March 2010: When is a Budget not a Budget? Tax practitioners comment
We asked leading tax practitioners what they saw as the key points of interest for business in the March 2010 Budget.
An overview of the responses is set out below; click on a name to read the comment in full then use the back button on your browser to return to the overview.
When asked to contribute to this article, the overwhelming response of contributors was "yes" (highly commendable), but with the following caveat, mostly expressed in identical terms: "...assuming there is anything to say".
Given that this article comprises over 20 pages when printed, it is reasonable to conclude that there is something to say.
But is there? Does the March 2010 Budget merit comment? Or is it actually a fairly pointless mound of paper, chiefly intended to satisfy the requirements of an ancient and anachronistic English political system, and in fact comprising only a collation of previously published technical detail?
If the latter, then it is probably the classic pre-election Budget.
There's nothing in it!
It was the overall absence of any specific provisions (other than those previously announced) that generated the most consternation amongst practitioners.
"Forget jam tomorrow, there's not even any jam today", complained Tom Scott (KPMG). James Bullock (McGrigors) said "Many of us wondered what was the point of this Budget". A similar observation from Mathew Oliver (Bird & Bird): "For me the key point of interest was the lack of any real points of interest".
Ashley Greenbank (Macfarlanes) concluded that it was a "'do nothing Budget' ... there are a lot of measures that are put off for another day". Further described by Charlotte Sallabank (Jones Day) as "dry" and "with little to excite".
Graham Airs (Slaughter and May) declared that " from the point of view of a City practitioner, yesterday was no more newsworthy than any other working day."
Not so for apple growers, undoubtedly, with duty on cider increased by 10% above inflation. The measure has met with some incredulity. Greg Sinfield (Lovells) asks "could the clue be that there is no Scottish cider industry?". In any case, Murray Clayson (Freshfields Bruckhaus Deringer) considers it is "good that our legislators are turning their attention to the integrity of the definition of cider".
In relation to specific omissions, Jonathan Cooklin (Freshfields Bruckhaus Deringer) considers that it is "surprising that something as fundamental as the corporation tax treatment of distributions has still not been resolved". Nick Cronkshaw (Simmons & Simmons) pointed out that yet further technical changes were needed to the worldwide debt cap rules "to iron out technical difficulties with the original legislation". But again no draft legislation was available. Martin Shah (Simmons & Simmons) noted that notwithstanding the proposed amendments to the consortium relief rules, there "are other, bigger questions concerning the compatibility of the UK group relief rules remaining".
Another omission was the absence of draft legislation on the bank payroll tax. Simon Yates (Travers Smith) wondered:
"Will this be the first tax to make it through its entire charging period without the publication of so much as a final draft of its provisions - and in particular those relating to who has to pay it? This from a Government that has listed Stability and Certainty as one of the five key policy principles against which it will test proposed tax measures. Physician, heal thyself. This is no way to govern."
Also in relation to the bank payroll tax, Caspar Fox (Eversheds) noted that although the tax was intended to produce a behavioural change, HM Treasury would be "privately delighted with the amount of revenue generated by the tax".
Nick Beecham (Field Fisher Waterhouse) also noted the failure to "take account of representations that charitable donations should be taken into account in determining whether an individual has income in excess of £150,000 for the purposes of restricting higher-rate tax relief on pension contributions".
Certain of the Budget's omissions were welcome, however. In particular, the absence of any increase in capital gains tax. As Robert Young (Taylor Wessing) put it: "In a Budget of relatively few surprises, one of the main talking points from a practitioner perspective concerns a tax left unchanged." However, Heather Corben (SJ Berwin) thought that the review of geared growth employment arrangements (more on this below) demonstrated "HMRC's increasing focus on the disparity between rates of tax for income and capital gains".
Political rhetoric and innuendo
What the Budget did contain in abundance, however, was soft-focus political posturing. Colin Hargreaves (Freshfields Bruckhaus Deringer) referred to it as a "triumph of electoral politics over principle", and Neil Warriner (Herbert Smith) described it as "very much an electioneering Budget".
In this vein came the announcement that the government is to pursue a "systemic risk tax" and is engaged in international discussions on this issue. Eloise Walker (Pinsent Masons) referred to the announcement as "a piece of populist propaganda so obviously aimed at the election it would be laughable (except it's no laughing matter for industry)". Miles Walton (Allen & Overy) thought the proposed measure was "no doubt a popular move but probably not best suited to allowing the banks to facilitate a faster recovery".
