Chris Morgan looks ahead to the UK Budget 

Tax Policy

• Tax avoidance:  We are expecting final details of the General Anti-Abuse Rule (GAAR), which will stop certain types of aggressive tax planning, and some changes to the disclosure of tax avoidance scheme rules.  Both of these will come into effect in the summer when the finance bill is given royal assent.

• Government procurement contracts: Those involved in supplying products or services to government will be watching closely for further details on new rules on tax disclosure relating to procurement contracts.  Draft rules which require disclosure of any amendments to tax returns under anti- avoidance provisions were unveiled in February and are set to take effect from 1 April this year.  Exactly how the rules will operate and what types of UK and, in particular, overseas tax planning will be affected is not clear.  Of particular concern is that, as currently drafted, companies will have to disclose events occurring up to ten years ago – although we expect this retrospective element to be dropped from the final guidance.  From 1 April, companies bidding for government contracts will be required to self-certify under these rules so having a clear understanding of what they mean is going to be crucial.

Corporate tax

On the corporate tax front there are already a number of measures in train which should further enhance the UK’s attractiveness from a tax perspective.  Remaining ‘open for business’ and competitive on tax against other jurisdictions on the global stage is crucial to the UK’s growth and recovery and we very much support the government’s commitment to making the UK tax system the most competitive in the G20.

Looking at specific measures, the headline rate of corporation tax is set to reduce from 24 percent to 23 percent from 1 April this year and then next year, as announced in the autumn statement, it will drop to 21 percent – lower than the previously expected 22 percent.  The Government has given heavy hints that we are “in touching distance” of 20 percent and an announcement that this is the end game for, say, 2015, would not be unexpected.

A series of targeted tax incentives are due to take effect from April this year.  These mostly focus on the intellectual property or creative sectors.  They include the patent box, under which profits derived from patented or patentable intellectual property will be taxed at 10 percent, an ‘above the line’ research and development tax credit under which large companies can claim a cash credit for qualifying activity (rather than a discount to their tax liability which is of no benefit to companies in loss-making situations), targeted corporate tax relief for the creative sector focused on companies developing video games and, also, producing high end television programmes and animation. This relief gives qualifying companies an additional tax deduction of up to 80% of their qualifying spend; and can even benefit loss making companies as they may also be able to claim cash back from the Treasury.

Infrastructure remains of key importance.  Targeted tax breaks to encourage investment here would be most welcome.  A failure to invest in infrastructure could mean we risk falling behind our international competitors.  The UK is now the most attractive tax regime compared to key competitors.

In Oil & Gas, the new rules on providing certainty on tax relief for costs of decommissioning offshore infrastructure will be published with the draft Finance Bill. The shale gas incentives consultation continues with firm proposals expected for inclusion in Finance Bill 2014. These proposals will play an important role in helping the UK access more of its natural energy reserves.

Whilst the government has made it clear that it is focussed on creating an attractive tax regime for business, it has also repeatedly stressed that it expects business to “play fair” by the rules.  It is therefore likely that, notwithstanding the GAAR which is just around the corner, we will see some targeted anti-avoidance measures in the budget seeking to address specific types of tax planning which the Government deems unacceptable.

Employers

One of the biggest issues for employers is the imminent introduction of “real time information” reporting of PAYE data.  Currently employers send this information to the tax authorities on an annual basis but under proposals designed to help the implementation of the universal credit system next year, this data will need to be sent in “real time” as and when payments are made.  Many smaller employers have made representations that this is likely to create a significant administrative headache.  They will be hoping for some concessions in the budget.  Allowing PAYE data to be reported on a monthly basis rather than in actual as it happens real time would be extremely helpful for many employers.

Personal tax

The top rate of personal income tax is set to reduce from 50 percent to 45 percent at the beginning of the next tax year.  Tax thresholds have been pre-announced already and for 2013-14 the personal allowance for those aged under 65 will be set at £9,440.  Faster progress towards the coalition’s target of a personal allowance of £10,000 would be a welcome measure and a likely headline grabber.

Around the time of the Budget and the publication of Finance Bill 2013 on 28 March, we expect to see the Government responses to the further points raised through the consultation process on the draft legislation on both how the cap on unlimited income tax reliefs will operate, together with the new rules for UK high value residential property charges which will affect properties worth more than £2 million owned by corporate entities or collective investment schemes.

The new statutory residence test will come into effect from 6 April 2013 with confirmation of some final points of detail anticipated.  For many years now, the tax residency rules for individuals have depended on a large body of case law and this new rule is designed to make the situation clearer for people to understand.  As is often the case in tax, however, it appears that an attempt to make things clearer may have resulted in a set of rather complex rules as the legislation is far from simple.

As previously announced, the annual allowances for tax relief on pension contributions are set to reduce.  The annual allowance will drop from £50,000 to £40,000 per year and the lifetime allowance will reduce from £1.5 million to £1.25 million.