EY Budget predictions: Corporate taxes

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“With the UK in the depths of austerity, the Chancellor faces one of his most difficult balancing acts to date. How can he stimulate growth without significantly increasing the burden on Treasury’s coffers?

“The corporate tax system will undoubtedly play its part and businesses will be closely watching the Budget speech for anticipated announcements on Controlled Foreign Companies rules, General Anti Avoidance Rule, corporate tax rates and enterprise zones, to name but a few.

Controlled Foreign Companies – the final chapter

“The Controlled Foreign Companies (CFC) reform has been under consultation for over five years and the saga is likely to conclude this year.  The CFC rules tax foreign subsidiaries of UK headquartered multinationals - even where there is no activity in the UK – and over the last decade, have led to many businesses relocating their headquarters overseas. Conversely, getting this right could lead to the UK once again becoming the gateway to Europe and elsewhere.

“Treasury has the right intentions but concerns remain that the complexity of the proposed system could be its undoing.

“We are expecting to see further details announced about the targeted anti avoidance rule and a temporary period of exemption. Based on the current plans, this should be the start of the concluding chapter.

GAAR and the crackdown on tax avoidance

“A decision to proceed with the introduction of a General Anti Avoidance Rule (GAAR) is also likely to be included in the Chancellor’s red box. Queen’s Counsel Graham Aaronson produced draft proposals at the end of last year, which have been considered by the government, and we are expecting a formal consultation to be announced for the Spring.

“Any government consultation is likely to set out the Treasury’s own interpretation of Aaronson’s blueprint.  Businesses will be closely watching any details to see whether the proposals have the potential to develop and expand in scope, beyond Aaronson’s original intent.

“This remains a delicate area, where the Government needs to be wary of introducing uncertainty that could undermine the UK’s competitiveness.
Reaffirming the UK’s position on a Financial Transactions Tax

“France’s continuing commitment to introducing the Financial Transaction Tax (FTT) may result in the Chancellor using his Budget speech to reaffirm the UK’s negative position. The prospect of nine member states potentially ‘going it alone’ may still have an impact on the UK, and on London in particular, even if it is not implemented here.

“While the FTT has been ruled out by the UK government, the door has been left open on another EU proposal - the Financial Activities Tax. This may yet come under the Chancellor’s spotlight.

Consultation updates and corporate tax rates

“The Chancellor is also due to provide an update on some of the key consultations that have been taking place over recent months. This should include the corporate tax rate reduction to 24%, which is due to be legislated for financial year 2014. There is also the consultation on the ‘above the line’ Research & Development (R&D) tax credit, which will enable the incentive to be recognised within the budgets of the R&D centres rather than as a reduction in corporation tax.

Extension of Enterprise Zones?

“Businesses are also awaiting further details of the Welsh and Scottish Enterprise Zones, the incentives that will be on offer, and whether the regional National Insurance tax breaks that were announced last year could potentially be extended.  However, there are still major questions over the effectiveness of these initiatives. The employers’ NICs holiday has only had a very limited take up to date and so any extension would require a publicity drive.

Devolving tax powers

“Political pressure is mounting around the devolution of tax powers to Northern Ireland and Scotland authorities, which are lobbing for their own corporation tax rates. Any reduction in rate would be accompanied by a similar reduction in central funding as determined by the Barnett formula.

Gaming under fire

 “Looking more widely, the leisure industry is awaiting a rate announcement on the new Machine Games Duty, applying to gaming machines in casinos, bingo halls, bookmakers, pubs and clubs, which will be a significant change from the current system of a licence and VAT.

“We could also see the decision on the introduction of taxation on Remote Gaming, targeting online poker and betting, together with a consultation paper on the detail.”

Additional tax tweaks?

“Overall, business will want to see the delivery of the large changes to the international regime that have been heralded for some time and will then be looking forward to a period of relatively stability.  However, faced with the need to stimulate growth, the Chancellor may yet feel the need to introduce further tax incentives and tweak the system further.”