An attractive international corporate tax environment?
Another recurring theme from commentators was disappointment at the lack of any measure to promote the UK as an attractive international business centre. Charles Goddard (Berwin Leighton Paisner) described it as "an opportunity missed to promote the UK as a preferred business location" and thought there was "little to dissuade businesses from restructuring to minimise their UK presence".
Richard Croker (CMS Cameron McKenna) lamented the lack of "any evidence of a serious intent to make the corporate tax environment more attractive internationally e.g. by reduced corporation tax rates, perhaps on a phased basis".
Nonetheless, the Budget did announce an intention to consult on whether establishing a tax-transaprent contractual fund vehicle would be beneficial for the UK. Paul Hale (Simmons & Simmons) thought the move would be "welcomed" and "would enable a UK equivalent to the European fonds commun de placement (FCP) to be developed". David Jervis (Eversheds) urged the government "to move fast on this to avoid the UK missing the boat and seeing a substantial part of its funds industry go sailing off to Dublin and Luxembourg".
Another industry to gain was the video games industry, with the announcement of a games tax relief. Cliona Kirby (Olswang) described the measure as "fantastic news for the UK games industry whose position as one of the world leaders in games development has gradually been being eroded". Geoffrey Kay (Baker & McKenzie) agreed, commenting that "the UK has a disproportionately large share of this market, including both the large players and many independents, and this relief should help to consolidate the UK's position".
Group mismatch schemes: principles based anti-avoidance
In terms of what the Budget did contain, the publication of a discussion document on the possibility of introducing a generic or principles-based rule in relation to group mismatch schemes prompted a number of comments.
Described by Heather Gething (Herbert Smith) as "one of the more interesting items announced in the Budget", the proposed measure is nonetheless controversial in the balance it seeks between clarity and principle.
Jonathan Richards, (Linklaters) put it thus:
"I believe that the focus should be on removing anomalous mismatches rather than following a path that is likely to lead to the enactment of woolly and vague legislation ... Business should be entitled to expect legislation that is clear and certain in its application."
Adam Blakemore (Cadwalader, Wickersham & Taft) made a similar point, commenting that "a key concern with legislation based on a set of "principles" remains whether the articulation of such principles is sufficiently clear in the draft legislative provisions, and whether such provisions can deliver sufficient clarity to avoid the dislocation of legitimate commercial activity."
Tony Beare (Slaughter and May) thought that although the government's intentions were "admirable" in this respect, there was "inevitably a concern that an approach of this nature could ensnare a number of transactions which would not normally be regarded as offensive". It is too early to be sure of the impact of this proposal though, as it is "hard to evaluate properly until draft legislation is available", according to Tim Sanders (Skadden, Arps, Slate, Meagher & Flom (UK)).
Employment taxation: review of tax treatment of growth shares
Brief announcements of a review of certain aspects of the taxation of employment initially appeared innocuous but have provoked concern. As David Taylor (Freshfields Bruckhaus Deringer) observed: "It is not unusual to find quite important items that are given little publicity in the Budget announcements."
This point was also pursued by Patricia Allen and Alexander Cox (Ashurst) who thought the private equity industry would be "concerned" about the government's proposed consultation on geared growth arrangements, and commented that given "the increasing divergence between income tax and capital gains tax rates, the ramifications of any revisions in this area could be significant".
Judith Greaves (Pinsent Masons) also wondered whether any resulting provisions would "catch normal commercial arrangements that have been running happily for many years, as well as structured tax schemes". Nicholas Stretch (CMS Cameron McKenna) described the proposed consultation in this respect as "ominous". The sentiment was echoed by Colin Kendon (Bird & Bird).
Kate Habershon (Morgan Lewis & Bockius) was also concerned. She commented that "On top of the higher tax rates and reduced reliefs for high earners this is likely only to detract further from London's ability to attract and retain key business people".
Simon Skinner (Travers Smith) thought it "regrettable" that HMRC had decided to pursue this course.
Stamp duty land tax changes
The government's "headline" changes were the doubling of the SDLT nil rate band for first-time buyers and a new 5% rate for expensive properties. Jennie Newton (Pinsent Masons) thought it was "unsurprising that the changes apply only to residential property, possibly to avoid stifling any recovery in the commercial property sector". Meanwhile, Colin Hargreaves (Freshfields Bruckhaus Deringer) declared:
"If what's needed is really encouragement to entry level house price inflation, rather than anything concrete on production, exports or reducing the deficit, then I'm a banana."
