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Did the Pre-Budget Report fill you with delight or dismay, or perhaps neither?
ALLISON PLAGER finds out what various professional firms had to say about it.
THE PRE-BUDGET Report went off smoothly, perhaps with more of a whimper than a
bang, and initially there seemed little to it, except perhaps to stand back and
admire how a potentially gloomy outlook can be transformed into a positive one.
On the tax side, the Chancellor said little, but the press releases as usual
flag up changes and plans which have given the professional firms plenty to talk
ALLISON PLAGER finds out what various professional firms had to say about it.
THE PRE-BUDGET Report went off smoothly, perhaps with more of a whimper than a
bang, and initially there seemed little to it, except perhaps to stand back and
admire how a potentially gloomy outlook can be transformed into a positive one.
On the tax side, the Chancellor said little, but the press releases as usual
flag up changes and plans which have given the professional firms plenty to talk
Did the Pre-Budget Report fill you with delight or dismay, or perhaps neither?
ALLISON PLAGER finds out what various professional firms had to say about it.
THE PRE-BUDGET Report went off smoothly, perhaps with more of a whimper than a
bang, and initially there seemed little to it, except perhaps to stand back and
admire how a potentially gloomy outlook can be transformed into a positive one.
On the tax side, the Chancellor said little, but the press releases as usual
flag up changes and plans which have given the professional firms plenty to talk
about.
This seems to be the feeling of John Whiting, tax partner at
PricewaterhouseCoopers, who says that the Chancellor spoke at length about the
economy, but from the point of view of tax, while there did not appear to be
much on the surface, a lot was buried in the layers of notices and press
releases. Patrick Stevens, tax partner at Ernst & Young says that there were
lots of 'little parcels of micromanagement of the tax system which are designed
to sound dynamic, but in fact have little real effect'. Echoing this comment,
John Battersby, head of tax policy strategy at KPMG says that the initial
feeling was one of relief that no significant extra burdens had been announced.
However, this was then followed by 'disappointment that there was no real help
for business, given the current difficult economic situation'. He suggests, for
instance, that it would have been helpful to see first year allowances increased
or the loss carryback provisions extended to, say, three years, instead of just
the one year.
Employee share schemes
Philip Fisher of Chantrey Vellacott DFK says that the employee share
contributions proposals are 'very welcome'. Having had a chance to go through
the proposals, he says that the deduction relates to approved and unapproved
qualifying share schemes. The deduction is for the market value of shares given
to the employee, but is reduced to the extent that the employee contributes for
the shares. He says that the 'idea is to cover situations where the employee is
provided with a real stake in the employer company', although he wonders how
wise it is to encourage employees to invest in their employer company given the
state of the current market.
Employee benefit trusts
Less welcome are the changes to the taxation of employee benefit trusts. These
are sometimes used to provide remuneration and benefits to employees in a
tax-efficient way, in that the employer gains a corporation tax deduction and
the employee's tax liability is deferred, sometimes indefinitely. This is one
area that has certainly caught the attention of the experts, with the general
consensus being that the Government has rushed in to stop perceived abuse,
without providing any chance for consultation first.
Philip Fisher, having waded through the draft legislation, which is likely to be
included in Finance Act 2003, but will take effect from 27 November 2002, says
that it restricts the deduction for employee benefit contributions from trusts
and other similar vehicles. In order to continue to qualify for the deduction,
the benefit must be taxable under Schedule E and liable to National Insurance.
Smith & Williamson's Nick Wallis says that the move is a 'clever attempt to
close down conditional share bonus plans', which City firms have been using to
give their employees National Insurance free bonuses for the last 18 months.
