24 November 2008
"Tax looks set to take centre stage for the foreseeable future"
On Monday 24th November, the Chancellor delivered his Pre-Budget Report.
James Bullock, a Partner specialising in Tax Disputes and Investigations at McGrigors LLP, made the following observations:
"The headlines have all been about VAT cuts and tax rises for the wealthy. But the detail in the PBR contains some significant developments which will be highly relevant to corporates and high net-worth individuals."
"Widely expected by the tax press, and of interest to the remaining UK based multinationals, will be the promise to abolish corporation tax on dividends from foreign subsidiaries. This is the first step forward in the reform of the taxation of foreign profits, following decisions of the European Court of Justice in Cadbury Schweppes and other cases such as FII Group Litigation. This commitment - which only applies to large and medium-sized businesses - rather suggests that no acceptable alternative emerged during the consultations on foreign profits taxation in 2007 and 2008 and might suggest a reaction to the threat of UK multinationals moving their HQs to more tax-sympathetic jurisdictions. However given the tightening in other areas, with a cap on interest deductibility calculated by reference to the group's worldwide debt, and additional anti-avoidance elements to the loan relationships rules, it is unlikely to cause any multinationals who have already decided to move to a more benign fiscal environment to change their minds.
There is a further Consultation Document published on "Principles Based Drafting" of anti-avoidance legislation in relation to financial products avoidance. This contains draft clauses which may be introduced into the next Finance Bill. The interesting angle here is the fact that the draft clauses contain a statutory Ramsay test in relation to "disguised interest". Could this be the start of a GAAR-by-the-back-door?
"Meanwhile, the "Review of Powers, Deterrents and Safeguards" continues, with a new forum involving the private sector and alignment of powers for late filing and late payment. There is also further consultation on the next stage of Compliance Checks. There is likely to be more on this in the Budget proper.
As predicted, there is to be a second round of the "Offshore Disclosure Facility", whereby taxpayers with overseas bank accounts and tax irregularities relating to those accounts have the opportunity to make disclosure of the irregularities and pay the tax due in return for a fixed penalty. Phase 1 operated in the spring of 2007, but despite 60,000 taxpayers coming forward it was anticipated that there were in fact considerably more in respect of whom HMRC had collected details from banks. Details of Phase 2 will be published in the New Year. Of particular interest will be the level of fixed penalty and in particular the question as to whether this will be higher than the 10 per cent penalty offered in Phase 1. At some point these "quasi-amnesties" will have to stop and HMRC will have to "get tough".
One area where they do appear to be prepared to "get tough" is in relation to the UK's Offshore Financial Centres, such as Jersey, Guernsey, the Isle of Man, the Cayman Islands and the BVI. There is to be a "review" of, inter alia, "Financial supervision and transparency" and "Fiscal arrangements" with interim conclusions being produced in time for the 2009 Budget. It is hard to escape the conclusion that this "review" will be used as something of an opportunity to "shake the stick" at the Offshore Financial Centres, particularly in light of the recent banking crisis and the ongoing war on offshore bank accounts and tax irregularities.
Finally, in terms of the big picture, Tax looks set to take centre stage for the foreseeable future, both in terms of its impact on business-and individuals. Any ideas of a "low tax economy" let alone "flat taxation" in the UK are well and truly over. Forget the "pre-Budget Report - it's back to the era of "mini-Budgets" - shades of the 1970s".
For further information, please contact James Bullock on 020 7054 2726, or e mail james.bullock@mcgrigors.com