A related topic of debate was the announcement that the Finance Bill 2010 would contain legislation to amend SDLT anti-avoidance rules in the context of partnerships. John Challoner (Norton Rose) described the scheme, which contrived a partnership relationship between buyer and seller, as "a thing of beauty as it was not only well-thought out, but was so complex that it guaranteed a doubling of the fees of the lawyers and accountants involved. Its passing will be mourned."
Robert Kent (Freshfields Bruckhaus Deringer) thought the revised rules would "increase unfairness". Simon Yates (Travers Smith) noted that the scheme had been disclosed to HMRC some years ago and wondered: "What took you so long?".
Any conclusions? Not yet
"That this was not a very exciting budget for the tax practictioner is hardly surprising", said David Harkness (Clifford Chance). Sandy Bhogal (Mayer Brown International) agreed that it "was inevitable that the upcoming election would mean little of real substance in the Budget".
However, as Daniel Lewin (Kaye Scholer) observed, "the real question is what measures we will see in the Post-Election Budget of whichever party will be in power". Susan Ball (Clyde & Co) makes a similar point: "The key points of interest for business in this Budget are what it didn't say - and what may be in store after the election".
Steve Edge (Slaughter and May) is looking forward to the post-election period. His observation is that "taxation and politics are always going to be interlinked - but there has perhaps been too much politics in the mix recently".
Read PLC Tax's detailed commentary on the 2010 Budget in Legal update, March 2010 Budget: key business tax announcements (www.practicallaw.com/4-501-6433). For comment tailored to specific practice areas, including property, environment, incentives, pensions and private client, , see Practice note, Pre-Budget, Budget and Finance Bill: Budget 2010 (www.practicallaw.com/5-376-3630).
Comments in full
Patricia Allen and Alexander Cox, Ashurst
(See Profile for Patricia Allen.)
"From the investment funds and private equity perspective there are two particularly interesting comments in the Budget.
The private equity industry will be concerned to ensure that the Government's proposed consultation on geared growth arrangements will not affect the tax treatment of managers' equity investments in venture capital and private equity backed companies which is dealt with in the 2003 Memoranda of Understanding (MOA) between the British Private Equity and Venture Capital Association (BVCA) and the Revenue. With the increasing divergence between income tax and capital gains tax rates, the ramifications of any revisions in this area could be significant. Remuneration arrangements remain a key focus for the Revenue, however, and the fear must be that, as with so much 'targeted anti-avoidance', any revisions here will be so widely drafted that genuine commercial arrangements, both within the private equity arena and beyond, will potentially be caught.
The investment funds industry will be interested to see the framework of the proposed tax transparent fund vehicle which the Government hopes to legislate for in Finance Bill 2011. Currently partnerships are generally the vehicle of choice for investment funds and it will be fascinating to see how the structure and tax treatment of a new vehicle will develop."
Graham Airs, Slaughter and May
(See Profile for Graham Airs.)
"Once again, HMRC has chosen to swamp practitioners with paper, without distinguishing items that are new from items that had previously been announced. This is either a complete waste of HMRC's, and our, time, or a deliberate ploy to make life difficult for taxpayers' advisers - I do not know which. Wading through it, there is very little that is new, and little of that that is significant.
In fact, from the point of view of a City practitioner, yesterday was no more newsworthy than any other working day."
Susan Ball, Clyde & Co
(See Profile for Susan Ball.)
"The key points of interest for business in this Budget are what it didn't say - and what may be in store after the election. There are some small but useful measures for SMEs. It will also be interesting to see how much of what is proposed in the Budget actually makes in into law in Finance Act 2010."
Tony Beare, Slaughter and May
(See: Profile for Tony Beare.)
Considering the brief period of time available for the passing of the FA 2010, yesterday's Budget was surprisingly fulsome. Having said that, most of the material had been the subject of announcements in the months leading up to the Budget. So far as the impact of the Budget on the City is concerned, I would have thought that the main areas of interest would be:
The consultation document in relation to financial products avoidance within groups - it would seem that, buoyed by the success of the principles-based legislation in relation to disguised interest and income transfers, the Government would like to move to a principles-based approach to financial products avoidance within groups. Whilst the desire for greater simplicity in, and the shortening of, the tax code is admirable, there is inevitably a concern that an approach of this nature could ensnare a number of transactions which would not normally be regarded as offensive.
