Priority needs to be given to supporting aspects of the tax system that bolster our international competitiveness. But the guiding principle for any changes needs to be simplification of the tax system.
Looking ahead to the Spring Budget next week Michelle Quest, Head of Tax at KPMG in the UK, said:
“Many are expecting a somewhat ‘boring Budget’ from Philip Hammond next week with no major structural changes and no relaxing of the Government’s current fiscal stance.
“Having said that, there are a couple of areas which have come to the fore recently which the Chancellor will be called on to address – these include business rate reforms, the ‘gig economy’ and the pressures on social care and funding.
“From a tax perspective, priority needs to be given to supporting aspects of the tax system which bolster our international competitiveness. With the triggering of Article 50 imminent, the Chancellor will need to demonstrate more than ever that the UK is ‘open for business’ and will remain competitive on the global stage.
“While the headline tax rate remains a factor in this regard, there are other areas that will be just as important in continuing to attract foreign investment. Targeted incentives and a good treaty network alongside things such as quality of infrastructure and access to markets and talent have played a vital role in ensuring the UK remains an attractive place to invest.
“Over and above this, KPMG‘s surveys of clients have established that companies look for simplicity, stability and predictability, both in economic and political terms when it comes to deciding where to do business. In light of this, a roadmap setting out guiding principles and priorities covering all taxes – personal and corporate – would be welcomed. The 2010 Corporate Tax Roadmap was a good example of this and was very well received by business. This would also go some way to offering some stability as the UK heads into what may be many years of uncertainty exiting the EU.
“Should the Chancellor decide to press ahead with any changes, the guiding principle needs to be moves toward simplification of the tax system. Clearly, a key area for simplification is how work is taxed, but beyond this, other ideas might include:
“Overall, the UK economy has performed better than expected since the EU referendum, but as we head into exit negotiations the Chancellor will need to keep some ammunition back should things take a more negative turn.”
Corporate & International Tax
Robin Walduck, Tax Partner at KPMG in the UK, commented:
“We are not expecting any major announcements with regards to the implementation of BEPS or new anti-avoidance measures.
“Businesses are already dealing with substantial changes with new rules coming into force on 1 April on the deductibility of corporate interest expense (a response to the OECD’s BEPS Action 4) and on corporation tax loss reform.
“After extensive consultation on the new corporate interest restriction the reality is lenders, investors and companies will still have a lot to contend with to protect returns and we expect HMRC to start taking non-statutory business clearance applications when the Finance Bill is published on 20 March. As people engage with these new rules, I foresee plenty of issues coming out of the woodwork (in terms of interpretation and compliance) so certainly corporates would appreciate a bit of a breather to let the latest raft of changes bed in before any further substantial changes are announced.
“The accelerated implementation of these new interest rules (versus their OECD or EU counterparts) has also caused serious concern amongst inbound investors such as sovereign wealth funds and pension funds given the extent of existing privatised infrastructure assets they own in the UK. We are starting to see a more ‘open for business stance’ come through in the form of the relaxation / reform of the substantial shareholdings exemption (SSE), for example, which will go some way to encouraging investment holding business in the UK for certain institutional investors. However, it is probably not enough to attract the wider funds management industry who are well established in the EU which, coupled with the associated passporting benefits the UK might lose post-Brexit, means the Chancellor may have to consider additional measures to preserve the future attractiveness of the UK.
“On anti-avoidance, previous administrations have announced a significant package of anti-avoidance measures at almost every fiscal event. The question will be whether Philip Hammond continues this theme or strikes out in a new direction.”
Innovation – R&D
David Woodward, Tax Partner, at KPMG in the UK, said:
“The Prime Minister has already signalled the Government’s intention to improve support for R&D to make the UK more competitive in this regard. At the Autumn Statement the Chancellor announced that the Government would review the tax environment for R&D and the Chief Secretary to the Treasury recentl confirmed this review is due to conclude at the Spring Budget. We are therefore likely to see some announcements on this on 8 March.