The legislation appears to Philip to have been 'drafted at speed' and rushed
through in response to the Special Commissioners' decision in Dextra. As a
result he thinks that the legislation is too broad reaching and 'not well
drafted'. Nick too considers that the Revenue has taken 'a sledgehammer to crack
the proverbial nut', and says that it will present a 'challenge' to the big
practices from the tax planning point of view. He hopes that the Revenue will
have another look at the draft legislation before it becomes final, particularly
as the way that it has been drafted means that some perfectly legitimate
employee share schemes will be caught by it. However, he thinks that the Revenue
has effectively 'closed the door on the use of employee benefit trusts for such
purposes', and that clients with employee benefit trusts could expect some
attention from the Revenue.
Patrick Stevens agrees that the legislation has been very widely drawn, and will
cover areas unintentionally. He suggests that, despite the new rules, some
companies may still choose to use employee benefit trusts, even though they will
gain no corporation tax deduction, as the employee can still benefit.
Domicile
The fact that not much was said about the domicile issue was generally felt to
be encouraging. Francesca Lagerberg, national tax partner at Smith & Williamson,
suggests wryly that it has been kept on the 'too difficult pile', but says that,
by not rushing in, the Government is providing further important opportunity for
discussion. On the downside, the resulting 'aura of uncertainty' means that
affected individuals are in a state of limbo.
Similarly, John Whiting says that it is 'positive' that there is not going to be
a 'knee-jerk reaction' to the domicile issue, and is pleased that the background
paper will provide more chance for discussion. He points out that the
Government, in reaching a conclusion on the issue, will have to make a business
or a political response. The business one would be to leave well alone, in that
the current arrangements contribute to 'UK plc's profitability'; however, he
feels that it might be 'difficult for the Government to do nothing politically'.
John Battersby comments that it would be an 'own goal' if the Chancellor brought
in big changes, as it is very important to the United Kingdom's economy that
internationally mobile executives continue to be based here. He is keen to see
some clear guidelines soon.
Also taking an optimistic view, Patrick Stevens thinks that the fact that the
Revenue is acknowledging the need to continue to attract high quality
internationally mobile executives is a good sign. He feels that by recognising
their value to the United Kingdom, the Government is taking a much more
'sensible' attitude than the original one focussing on 'great unfairness'.
Personal tax
The increases in National Insurance and freezes to the main personal tax
allowances were pretty much glossed over by the Chancellor, but Francesca
Lagerberg says these should not be forgotten, since as a result of them, many
taxpayers will be worse off than they might have thought from 6 April 2003. She
wonders if there will be some 'interesting tax planning' taking place to assuage
their effect.
On the issue of tax credits, Francesca says that these will affect many people
and most tax advisers are likely to have clients who could make claims, so
should 'be thinking about the issue now'. The claim should not be left 'to the
last minute' particularly since they can only be backdated by three months.
Francesca points out that claims can be submitted in advance, provided that the
adviser has all the necessary information.
Construction industry scheme
The Chancellor's announcement of a consultation aimed at reforming the
construction industry scheme pleased the tax profession, although with some
provisos. John Whiting says that this was a 'very positive step forward, and is
a good Revenue response to quiet and persistently made points at various
meetings' demonstrating the difficulties inherent in the current scheme. He sees
the planned reform as a 'sensible attempt to address practical and logistical
problems', as the Revenue tries to keep the balance between protecting tax
revenues and the practical administration required.
Also welcoming 'any attempt to simplify and streamline the current system',
Matthew Hunnybun, people services director at KPMG, says that the disadvantage
in the Revenue's proposals is that 'contractors will have to take full
responsibility for determining whether a subcontractor is an employee or self
employed', with the likelihood of penalties for getting a decision wrong. He
suggests that perhaps 'a system of advance confirmation of a subcontractor's
status' could be introduced which would offer contractors some certainty, as to
expect them to decide on a subcontractor's status with frequently only
incomplete information 'is a little unfair'.
Matthew also mentions the Revenue's enthusiasm for a system using telephone and
online verification, which he feels is a 'move in the right direction', as it
would cut down on the paperwork and travel necessitated by the current system.
