut to the supplementary charge which was already reduced by 2% in the Autumn Statement to 30%.
An investment allowance relief to encourage investment may also be forthcoming following on from a consultation that was announced in January.
The new allowance is likely to reduce the effective tax rate to 45%-50% for companies investing in the future of the North Sea, in an industry where companies can pay up to 80% in tax.
Wish List
1. Re-introduce a tax allowance for expenditure on factories
UK companies should be encouraged to invest in new factories or extend/improve existing ones. This investment should lead to increased UK production capacity to meet both domestic demand and an increase in exports.
UK tax allowances for expenditure on factories were removed in 2011 leaving UK businesses at a disadvantage to their European competitors.
This is most notable in Germany and France where provisions are made for such tax allowances on expenditure. A tax allowance that followed accounting depreciation would be the easiest method to adopt.
We estimate that such a measure would cost the Exchequer c£2.5bn per annum.
2. A temporary reduction in employers’ National Insurance (NI) for the manufacturing industry
Employers’ NI is a barrier to businesses taking on new workers. The Government has sought to tinker with National Insurance reliefs in the past but the impact of these measures has so far proven negligible.
To back up the Government’s rhetoric on targeting a doubling in exports, a bold step is required.
A temporary reduction in employers’ NI for UK businesses that take on all new employees involved in manufacturing production processes would be a targeted relief aimed at those businesses that are most likely to be exporters or that supply exporters.
The initial reduction could be phased back up to current rates over, say, a 5 year period.
3. Increase the annual investment allowance for expenditure on plant and machinery to £1m
With the progressive reduction in the rates of capital allowances down to currently 8%/18% many businesses are finding that the reward for investing in new capital assets, such as plant and machinery, is no longer a significant incentive.
Although the Annual Investment Allowance (AIA) which currently provides a 100% first year deduction on new expenditure up to £500,000 is generous, it does not stimulate the significant capital investment that the economy needs and is only a temporary relief.
Increasing the AIA permanently to £1m would provide a significant incentive for mid-market businesses to invest in the capital assets that will drive future growth.
The measure would provide a c£150k cashflow timing benefit to businesses who invested the full £1m.
4. VAT zero rating of supplies to companies that export
The UK currently allows manufacturers to zero rate their exports, however, it is less generous with reliefs for domestic companies that supply to UK exporters.
In contrast, Ireland has a more generous relief for regular exporters, where a qualifying exporter is able to inform its suppliers of its export authorisation and those suppliers can then zero rate their supplies to the qualifying exporter. Such a measure provides a VAT cashflow advantage to the exporter.
We would recommend that the UK introduces a similar relief to that in operation in Ireland.
Except for a cashflow timing advantage given to the exporter, this measure would be Exchequer neutral.
5. Removal of the 5% condition to access Entrepreneur’s Relief
In recent years, there have been many changes to the ways individuals can access favourable rates of capital gains tax in addition to the long standing Entrepreneur’s Relief (ER).
As it stands, individuals who acquire shares under an Enterprise Management Incentive (EMI) scheme or by way of the recently introduced Employee Shareholder Status (ESS) scheme are not subject to the same requirements to hold at least 5% of the shares in a trading company before tax reliefs kick in.
In the spirit of fairness and to reward all employees who risk money investing in their employing companies we would like to see the removal of the requirement to hold 5% of the shares before ER is available.