“There are various simplifications and improvements that could improve the current regime which include increasing R&D Expenditure Credits to 12.5% to give a 10% net headline rate and monetarising R&D Allowances which could encourage business to ‘lay foundations’ to lock in their investment in the UK for the longer term. The Government could also look at offering more support across the full lifecycle of innovation all the way through to exploitation of the IP generated here as, at the moment, there are no real incentives to build hi-tech manufacturing facilities in the UK.
“Looking further ahead, if the UK no longer has to follow certain EU guidelines post-Brexit this could open up more avenues for reform to encourage and support additional investment in innovation.”
Colin Ben-Nathan, Tax Partner at KPMG in the UK, highlighted:
“All signs seem to be pointing to a significant announcement in the Spring Budget on the future, strategic approach of how work is taxed to better reflect the changing economy. Certainly this area is now under a lot of scrutiny and the Government has already said that it will “look at how it can ensure that the taxation of different ways of working and different forms of employee remuneration is fair, sustainable and efficient”.1
“In my view, narrowing the fiscal differences between employment and self-employment is the right approach. This would mean we could move away from the increasingly complex and administratively burdensome sticking-plaster approach whereby the Government tries to preserve differences in their tax and NIC treatment which are increasingly difficult to justify in a gig economy where the traditional distinctions between employment and self-employment no longer apply. And levelling out the playing field would certainly make it easier for people to get on with their day jobs!
“However, the question of “how we tax work” sits right at the heart of our tax system and so there are wider and longer-term issues that also need to be addressed. There are several reviews on-going into this area which include the Cross-Government Working Party on Employment Status, the Business, Energy and Industrial Strategy (BEIS) Committee’s inquiry into the future world of work, the Treasury Committee’s inquiry into the tax base and, not least, the Taylor Review commissioned by the Prime Minister on modern employment practices. It’s critical that all these strands are brought together and that the tax, NIC, labour law and welfare benefits angles are looked at carefully in this context.
“Taxing how we work is a fundamental issue and it’s vital that we get this right. There is no quick fix here, rather we need a careful and considered approach not only to bring things up to date, but also to simplify things and to anticipate the increasing trend to multiple jobs in the gig economy. We would welcome an announcement that the Government intends to address this issue.”
1 The Chancellor‘s letter to the Office of Tax Simplification dated 23 November 2016
Stuart Secker, Tax Partner at KPMG in the UK, said:
“We are expecting to see the promised consultation on moving non-resident companies from income tax to corporation tax (mainly affecting non-resident landlords) around the time of the Budget and there has been much speculation about a potential easing of the planned business rate increases for smaller businesses. But could the Chancellor go further and announce a full review of the taxation of property generally?
“According to the OECD the UK has the highest property taxes in the developed world, with £1 in every £8 of UK tax revenue coming from property taxation (the OECD average is 5%). In practice, the forthcoming proposals will increase this share because moving non-resident investors to a corporation tax basis will reduce tax relief on shareholder debt and impose limits on the relief available for losses incurred during the development phase against future rental income.
“Property is an easy target for tax authorities because they know who owns it and it can’t be re-located. Capital funding, however, can be, and the UK market is particularly dependent on foreign capital for transactions and development. A review which considers the full range of taxes that affect property to ensure the overall tax burden is set at a fair level would be welcome.”
Small and Medium-sized Enterprises (SMEs)
Mandy Pearson, Tax Partner at KPMG in the UK, commented:
“Making Tax Digital (MTD) is one of the most fundamental changes to the UK’s tax system in a generation.
“KPMG are fully supportive of a digital tax system; without doubt this is the future. But also like many, including the Treasury Select Committee, we are concerned that the proposed timetable for implementation is too tight, that the exemption threshold is too low and that adoption is to be by mandation rather than voluntary. Added to this, with changes due to come into effect for Income tax and NIC from 6 April 2018, public awareness also seems relatively low.