The new legislation in relation to distributions - this is a much-needed measure following the confusion prevailing over recent months on the extent of the new dividend exemption.
The extension of the disclosure legislation - this has already been the subject of consultation but it involves extensions to the existing disclosure regime, reflecting HMRC's views of certain deficiencies in the regime.
The new legislation relating to transactions in securities - this too has been the subject of consultation and it will be interesting to see how the old legislation, which was terribly out-moded, is revamped to deal with the modern business environment.
Yet more changes in relation to sales of lessor companies in an attempt to separate the sheep from the goats."
Nick Beecham, Field Fisher Waterhouse
(See Profile for Nick Beecham.)
"There will be disappointment for some high earners who make charitable donations and pension contributions. The Government has failed to take account of representations that charitable donations should be taken into account in determining whether an individual has income in excess of £150,000 for the purposes of restricting higher-rate tax relief on pension contributions."
Sandy Bhogal, Mayer Brown International
It was inevitable that the upcoming election would mean little of real substance in the Budget. The Chancellor is clearly looking to present a message of stability to the financial sector and the international capital markets (although the suggestion of a targeted tax at financial institutions which present “systemic risk” will raise some heartbeats). The entrepreneurs relief and other SME changes may grab a few votes, but corporates will be disappointed that there is still no detail available on the proposed patent box regime.
Adam Blakemore, Cadwalader, Wickersham & Taft
"While the bundle of Budget press releases and supporting documents contained fewer taxation surprises than in previous years, a continued resolution to clamp down on perceived tax avoidance is readily detectable within many announcements. Clear examples of this approach are the discussion document on perceived group tax mismatches and the extension of the regulation making powers relating to the risk transfer schemes legislation, the latter extending the scope of these rules to schemes which do not just involve loan relationships or derivative contracts but involve other instruments which are held on trading account by financial traders.
The approach in the group tax mismatch discussion document is interesting, particularly when placed alongside the proposed legislation on risk transfer schemes. We have seen the discussions and consultations on “principles-based” and “generic” legislation before in the context of the disguised interest and transfer of income streams legislation introduced in 2009. It remains to be seen whether the emphasis in the discussion document on “principles-based” legislation follows the compromise path eventually taken after extensive consultation in Finance Act 2009, as opposed to the novel but controversial form of “principles-based” legislation first proposed by HMRC regarding financial products avoidance in December 2007. A key concern with legislation based on a set of “principles” remains whether the articulation of such principles is sufficiently clear in the draft legislative provisions, and whether such provisions can deliver sufficient clarity to avoid the dislocation of legitimate commercial activity.
In this regard, it will be particularly important to be able to identify with certainty the group arrangements which are motivated by the desire to create a tax mismatch and distinguish such arrangements from legitimate commercial transactions where the tax attributes may be attractive but remain a component of a wider package in which the tax features are subordinated to the economic benefits of companies being within a group.
Notwithstanding these initial reservations, the clear indication by HMRC of a thorough consultation process on these proposals is encouraging."
James Bullock, McGrigors
(See Profile for James Bullock.)
"Many of us wondered what was the point of this Budget, given that there will probably be another one in some shape or form after the General Election, depending on its outcome. Following the Chancellor's speech that view is confirmed.
There was very little of any interest that we did not already know about. However, it appears that HMRC still believe that there is significant undisclosed money offshore that will not be teased out by the various disclosure facilities. Hence the potential for doubling penalties where evasion involves a country where there are limited – or no - tax exchange provisions in place with the UK.
What the Budget did contain is vast plethora of minor measures which will surely keep the Commons Standing Committee working late into the night when an (inevitably) voluminous Finance Bill is eventually published."
John Challoner, Norton Rose
(See Profile for John Challoner.)
"The SDLT scheme using the partnership rules, which has now been outlawed, was a thing of beauty as it was not only well-thought out, but was so complex that it guaranteed a doubling of the fees of the lawyers and accountants involved. Its passing will be mourned."
John Christian, Pinsent Masons
(See Profile for John Christian.)
"For the property investment industry, allowing REITs to use stock dividends to meet the 90% rental profits distribution condition is a valuable change allowing REITs to retain more cash in difficult market conditions. For funds or other property investment structures using limited partnerships or LLPs, the further anti-avoidance changes to the SDLT partnership rules will need to be scrutinised. The SDLT partnership rules are already highly complex and the industry will not want the changes to jeopardise commercial fund management or restructurings.
