 Taxing times ahead as autumn statement to focus on revenue raising
25 November 2011: PKF Accountants & business advisers is warning businesses and individuals to prepare for bad news from next Tuesday’s Autumn Statement, as revenue raising initiatives will overwhelm the pro-growth announcements designed to steal the headlines.
Lisa Macpherson, national tax director at PKF, comments: “We have seen a number of high profile announcements from the Government over the past week or so, and we expect some additional growth-focused proposals to be included in the Chancellor’s speech next Tuesday. However, they will need to be paid for somehow. I suspect the tax measures will be dominated by tough new initiatives focusing on anti-avoidance that protect or increase revenues, but that cannot be directly attacked by critics as tax rises.”
The Chancellor will highlight plans to boost growth…
Lisa Macpherson continues: "The Chancellor has very little room for manoeuvre, particularly if, as expected, it is confirmed that deficit reduction is behind schedule due to lower than expected economic growth. The paradox is that the Treasury cannot afford to introduce any major pro-growth measures because the stagnating economy is hurting its finances - how do you boost growth when you don’t have the money to pay for it?"
“We expect Mr Osborne to focus on a handful of highly targeted initiatives that will seek to achieve ‘maximum bang for his buck’, both in political and economic terms.”
SME CREDIT EASING SCHEME
Stephen Bayfield, a partner in PKF’s corporate finance team, comments: "The Chancellor announced the SME credit easing scheme with much fanfare back in October but will need to clarify exactly how the scheme will work if he is to avoid this becoming a purely political exercise. The logic is compelling – if banks are not advancing enough funds to small businesses then creating the infrastructure to engage a broader pool of potential lenders makes sense – but the devil really is going to be in the detail. Will we see the creation of a genuine bond market for SME debt, with the Government, institutional investors or private individuals as potential buyers? Or will this simply be an extension of the existing Enterprise Finance Guarantee programme, which has enjoyed limited success and can, in fact, trace its heritage back to the Small Firms Loan Guarantee first introduced during the recession of the early 1980s?"
“Either way, the new scheme will not address the fact that the low level of SME lending is due to reduced demand as well as a lack of supply from traditional lenders. In our day to day work, we’re seeing small business that are, understandably, reluctant to stick their heads above the parapet because of the uncertainty about the future direction of the economy. Important decisions are being delayed and major projects postponed until there is more clarity about where we’re headed. Improving business confidence is therefore the key issue that the Government needs to address.”
REAL ESTATE INVESTMENT TRUSTS (REITS)
Marios Gregori, tax partner and a real estate specialist at PKF, comments: "The Government confirmed last month that it will make converting to REIT status much easier and more attractive. This should see the UK REIT market expand considerably from the current 23 REITs, which are mostly very large businesses, to offer a more diverse market for investors. A diverse and expanding REIT sector in the UK would be good for the economy in the long term."
“Removing the current 2% conversion charge, allowing REITs to be listed on the AIM and PLUS exchanges or overseas, and allowing cash to be classed as a ‘good asset’ will certainly encourage medium-sized property businesses to consider adopting REIT status. If we see further details on Tuesday, I sincerely hope that the Government will not over-engineer the new rules and deter companies from converting to REITs. The Treasury needs to accept that the purpose of giving these tax breaks is for them to be used widely.”
‘DRAGONS’ DEN TAX RELIEF’
Stephen Bayfield, partner at PKF, comments: “We are keen to see the introduction of tax incentives to Business Angel investors that support embryonic businesses, as first muted in a recent Treasury consultation document about venture capital schemes. Most early stage businesses find it virtually impossible to attract either debt or equity funding in the current economic environment because of the inherently high risk nature of the investment. There is a role for the tax system to support early stage businesses because they have the potential to be the success stories of the future and contribute to our economic prosperity further down the line.”
TACKLING YOUTH UNEMPLOYMENT
Toby Stephenson, partner at PKF, comments: "We welcome news of a £1 billion fund to tackle youth unemployment, but are not convinced that funding short term placements is the best way of addressing this important issue. Temporary work placements are just that – although participants can learn new skills and bolster their CVs, they are not guaranteed a permanent job once the contract or internship has finished."
“A more effective alternative may be to fund more long term apprenticeships or provide a National Insurance holiday to businesses that take on workers who have not had jobs before, thereby lowering the cost of employing such people. The reduced costs could swing the calculations in favour of hiring an extra member of staff, with the employer, the employee and the economy as a whole all benefiting.”
…but revenue raising will be the dominant theme
Lisa Macpherson says: "There are a number of revenue raising measures that may be brought forward to boost the Chancellor’s coffers. Many could be based on the 40 or so tax consultation exercises that have taken place in the past year, the results of which the Treasury has committed to announcing by 6 December."
