TAXREP 31/07 BUDGET 2007: SUBMISSION TO TREASURY COMMITTEE

TAXREP 31/07
BUDGET 2007: SUBMISSION TO TREASURY COMMITTEE
Text of written evidence submitted on 23 March 2007 by the Tax Faculty of the
Institute of Chartered Accountants in England and Wales in response to an
invitation dated 1 March 2007 from the House of Commons Treasury
Committee to comment on the Budget of 21 March 2007
ICAEW Tax Faculty, Chartered Accountants’ Hall,
PO Box 433, Moorgate Place, London EC2P 2BJ
www.icaew.com/taxfac
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+44 (0)20 7920 8646
+44 (0)20 7920 8780
[email protected]
Submission to Treasury Committee on the Budget 2007
Section
Overview
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The ICAEW welcomes the measures in the Budget designed to improve competitiveness
Changes in corporation tax and the capital allowance regime
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Businesses will pay for the 2% cut in corporation tax by the changes in the capital
allowance rules, which will cost companies about £1.5 billion next year and £2.27bn in
2009-10
Reduction in basic rate of income tax- impact on Charities
4
The proposed reduction in the basic rate of income tax will have an unwelcome and
significant effect on charities income from donations
R&D tax credits
5
The ICAEW welcomed the increase in the level of credit and the extension of SME R&D
tax credits to companies with 250-500 employees. Yet ICAEW research shows that the
scheme is not effectively incentivising companies to invest in R&D and needs reforming
Simplification of the tax system
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We were disappointed not to see a commitment to tax simplification in the Budget
Skills- training allowance for basic skills
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We welcome the grant, but await further details on the level of administration attached to
the scheme before we can judge its usefulness to business
Managed Service Companies
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Ordinary workers must be warned that they will receive a significant cut in income when
MSC’s start to pay employment taxes
Green Taxes- environmental issues
9
These measures announced in the Budget are ‘environmentally differentiated’,
demonstrably incentivising behaviour change. It remains an anomaly that the Air
Passenger Duty, which was launched as a green tax, does not.
Further contact details
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Submission to Treasury Committee on the Budget 2007
1. Overview
In its submission to the Chancellor ahead of the Budget, the ICAEW suggested a number of
actions the Government could take now to improve UK competitiveness and productivity. In
this context we welcome the cut in the main rate of corporation tax, introduction of a training
grant for small business and the increase in funding for R&D tax credits. However we do
have some comments on the details of these announcements, particularly the impact of the
changes to the capital allowance regime needed to fund the cut in the main rate of
corporation tax.
In particular the ICAEW was disappointed that there was no formal, time bound commitment
to tax simplification in the Budget as we believe that this is a critical issue for UK businesses.
Reducing the complexity of the tax system is a way to increase competitiveness without
impacting on the soundness of public finances.
2. Changes in Corporation Tax and the Capital Allowance regime
The ICAEW had called for a cut in the headline rate of corporation tax and therefore we
welcome the 2% cut. However we do believe that the long term pressure for the UK to
remain internationally competitive will lead to future calls to reduce rates further.
The government is paying for this reduction by changing the capital allowance rules which
will cost companies about £1.5 billion next year and £2.27bn in 2009-10. The corporate tax
burden is effectively being shifted from businesses that can easily move headquarters to
capital intensive businesses with fixed assets e.g. large companies like BAA and smaller
firms like printers and hotels.
The changes to capital allowances will particularly impact small companies. Companies that
make profits of less than £300,000 per year currently pay tax at 19%. As a result of the
changes announced on Budget Day, they will see an increase in that tax rate over three
years to 22%. This is then further impacted by the reduction in the capital allowances
available to them. This will particularly be the case for those that claim significant amounts
as plant and machinery allowances and in respect of industrial buildings.
The position will be even more difficult for those companies that have integral fixtures as part
of a building. Hotels are also exactly the kind of buildings that have integral fixtures and so
the restriction of plant and machinery allowances in such cases to 10% will further increase
such companies’ tax liability. Examples of other family businesses that would be affected are
printing companies, haulage businesses, manufacturing companies, etc. Such companies
are likely to be significant businesses in the local community around the country. Well
planned cash flow contributes to the success of these businesses and these changes will
have a significant and possibly harmful affect on many small companies because they will
have planned for greater relief through capital allowances and lower corporation tax bills.
The ICAEW does believe that the reform of tax relief’s for capital investment are probably
long overdue, but the changes that have been made appear to have been designed more to
make the numbers work than to improve the system. It is disappointing that such a
fundamental reform to the capital allowances rules was not published beforehand for
discussion and consultation in line with the recommendations from the Varney review.
