'The Pre Budget Report today (Weds) will be keenly awaited by business, as there are a number of important tax measures under consideration, where new or updated proposals are expected.
Pre Budget Report (PBR): Deloitte's expectations
International changes, such as International Accounting Standards and European Court decisions, are leading to important changes to the UK corporate tax system,' comments George Atterbury, head of tax at Deloitte in Cambridge.
'From a personal tax perspective, more announcements on ongoing consultations are likely, in particular residence and domicile and pensions reform. While the Pre Budget Report stage is not normally a time for headline tax change announcements, more anti-avoidance provisions may well be introduced.'
Potential Business Tax Measures
1. Corporate Tax Reform
Responses to the Treasury's corporate tax consultation paper issued in August were due by 3 November. An update on progress is expected in the PBR, possibly accompanied by further consultation documents and/ or draft legislation.
Further news is likely on the significant proposals for transfer pricing and thin capitalisation, where the Government has indicated that a decision by the European Court of Justice has effectively forced it to extend the scope of the UK transfer pricing legislation. It is intended that it will in future apply to transactions between all related parties, whether or not UK resident. At the same time, the UK thin capitalisation rules will be subsumed into the existing transfer pricing regime. These changes will add extra administrative costs to all UK groups and are likely to increase tax liabilities for some. The Government is keen to minimise the impact on small groups and may well announce some proposals in this area.
An update on the proposals for leasing is also expected. The August consultation document proposed a fundamental change in the UK's approach to leasing. Currently, capital allowances (tax depreciation) are given to the lessor; the proposal was instead to give the allowances to the lessee. If introduced, this proposal could increase the cost of finance for airlines, the rail industry and other capital intensive businesses with tax losses.
2. Proposals or consultation on International Accounting Standards (IAS) and their implications for taxation are expected.
IAS will apply to UK groups' consolidated accounts for 2005 (and by choice, to their company-only accounts) There are some important differences, compared with UK GAAP, which could affect companies' tax position, unless tax law is adapted. Key areas include goodwill, research & development tax credits and financial instruments, including hedging contracts. It is hoped that UK tax law will be adapted to deal with IAS and that consultation on the changes will be announced.
3. Progress on Pensions Reform
The consultation period on the pension tax measures ended on 11 April 2003. An announcement on the proposed way forward is expected to be made at the time of the PBR.
The new rules - which will apply from April 2005 - aim to impose a single pension regime across all types of pension scheme, by allowing tax deductions for much larger contributions to pensions, but imposing a cap of 1.4 million to an individual's pension fund. Pension funds in excess of this cap are proposed to be taxed at an effective rate of 60%.
There has been considerable press speculation about the level of the proposed cap and also about the rate of tax charged on any excess. Any reforms on annuities may also be included. Business has lobbied for changes to the proposals, arguing that the cap will affect many more people than at first thought
4. Implementation of the Interest and Royalties Directive
This Directive will apply to payments of interest and royalties between EU-based, related companies. In most cases, withholding tax will be abolished from 1 January 2004. It is expected that draft UK legislation to implement the Directive will be announced shortly.
5. Stamp Duty Modernisation (introduction of Stamp Duty Land Tax - SDLT)
The implementation of the SDLT regime took place on 1 December 2003. There may be further announcement on the details, e.g. in relation to partnerships.
6. Construction Industry Scheme
More news is likely following the consultation exercise earlier this year. The same applies to proposals to change the tax regime for shared company vans.
7. Research and Development
Progress report following the consultation document on the definition of research and development issued in July 2003.
8. Treasury Review of Revenue and Customs
Initial conclusions on this review were promised in the Government response to the Treasury Committee's Eighth Special Report on Inland Revenue matters published on 16 October.
9. Real Estate Investment Trusts
There has been speculation that the Chancellor might overcome previous Treasury reluctance and encourage investment in property for letting by allowing bodies to be formed along similar lines to US real estate investment trusts (REITs) or, more likely, Socit d'Investissement Immobiliers Cotes (SIICs), recently introduced in France.
It is most likely that the funds would be designed for investment in commercial property. This would enable a more liquid market to be achieved, with investors able to buy and sell units in the underlying properties owned by the funds rather than buy and sell 'bulky' properties themselves.
It is possible that this will be extended to residential property as well, on the grounds that it would encourage the private letting market. Either way, for the idea to be attractive to investors, the funds would have to be transparent for tax. In other words, the fund would not be taxed either on its rents or on its gains from selling its properties so long as it distributed nearly all of its rents, e.g. as dividends (on the lines of UK qualifying investment trusts).
The investor would be taxed on the distributions it received and on gains it made when selling its investment in the fund. The investor would pay the tax at its own rate or be free from tax if, for instance, it was a pension fund.
Individual and Savings Measures
10. Offshore Funds
Following previous consultation, details of a replacement regime may be announced. At the moment there is a complex regime for both tax and compliance, distinguishing between funds that roll up the income and those that distribute it. This also makes it difficult to market such investments outside the UK
11. Review of residence and domicile rules
A progress report is likely following the consultation paper issued on this subject. This is likely to generate a lot of interest among the significant number of people whose tax status is at risk of being changed.
12. Simplification of ISAs
The present rules have caused a great deal of confusion, and are thought to deter savers. According to the Inland Revenue's latest annual report, taxation of savings is one of the areas currently under review.
13. Insurance Bonds
The ability to withdraw up to 5% capital per year tax free may be abolished following recommendation in the Sandler report.
14. Changes already announced which had immediate effect (legislation to be in FA 2004):
15. Other changes in the pipeline on NIC and NIC-related points
These are included in the newly published National Insurance Contributions and Statutory Payments Bill (available at www.publications.parliament.uk/pa/cm200304/cmbills/002/2003002.htm) as follows:
Increase the ability of employers to recover primary (employer's) Class 1 NICs from their employees when making payments of non-monetary earnings;
Extend the range of circumstances in which an employer and employee can make voluntary joint elections and agreements to transfer secondary (employee's) Class 1 National Insurance liability to the employee;
Put right misalignments between Tax and NICs in Officers' inspection powers;
Move the Statutory Sick Pay/Statutory Maternity Pay compliance regime from a criminal to a civil procedure.
Draft legislation has also been prepared to move the liability for Funded Unapproved Retirement Benefit Schemes (FURBS) from Class 1 to Class 1A NICs, i.e. they are only charged on the employer; this may be added to the above Bill or legislated for separately.
16. Child trust funds - The newly published Child Trust Fund Bill
This is available at http://www.publications.parliament.uk/pa/cm200304/cmbills/001/2003001.htm
Further details or comment may be included in the PBR.
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