"We expect the announcements to focus on anti-avoidance to demonstrate that the Government is serious about reducing the tax gap – the difference between the amount of tax revenue that HMRC should theoretically collect and the amount that it actually receives – which currently stands at around £35 billion per annum."
“Even taken together, these measures are not going to raise anywhere near the sort of sums that Mr Osborne needs to get the budget deficit back on track. But they have the potential to generate more revenue in the long term than they cost to implement, and so should be welcomed.”
CHANGES TO RULES ABOUT THE TAX TREATMENT OF NON-DOMICILES AND THE INTRODUCTION OF A STATUTORY RESIDENCE TEST
Andrew Penman, London Head of Private Client Tax Services at PKF, said: "The new rules on non-doms and the statutory residence test, which the Government hopes to outline by 6 December, are billed by HMRC as a way of introducing greater clarity into the tax system. It is no easy task and there may yet be delays, but make no mistake: the Treasury would not have advanced the proposals if they didn’t generate more revenue for the Government coffers."
"Individuals who are in the UK for the long term will soon have to pay an extra £20,000 a year to preserve the tax benefits of their non-UK domicile status. And while the new statutory residence rules should indeed give more certainty on an individual’s status, they will mean more people become taxable in the UK unless they change their visiting and working patterns."
TAX LOSS RELIEF RESTRICTIONS FOR SMALL BUSINESS OWNERS
Patrick Harrison, partner at PKF, says: “We know that HMRC is already seeking to block claims for artificially inflated trading losses in the income tax returns of small business owners, but my worry is that creating broad brush restrictions will hit entrepreneurs who are taking risks to create businesses. This is one area of tax law in which over-simplification could be bad for business growth.”
TOUGHER RULES FOR BUSINESS INVESTMENT
Lisa Macpherson says: “Making it harder for investments to qualify for the tax efficient Enterprise Investment Scheme (EIS) – which could be confirmed in the Autumn Statement following a consultation earlier in the year - can be seen as a trade-off for increasing the annual subscription limits for investors and the limits on the size of company that can qualify. With wealthy investors able to claim up to £300,000 a year in tax relief on EIS investment in 2012/13 and later years, many would argue it is right that the investments are restricted to genuine trading businesses rather than just funding vehicles. But with business finance so scarce at the moment, it might not be the right time to restrict a means of accessing private venture capital that has proved so successful in recent years.”
CHANGES TO CAPITAL ALLOWANCE RULES
Marios Gregori, tax partner at PKF says, “Highly technical rules to block avoidance schemes centred on capital allowances claims are scheduled to be announced by 6 December and could be part of the Autumn Statement. The move will be welcomed by most businesses provided it does not over complicate the process of making genuine claims. But it would be better for the Government to concentrate on making it more attractive for businesses to invest and allowances simpler to claim. “
FURTHER ANNOUNCEMENTS ON HMRC INITIATIVES
John Cassidy, tax investigation and dispute resolution partner at PKF, comments: “After many years of reorganisations at HMRC, it seems that the Government has finally woken up to the fact that it is possible to collect more money by ramping up enforcement activities. We have seen more new taskforces, disclosure initiatives and investigations in the last few months than in the preceding few years. Further announcements in the Autumn Statement ought to be good news for honest taxpayers but I do hope that HMRC’s work is better funded in the future so that it can hit the right targets and not trouble those who are compliant.”
ENDS
For further information, please contact: Andy Konieczko on 020 7065 0537 or andrew.konieczko@uk.pkf.com
Notes to Editors:
1. PKF (UK) LLP is a leading firm of accountants and business advisers with more than 1,500 partners and staff operating in 23 offices in the UK mainland firm, incorporating a wholly-owned financial planning company and associated offshore practices. The firm specialises in advising growing and entrepreneurial/owner-managed businesses, AIM and fully listed companies, and also has extensive experience in the public and not-for-profit sectors. Principal services include assurance and advisory; taxation; consultancy; corporate recovery and insolvency; corporate finance and forensic. The firm has particular expertise in advising sectors such as hotels and leisure; mining and resource; public sector; real estate and construction; professional practices; not-for-profit; and medical. The firm’s web site is www.pkf.co.uk
2. PKF (UK) LLP also offers financial services through its FSA authorised company, PKF Financial Planning Limited. PKF (Isle of Man) LLC is a limited liability company registered in the Isle of Man. PKF (Guernsey) Limited is incorporated in Guernsey.
3. PKF (UK) LLP is a member firm of the PKF International Limited network of legally independent firms. The PKF International Limited network has around 17,600 people operating in 120 countries around the world.
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