“More recently, there has been increasing concern about how much MTD will cost small businesses with significant disparity between Government estimates and industry figures. The Government has evaluated the transitional cost per business to be £280 (with subsequent savings of £100m per year across all businesses), however most think this is grossly understated. In contrast the Federation of Small Businesses (FSB) puts the on-going cost to business at £2,770 per annum – a significant cost given those initially affected will be SME’s, sole traders and small partnerships.
“A separate area of scrutiny has been the degree to which software will be ready. At the heart of MTD will sit the third party, commercial software that is critical to the digital recording and quarterly updates. Recent reports indicate that the developers are working to incredibly tight deadlines and, in some cases, developers are not going to be ready for the pilot due to start in April 2017. This means when taxpayers will actually have software available to choose from, and to familiarise themselves with, is not yet clear.
“So what does this all mean? At the very least, if MTD is to commence in April 2018, then an enormous awareness campaign is required to inform the public generally. And we could very well see the Chancellor start this ball rolling by announcing the proposed exemption threshold on Budget day.
“On the other hand, the recent scrutiny around costs and timetable could plausibly lead to MTD being deferred for a year or mandation being dropped. Either way, we do expect that the Chancellor will have something to say on MTD come Budget Day.”
Greg Limb, Head of Private Client at KPMG UK, highlighted:
“Most expectations are that this is likely to be a reasonably low key Budget for individuals. Personal allowances, tax thresholds and other changes to be introduced from 6 April 2017 are already confirmed including, restrictions to finance costs for non- corporate landlords.
“In order to maintain the UK as an attractive location for both UK and overseas high net wealth individuals to invest, there is a great need for the Government to focus on introducing changes that are “workable” in practice. We would therefore welcome a delay in the introduction of the new rules currently proposed to come into effect from April 2017 for both non doms (including rules for offshore trusts) and inheritance tax (IHT) on UK residential property. There is much uncertainty around these new rules with no clarification expected until publication of the Finance Bill 2017 on 20 March.
“Overall however, my view is that the position for personal taxes often appears to be lacking in a clear direction. Without an overarching strategy, amendments to personal tax rules can be reactionary to particular perceived issues and sometimes appear contradictory in their resulting behavioural impact, rather than a planned approach to the wider structural questions around income generation and personal wealth.
“For example, the numerous tax changes aimed at UK residential property have resulted in no clear policy message. Initially the aim was to discourage ownership via corporate structures with the introduction of the Annual Tax on Enveloped Dwellings (or ATED). However shortly after these changes were introduced, another new rule was announced restricting the tax deduction for interest costs for direct holdings of UK residential property, but not for property owned via a corporate structure, thereby seemingly encouraging holding of such property via a company.
“What we need is a plan. As such, we would welcome the introduction of a personal tax roadmap that sets out the direction of travel for the taxation of individuals.
“Without offering people some certainty around future changes, individuals are finding it increasingly difficult to plan for the longer term and ultimately having to choose options that maintain some flexibility. Signposting policy direction is therefore key in order that the UK remains an attractive and stable fiscal environment for business owners as well as the businesses themselves.”
David Fairs, Pensions Partner at KPMG in the UK, said:
“We know that the Government is continuing to eye further changes to the tax regime for pension schemes. However, what we don’t know is whether this will involve sweeping changes – along the lines of the pensions ISA mooted in the 2015 Treasury green paper – or just further tinkering with existing allowances.
“The recent DWP pensions green paper raises the prospect of a lot of further changes to the regulation of defined benefit schemes. Yet this runs the risk of completely overwhelming employers and scheme trustees if these have to be implemented alongside a range of other tax changes that are currently being worked through for business.
“Overall, we would welcome a period of stability for pension schemes – but that is likely to be a vain hope. The likelihood is that, if we don’t have pensions tax measures announced in this Budget, we will get something in the new Autumn Budget.”
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