The revised rules on IPT splitting are likely to be welcomed as more focussed on addressing HMRC's concerns regarding the type of arrangements in the Homeserve case. The initial draft legislation caused concern in the insurance industry as it was wide enough to impose IPT on many fee based broker arrangements in the intermediary chain."
Murray Clayson, Freshfields Bruckhaus Deringer
(See Profile for Murray Clayson.)
"Unsurprisingly dull. A plethora of pre-trailed technical material. A few cheap shots. The anti-group asymmetry/arbitrage proposal is an interesting further flirtation with principles-based drafting which might lead to legislation next year. It is good that our legislators are turning their attention to the integrity of the definition of cider (BN62)."
Jonathan Cooklin, Freshfields Bruckhaus Deringer
"It's surprising that something as fundamental as the corporation tax treatment of distributions has still not been resolved, particularly where publicly announced transactions are potentially affected. Fortunately, the election for non-retrospective application of the new measure on capital distributions should give companies some breathing space."
Heather Corben, SJ Berwin
(See Profile for Heather Corben.)
"The announcement of a review of the taxation of geared growth arrangements (which is likely to include ratchet shares and flowering shares) demonstrates HMRC's increasing focus on the disparity between rates of tax for income and capital gains. The review is expected to focus on whether these geared growth arrangements should be taxed as employment income or under the more beneficial capital gains regime."
Richard Croker, CMS Cameron McKenna
"There's more to this Budget than meets the eye. There is some interesting action on the personal tax side and in relation to anti avoidance in a number of areas. I'm worried about the lack of parliamentary time to debate the anti avoidance legislation given the likely election timetable. The increase to entrepreneurs' relief is a welcome surprise for those who qualify, but this further accentuates the less beneficial tax treatment now available to minority shareholders as a consequence of the change from taper relief. We will be interested to see the impact of the new transactions in securities rules on capital transactions in the 50% income tax environment if the CGT rate stays at 18%.
Then there is what he didn't do. Despite the Chancellor noting at the weekend his understanding of the need for the UK tax system to remain competitive the whole package of PBR measures directed at high income earners has remained unchanged. Nor did we get any evidence of a serious intent to make the corporate tax environment more attractive internationally eg. by reduced corporation tax rates, perhaps on a phased basis. I wonder whether he could have found fiscal room for that given sufficient political will?"
Nick Cronkshaw, Simmons & Simmons
(See Profile for Nick Cronkshaw.)
"The government announced a number of further technical changes to the worldwide debt cap rules to iron out technical difficulties with the original legislation. Whilst they are uncontroversial, this need to introduce yet more retrospective changes to legislation which is already in force bears out the warnings of those in the tax fraternity that this legislation was rushed into the Finance Act 2009 with unseemly haste."
Steve Edge, Slaughter and May
(See Profile for Steve Edge.)
"Not much to say about this most anodyne of budgets - the focus now switches to the post-election period when some early decisions have to be taken in critical areas affecting business in the UK. Taxation and politics are always going to be interlinked - but there has perhaps been too much politics in the mix recently and it will be good to escape that for a period of stability if we can."
Caspar Fox, Eversheds
"I was under the impression that HMRC did not intend to use the simplification of the "transactions in securities" rules to extend the scope of those rules. It is therefore surprising that the Treasury expects this to be one of the greater revenue-raising measures in the Budget - with £170m of additional tax revenues expected in 2010-11 and £65m in each of the next two years.
The Treasury expects that bonuses eligible for the bank payroll tax will rise by about a quarter on last year's levels. This makes it difficult for them to sustain that the tax has been successful in producing a behavioural change in the attitude of the banks towards bonuses, which was the official intention behind the tax. Nevertheless, the Treasury will privately be delighted with the amount of revenue generated by the tax."
Heather Gething, Herbert Smith
(See Profile for Heather Gething.)
“One of the more interesting items announced in the Budget is the Discussion Document on Financial Products Avoidance. The idea is to prevent tax advantage being obtained from intra-group arbitrage – expenses incurred by one group member on an intra-group transaction not being matched by taxable receipts of the other member of the group. In many cases such arrangements are caught by existing legislation but HMRC say they continue to receive notifications of such schemes and so are proposing a principles- based approach. Its resulting legislation will give rise to fewer problems than last year’s principles-based measures."