KPMG is suggesting that all those who may be affected by the proposed changes
should let the Revenue know their views. The deadline for responses to the
consultative document is 28 February 2003.
Value added tax
For John Whiting, one of the most significant measures in the Chancellor's
report was the protection of indirect tax revenues, and he is 'surprised' that
this has not featured more prominently in subsequent commentary. In particular,
the Chancellor has targeted VAT missing trader fraud and 'abusive' tax avoidance
schemes. As Smith & Williamson says in its commentary, the anti-avoidance
measures have no doubt been brought about 'following a number of high profile
VAT cases' which have been in the courts recently.
Readers who heard Richard Broadbent, chairman of Customs and Excise, deliver the
Hardman memorial lecture at the Tax Faculty in October, will probably agree with
John Whiting's comment that he could 'hear Richard Broadbent in the document'.
Much of the talk centred on so-called avoidance, and the determination of
Customs to prevent schemes which, even if within the law, went against the
spirit of the legislation.
Another area of VAT mentioned in the report is the VAT treatment of fund
management fees. As Patrick Stevens says, some fees are exempt, others are
VATable. The current system seems 'wholly illogical', so it is encouraging that
Customs are trying to rationalise this area of VAT. Customs are suggesting three
options:
all fees should be exempt;
all fees should be subject to VAT;
redraw the current borderlines.
The third option would not be helpful, says Patrick, and he suspects that
Customs will veer towards the first option.
Stability required
With regard to the keenly awaited green paper on pensions, still to be
published, John Battersby says that is 'reassuring to be told by the Chancellor
that tax relief for pension contributions is not be interfered with'. He adds
that in order to encourage people to save for their retirement, the pensions
régime must be stable. While simplification of the legislation would be a good
thing, the making of wholesale changes may not be.
Stamp duty
Although not much was said about the reform of stamp duty, Stephen Nixon, tax
technical manager at PKF, notes that, having read the draft legislation issued
shortly after the report, it did not mention either rates or lease duty charges.
He senses that the latter area is causing some friction between the Revenue and
the consultation committee, which will be difficult to resolve.
Disappointing
Opinions canvassed were pretty much in agreement that the Chancellor's report
had been disappointing as it related to tax, with much of what was said having
been announced before. The biggest issue pertains to employee benefit trusts
where, overwhelmingly, the profession considers that the Revenue has introduced
over-zealous measures, without consulting or fully thinking through how they
will work in practice.
ALLISON PLAGER finds out what various professional firms had to say about it.
THE PRE-BUDGET Report went off smoothly, perhaps with more of a whimper than a
bang, and initially there seemed little to it, except perhaps to stand back and
admire how a potentially gloomy outlook can be transformed into a positive one.
On the tax side, the Chancellor said little, but the press releases as usual
flag up changes and plans which have given the professional firms plenty to talk
about.
This seems to be the feeling of John Whiting, tax partner at
PricewaterhouseCoopers, who says that the Chancellor spoke at length about the
economy, but from the point of view of tax, while there did not appear to be
much on the surface, a lot was buried in the layers of notices and press
releases. Patrick Stevens, tax partner at Ernst & Young says that there were
lots of 'little parcels of micromanagement of the tax system which are designed
to sound dynamic, but in fact have little real effect'. Echoing this comment,
John Battersby, head of tax policy strategy at KPMG says that the initial
feeling was one of relief that no significant extra burdens had been announced.
However, this was then followed by 'disappointment that there was no real help
for business, given the current difficult economic situation'. He suggests, for
instance, that it would have been helpful to see first year allowances increased
or the loss carryback provisions extended to, say, three years, instead of just
the one year.
