BDO predicts Corporation Tax to fall in next weeks Pre-Budget Report

Government likely to reduce corporation tax to 25 per cent.

With the Pre-Budget Report likely to be next week, BDO has compiled what it predicts are some of the more likely announcements to be made. The Government is likely to be looking to 'kick start' the economy through tax cuts focused upon the businesses sector to further support the recent 1.5 per cent cut in base rate. We believe the Government could well announce the reduction of corporation tax to 25 per cent and cut employers National Insurance Contributions. However there are longer term issues to be answered; such as from where exactly tax cuts will eventually be financed.

BDO’s tax team also predict that the government will wish above all to avoid any own goals by limiting changes made to income tax, capital gains tax and inheritance tax.

Here is a full list of predictions of what the Pre-Budget Report may hold for us this year:

  • No structural changes to income tax, capital gains tax and inheritance tax, to avoid repeating political 'own goals', excluding routine annual up-ratings. Except for announcing further and more generous compensation to low paid workers who lost out from the removal of the 10 per cent tax band.
  • Stamp Duty Land Tax: a further increase in the zero and lower rate bands to support the troubled UK housing market.
  • An announcement that the corporation tax rate will be reduced to 25 per cent over a three year period from 2009/10 to maintain the UK’s international tax competitiveness.
  • A temporary reduction in the VAT rate until 1 April 2010 to 16 per cent to mitigate the severe contraction in consuming spending.
  • But, a future increase in the VAT rate from 1 April 2010 to 19 per cent to alleviate the annual public financing deficit.
  • A temporary reduction in employer’s national insurance contributions in 2009/10 from 12.8 per cent to 11 per cent to reduce pressure on employment costs and support employment levels.
  • Reform of the taxation of small service companies. There could well be moves to protect the tax base and promote a more level playing field in the taxation of individual consultants, partnerships and incorporated businesses.
  • An announcement of a consultation leading towards chargeable gains reliefs on dis-incorporation for small businesses. This should assist small businesses in the economic downturn and match the reliefs available for un-incorporated businesses wishing to incorporate.
  • Hopefully, the announcement of a consultative process to clarify the taxation of partnerships, limited partnerships and limited liability partnerships. This is currently dependent upon non legislative HMRC Statements of Practice and extra statutory concessions rather than codified tax legislation.
  • Abolition of indexation allowance for company's capital gains to align system with personal Capital Gains Tax.
  • An elimination of UK corporate taxation of overseas profits remitted by dividends paid to the UK from both European Union and Tax Treaty countries. This is currently seen as a 'quick fix' in advance of the ongoing consultative processes which will recognise the threat to both UK PLC and tax revenues arising from the emigration of UK resident international groups with substantial non-UK profits.
  • Clarification of the impact of European Court of Justice decisions upon UK tax system and additional measures to protect UK tax revenues in response to perceived tax avoidance.
  • Additional but limited environmental tax measures including both 'sticks' and 'carrots' to combat global warming.
  • The announcement of measures to facilitate the creation of UK residential property real estate investment trusts (UK-REIT’s) to promote the expansion of a professionally managed residential rental market and provide new customers for house builders.
  • Hopefully, an extension of Entrepreneurs' Relief to all employee shareholders without the need to meet the existing onerous minimum shareholding requirements.  This would further encourage the use of equity as part of executive and middle-management remuneration packages.
  • A temporary suspension of empty property rates pending further consultation to respond to property occupier and developer lobbying in the light of the severe commercial property downturn.
  • Hopefully, an alignment of reliefs available for losses in property businesses incurred by individuals with the more generous provisions for corporate entities. This would be particularly helpful in the current market and could help to alleviate the effects of the property downturn on the general economy.
  • The announcement of a further consultation on a method of taxing planning gains. There is a need to simplify the funding of infrastructure (often currently met through Section 106 agreements) by 'capturing' a portion of the land value uplift created by the planning process, but in a manner which is acceptable to the property sector and does not increase its cost base.

Stephen Herring, Senior Tax Partner at BDO said: “We strongly consider that the Government should resist any temptation to introduce windfall taxes on utilities such as oil and gas companies. Not only would this be very business unfriendly, it would have unpredictable results, be difficult to enforce as many such firms are multinational and would set very poor precedents for government and business relationships.

This has been a turbulent year for the Treasury which is facing a whole host of conflicting pressures. What we are likely to see with this year’s Pre-Budget Report is a number of measures to help sustain the economy, consumer confidence and business confidence in the short term, while avoiding anything that could potentially damage the electorate’s opinion of the Government’s fiscal competence.”

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For more information, please contact Matthew Longbottom at BDO on 020 7893 2717, 0797619 8786 or email matthew.longbottom@bdo.co.uk

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