Tenon's take on the Pre-Budget Report

H.M.Treasury

Compiled by Les Winnard of local accountants and business advisers Tenon. Les says: "Perhaps I am unduly cynical but long experience tells me that the more positive the Chancellor is about how attractive his reforms are for business, the more likely it is that bad news is lurking somewhere in the small print."

His summary:

Small business

The Chancellor has struggled for some time to come up with a coherent system for the taxation of small business.  He wants to encourage people to set up small businesses, but at the same time he is very concerned that people have been incorporating businesses in order to obtain tax advantages.  So in recent years we have seen the introduction of a low starting rate for small companies, which in the last two years has been set at zero, but we have also seen a very complex set of rules – known in the jargon as the Non Corporate Distribution Rate [NCD] – which in many cases remove the incentive of the low starting rate!  This year the Chancellor has finally seen sense and gone back to a simple system under which all small company profits will be charged to tax at 19%.  Although a rate increase from 0% to 19% might seem to be a huge jump in fact, because of the complexities of the system, most small companies will not see any significant increases in their corporation tax liabilities.  The only companies who will be affected will be those comparatively few small companies which retain their profits within the business for future investment. 

The NCD rate was a classic example of a knee-jerk piece of legislation which was rushed in to deal with a specific problem and which turned out, on close examination, to create as many difficulties as it solved.  Few will mourn its passing.

Capital allowances

The Chancellor loves tinkering with capital allowance rates and this year is no exception.  Allowances on plant and machinery for small companies were reduced from 50% to 40% for this financial year: now we find that they will be increased back to 50% for 2006-7.  I can’t really complain at the increase in allowances but neither can I believe that such measures have any real effect.  After all, for every £1,000 which a small company invests in plant and machinery it will only get an extra £19 reduction in its tax liability in the first year.  Don’t spend it all at once!   

VAT simplification

Reduction of the burdens on business is a recurring theme for this government.  In the days leading up to the pre-Budget report we saw some relaxation of the reporting for employee share incentives, and in this report we see some significant announcements in VAT.  Small companies are allowed to account for VAT on an annual basis instead of having to make quarterly VAT returns.  The Chancellor announced that the threshold for annual accounting is to be increased to £1,350,000.  Of more direct benefit is the second announcement: the intention to use the same monetary limit for cash accounting.  Under normal VAT accounting a business has to account for VAT on a sale whether or not the customer has paid for the goods or services.  Under cash accounting VAT is only accounted for when the customer pays.  (As a quid pro quo the business can only recover VAT when it actually pays its bills).  The Chancellor has written to the EU authorities for authority to increase the threshold for cash accounting to £1,350,000.  On the assumption that this permission is granted I anticipate that many businesses will want to look seriously at a move to cash accounting for VAT.

If we really had joined-up thinking, the Chancellor would have announced that he was also going to allow cash accounting for corporation tax purposes for small businesses.  This has not happened – and I don’t think that there is any reasonable likelihood that it ever will, so businesses will still be required to maintain accounts on a normal accruals basis.  Depending on your point of view the cash accounting glass is therefore either half full or half empty.  Nothing is ever simple!

Pensions

The new pension regime starts on 6 April 2006 (there were some wild rumours that it would be postponed for a year, but the Chancellor has confirmed that there will be no delay).  All sorts of schemes were being promoted in the market place for using pensions to hold private assets such as residential property or collections of fine wine.  A pre-emptive strike has been launched on such arrangements and it is now unlikely that people will be able to use their pension funds to hold personal assets in a tax-favoured environment.  There is not a complete prohibition on pension funds holding such assets, but in practice where the people benefiting from the use of the assets are the same people who are controlling the pension scheme such investments will not be permitted.

This change, and various other changes to the new pensions regime, are likely to have a significant effect on the ways in which pensions are used as a tax shelter.  We don’t have all of the details yet and these new developments are likely to be the subject of much controversy, but there is no doubt that the Government is worried that its pension reforms are still not fully thought through and have the potential to back fire.  I have no doubt that further changes to the new regime will be introduced before it comes into effect.

Avoidance

There is the usual crop of anti-avoidance measures.  At first sight these seem to be specifically targeted at known schemes but there is always the danger that they might on closer examination have an effect on straightforward commercial transactions.  The disclosure rules, under which promoters have to notify HMRC about tax avoidance schemes, are being tightened up and it does now seem that very few aggressive avoidance schemes will escape the requirement for disclosure. 

Next year

Much of the report was taken up with reports of changes which might take place, and as usual a number of consultation documents have been released.  One which will be of particular interest concerns medium-sized companies.  Small business tax has been very much on the Government’s agenda recently but nobody has really paid much attention to the needs of medium sized businesses (let’s not get hung up on definitions here, but we might broadly be thinking of unquoted businesses with more than 50 employees).  So there is a now a consultation on the specific needs of such businesses.  Our initial reaction to the consultation is positive.  In particular it recognises that the current system makes it very difficult for growing companies to know precisely when their tax liabilities fall due.  Tenon will be contributing to the review of medium-sized businesses and welcome any thoughts that you might have about how the system can be improved.

There has been much speculation in the press about a new tax on development gains from property.  There was an announcement, but only of a consultation.  Any new rules will not come into effect before 2008 so if you are likely to be affected you have plenty of time to plan your affairs in a tax efficient manner.

And finally

Chancellors do not like announcing tax increases and use all possible means of raising taxes without using the T** word. This year was no exception. The new planning gains tax is going to be called a “supplement”. I bet it will feel like a tax if you have to pay it!