Employee share schemes
Philip Fisher of Chantrey Vellacott DFK says that the employee share
contributions proposals are 'very welcome'. Having had a chance to go through
the proposals, he says that the deduction relates to approved and unapproved
qualifying share schemes. The deduction is for the market value of shares given
to the employee, but is reduced to the extent that the employee contributes for
the shares. He says that the 'idea is to cover situations where the employee is
provided with a real stake in the employer company', although he wonders how
wise it is to encourage employees to invest in their employer company given the
state of the current market.
Employee benefit trusts
Less welcome are the changes to the taxation of employee benefit trusts. These
are sometimes used to provide remuneration and benefits to employees in a
tax-efficient way, in that the employer gains a corporation tax deduction and
the employee's tax liability is deferred, sometimes indefinitely. This is one
area that has certainly caught the attention of the experts, with the general
consensus being that the Government has rushed in to stop perceived abuse,
without providing any chance for consultation first.
Philip Fisher, having waded through the draft legislation, which is likely to be
included in Finance Act 2003, but will take effect from 27 November 2002, says
that it restricts the deduction for employee benefit contributions from trusts
and other similar vehicles. In order to continue to qualify for the deduction,
the benefit must be taxable under Schedule E and liable to National Insurance.
Smith & Williamson's Nick Wallis says that the move is a 'clever attempt to
close down conditional share bonus plans', which City firms have been using to
give their employees National Insurance free bonuses for the last 18 months.
The legislation appears to Philip to have been 'drafted at speed' and rushed
through in response to the Special Commissioners' decision in Dextra. As a
result he thinks that the legislation is too broad reaching and 'not well
drafted'. Nick too considers that the Revenue has taken 'a sledgehammer to crack
the proverbial nut', and says that it will present a 'challenge' to the big
practices from the tax planning point of view. He hopes that the Revenue will
have another look at the draft legislation before it becomes final, particularly
as the way that it has been drafted means that some perfectly legitimate
employee share schemes will be caught by it. However, he thinks that the Revenue
has effectively 'closed the door on the use of employee benefit trusts for such
purposes', and that clients with employee benefit trusts could expect some
attention from the Revenue.
Patrick Stevens agrees that the legislation has been very widely drawn, and will
cover areas unintentionally. He suggests that, despite the new rules, some
companies may still choose to use employee benefit trusts, even though they will
gain no corporation tax deduction, as the employee can still benefit.
Domicile
The fact that not much was said about the domicile issue was generally felt to
be encouraging. Francesca Lagerberg, national tax partner at Smith & Williamson,
suggests wryly that it has been kept on the 'too difficult pile', but says that,
by not rushing in, the Government is providing further important opportunity for
discussion. On the downside, the resulting 'aura of uncertainty' means that
affected individuals are in a state of limbo.
Similarly, John Whiting says that it is 'positive' that there is not going to be
a 'knee-jerk reaction' to the domicile issue, and is pleased that the background
paper will provide more chance for discussion. He points out that the
Government, in reaching a conclusion on the issue, will have to make a business
or a political response. The business one would be to leave well alone, in that
the current arrangements contribute to 'UK plc's profitability'; however, he
feels that it might be 'difficult for the Government to do nothing politically'.
John Battersby comments that it would be an 'own goal' if the Chancellor brought
in big changes, as it is very important to the United Kingdom's economy that
internationally mobile executives continue to be based here. He is keen to see
some clear guidelines soon.
Also taking an optimistic view, Patrick Stevens thinks that the fact that the
Revenue is acknowledging the need to continue to attract high quality
internationally mobile executives is a good sign. He feels that by recognising
their value to the United Kingdom, the Government is taking a much more
'sensible' attitude than the original one focussing on 'great unfairness'.
Personal tax
The increases in National Insurance and freezes to the main personal tax
allowances were pretty much glossed over by the Chancellor, but Francesca
Lagerberg says these should not be forgotten, since as a result of them, many
taxpayers will be worse off than they might have thought from 6 April 2003. She
wonders if there will be some 'interesting tax planning' taking place to assuage
their effect.