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3. Small Business taxation
The small companies’ rate of corporation tax will increase in 1% steps from 19% to 22% over
three years. The Chancellor balanced this increase with the new long term annual
investment allowance of £50,000, set to supersede first year capital allowances. However,
the Budget documents outline that the details are still to be consulted on. Small enterprises
(below 50 people) will still be able to claim the 50% first year capital allowances in the
meantime.
This increase was justified as a measure to try and stop businesses incorporating to save tax
by paying out dividends rather than salary, but will increase costs for all small businesses.
4. Reduction in basic rate of income tax- impact on Charities
The proposed reduction in the basic rate of income tax will have an unwelcome and
significant effect on charities income from donations. This is because Gift Aid will fall from
22p in every pound to 20p in the pound. Other ways of giving charities tax relief for example
through modification to the VAT regime could be explored.
5. R&D tax credit
The ICAEW welcomed the increase in the level of credit and the extension of SME R&D tax
credits to companies with 250-500 employees. Yet, as ICAEW research shows, the scheme
is not effectively incentivising companies to invest in R&D and needs reforming. Boosting
R&D tax credits will give more firms the opportunity to invest in R&D. But companies need to
know if government will help before they invest. The criteria for identifying expenditure that
qualifies as R&D needs to be simplified, particularly for those seeking lower levels of tax
credit. An optional pre-approval process should be developed with the ability for companies
to know in advance if they will receive the funds.
6. Simplification of the tax system
The Chancellor did not announce a formal, time bound commitment to simplify the tax
system, which the ICAEW and others had called for. We remain concerned that the volume
of UK tax legislation has doubled in the last ten years and has added considerable
complexity to the system. Reducing the complexity of the tax system is a way to increase
competitiveness without impacting on the soundness of public finances. The current
complexity of the tax system is a problem for businesses of all sizes.
7. Skills- training allowance for basic skills
The Chancellor announced a training grant for small companies who take on an employee
needing to acquire the most basic of skills. In the period from now to 2011, the government
will offer £2,000 training help per employee and in some cases £3,000. We welcome the
grant, but await further details on the level of administration attached to the scheme before
we can judge its usefulness to business.
8. Managed Service Companies
The Chancellor announced revised measures to deal with the growth of ‘managed service
companies’, which seek to exploit the many advantages of incorporated businesses but
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which pay their workers through dividends, rather than PAYE, thereby loosing HM Treasury
revenue. In principle the ICAEW does not have a problem with what the government is
doing, we would just like the rules to be properly targeted at illegitimate companies and the
changes explained to workers.
The new rules will deem income received by individuals providing their services through
MSCs not already treated as employment income, to be employment income. The
consequence of this will be that MSCs will have to operate Pay As You Earn (PAYE) income
tax and Class 1 National Insurance contributions on all payments received by individuals in
respect of services provided through such companies.
To protect ordinary workers, we believe that there needs to be good publicity highlighting this
change as when they start paying employment taxes and NI they will receive a significant
drop in pay which will need to be explained. These are likely to be people on low incomes
such as nurses and teachers. Technically it is right and fair that they should pay employment
taxes, but this needs to be published in an intelligible fashion.
Transfer of debt provisions will ensure that where an MSC incurs a PAYE / Class 1 National
Insurance debt, and that debt cannot be recovered from the company, HMRC may transfer
the debt to specified persons. These will primarily be the MSC’s director and the person who
provided the company to the individual (the MSC Provider.) Many of our members provide
this service and are concerned that they will become liable for debts incurred by their clients
if the proposed exclusion for accountants is not properly drafted. The new rules will define
director’s liabilities in such a way that may impact on legitimate business structures. The
ICAEW wants to ensure that members businesses are not harmed and to do this we need a
full and open consultation.
9. Green Taxes- Environmental issues
The Budget placed a strong emphasis on green measures such as higher vehicle excise
duties for the most polluting cars; continued and increased tax incentives for greener
vehicles and fuels; a range of incentives for domestic energy efficiency (including specific
mortgages for energy efficient houses, increases in domestic micro-generation grants and
stamp duty exemptions for carbon-neutral homes); and increases in the climate change levy,
landfill taxes and the aggregate levy. The chancellor also unveiled an extension of fuel duty
discount for bio-fuels and a steep increase in vehicle excise duty for owners of gas guzzling
cars who would pay up to £400 by next year for a tax disc. This would be accompanied by
lower tax for fuel efficient cars, where tax would fall to £35. He deferred the annual fuel duty
increase for 6 months, until the autumn.
These measures are ‘environmentally differentiated’, demonstrably incentivising behaviour
change. It remains an anomaly that the Air Passenger Duty, which was launched as a green
tax, does not.
10. Further Contact Details
For any further enquiries, please contact:
Frank Haskew
Head of ICAEW Tax Faculty
E-mail: [email protected]
Tel: 020 7920 8618
Liz Stevenson
ICAEW Public Affairs Executive
E-mail: [email protected]
Tel: 020 7920 8694
23.3.07
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