On the issue of tax credits, Francesca says that these will affect many people
and most tax advisers are likely to have clients who could make claims, so
should 'be thinking about the issue now'. The claim should not be left 'to the
last minute' particularly since they can only be backdated by three months.
Francesca points out that claims can be submitted in advance, provided that the
adviser has all the necessary information.
Construction industry scheme
The Chancellor's announcement of a consultation aimed at reforming the
construction industry scheme pleased the tax profession, although with some
provisos. John Whiting says that this was a 'very positive step forward, and is
a good Revenue response to quiet and persistently made points at various
meetings' demonstrating the difficulties inherent in the current scheme. He sees
the planned reform as a 'sensible attempt to address practical and logistical
problems', as the Revenue tries to keep the balance between protecting tax
revenues and the practical administration required.
Also welcoming 'any attempt to simplify and streamline the current system',
Matthew Hunnybun, people services director at KPMG, says that the disadvantage
in the Revenue's proposals is that 'contractors will have to take full
responsibility for determining whether a subcontractor is an employee or self
employed', with the likelihood of penalties for getting a decision wrong. He
suggests that perhaps 'a system of advance confirmation of a subcontractor's
status' could be introduced which would offer contractors some certainty, as to
expect them to decide on a subcontractor's status with frequently only
incomplete information 'is a little unfair'.
Matthew also mentions the Revenue's enthusiasm for a system using telephone and
online verification, which he feels is a 'move in the right direction', as it
would cut down on the paperwork and travel necessitated by the current system.
KPMG is suggesting that all those who may be affected by the proposed changes
should let the Revenue know their views. The deadline for responses to the
consultative document is 28 February 2003.
Value added tax
For John Whiting, one of the most significant measures in the Chancellor's
report was the protection of indirect tax revenues, and he is 'surprised' that
this has not featured more prominently in subsequent commentary. In particular,
the Chancellor has targeted VAT missing trader fraud and 'abusive' tax avoidance
schemes. As Smith & Williamson says in its commentary, the anti-avoidance
measures have no doubt been brought about 'following a number of high profile
VAT cases' which have been in the courts recently.
Readers who heard Richard Broadbent, chairman of Customs and Excise, deliver the
Hardman memorial lecture at the Tax Faculty in October, will probably agree with
John Whiting's comment that he could 'hear Richard Broadbent in the document'.
Much of the talk centred on so-called avoidance, and the determination of
Customs to prevent schemes which, even if within the law, went against the
spirit of the legislation.
Another area of VAT mentioned in the report is the VAT treatment of fund
management fees. As Patrick Stevens says, some fees are exempt, others are
VATable. The current system seems 'wholly illogical', so it is encouraging that
Customs are trying to rationalise this area of VAT. Customs are suggesting three
options:
all fees should be exempt;
all fees should be subject to VAT;
redraw the current borderlines.
The third option would not be helpful, says Patrick, and he suspects that
Customs will veer towards the first option.
Stability required
With regard to the keenly awaited green paper on pensions, still to be
published, John Battersby says that is 'reassuring to be told by the Chancellor
that tax relief for pension contributions is not be interfered with'. He adds
that in order to encourage people to save for their retirement, the pensions
régime must be stable. While simplification of the legislation would be a good
thing, the making of wholesale changes may not be.
Stamp duty
Although not much was said about the reform of stamp duty, Stephen Nixon, tax
technical manager at PKF, notes that, having read the draft legislation issued
shortly after the report, it did not mention either rates or lease duty charges.
He senses that the latter area is causing some friction between the Revenue and
the consultation committee, which will be difficult to resolve.
Disappointing
Opinions canvassed were pretty much in agreement that the Chancellor's report
had been disappointing as it related to tax, with much of what was said having
been announced before. The biggest issue pertains to employee benefit trusts
where, overwhelmingly, the profession considers that the Revenue has introduced
over-zealous measures, without consulting or fully thinking through how they
will work in practice.