Charles Goddard, Berwin Leighton Paisner
"Despite some minor welcome developments, the Budget was an opportunity missed to promote the UK as a preferred business location. The extension of entrepreneurs relief and the fact that CGT remains at 18% for now are good news, though private equity will be concerned at indications that HMRC are to consult on taxing returns from geared growth. However, there was little to dissuade businesses from restructuring to minimise their UK presence."
Judith Greaves, Pinsent Masons
"With CGT treatment remaining very attractive, companies will continue to consider HMRC approved plans as part of their incentives package- we have seen more new plans adopted recently and we expect this to continue. It remains to be seen how far the consultation on 'geared growth' and EBTs will extend and whether, as with the blocking of CSOPs over shares in unlisted subsidiaries of listed companies, it will catch normal commercial arrangements that have been running happily for many years, as well as structured tax schemes."
Ashley Greenbank, Macfarlanes
"By and large this is a “do nothing Budget”. Apart from a few measures to help small businesses – such as the increase in entrepreneur’s relief to £2m, the increased annual investment allowance of £100,000 and some relief for business rates – we have seen most of this before.
Perhaps inevitably, there are a lot of measures which are put off for another day. So, for example, we will have to wait for changes to the associated company rules, wait for detail of the changes to the hallmarks under the DOTAS regime and wait for the Government to set out details of proposals to deal with the mess it has made of the tax treatment of company distributions.
On this last point, the Budget repeats the commitment, given by the Financial Secretary to the Treasury on 24 February to introduce retrospective legislation to restore “previous expectations about the way that distributions are taxed”. However, no draft legislation has been published at this stage and, until it is, considerable uncertainty will surround the tax treatment of many common corporate transactions, including dividends paid out of reserves generated otherwise than from normal commercial profits (for example, by a reduction of capital), share buybacks and share redemptions."
Elaine Gwilt, Addleshaw Goddard
"I doubt any of the revenue raising measures will make any serious inroads into the budget deficit earmarked to be met from tax revenues and so it's a case of "watch this space" for Round 2 post election.
Retaining the rate of CGT at 18% for the time being is welcome, as too is the increase in entrepreneurs' relief. That said, the widening gap between income tax and CGT rates will result in ever more complex legislation designed to ensure returns are taxed as income where the Revenue perceives that to be the correct treatment. Examples in this Budget are the transactions in securities rules (the welcome simplification of these rules is tempered by the suggestion of a wider impact for close companies), changes to the share option scheme rules relating to subsidiaries of listed companies and the consultation with regard to "geared growth shares". The private equity industry will be particularly interested in the latter, with the suggestion being that this may herald an attempt to tax as income returns for managers holding shares in investee companies (and even possibly the carried interest paid to private equity executives). Is this a chance for the Revenue to row back from the memoranda of understanding entered into with the BVCA in July 2003? What is clear is that the "'across the board' 18% CGT rate - Chancellor Darling's headline 'tax simplification measure" - is anything but.
The jury is still out on the implications and true impact for London as a financial centre, particularly in the asset management and hedge fund arena, of the well trailed increased tax burden on high earners and the higher costs of employing staff due to take effect in 2011. Given the size of the deficit, and the impending election, this is unsurprising, but a statement to the effect that these are temporary measures designed to deal with extraordinary times rather than a shift in UK tax policy would have been useful.
Both the continued strengthening of the disclosure regime, and a relatively small number of anti -avoidance measures, is perhaps a sign of the regime working. The disclosure requirements, allied to the Banking Code of Conduct, will continue to have a profound effect upon the way in which advisers and taxpayers approach tax planning with an ever greater emphasis on bespoke tax mitigation steps rather than mass marketed tax avoidance techniques.
The uncertainty in relation to the fundamental tax treatment of multinationals businesses, especially financial institutions, continues with the Chancellor looking at addressing "group mismatches" by introducing a principles-based rule and progressing with "an internationally coordinated systemic risk tax", which is just the clarity business loves!"
Kate Habershon, Morgan Lewis & Bockius
"Not too surprisingly, given the upcoming election and state of the economy, the Budget did not contain many surprises, nor additional tax changes beyond those already announced that will have a dramatic impact on business. While the various measures designed to stimulate small and medium size enterprises are beneficial, it is disappointing - but not unexpected given the UK's deficit - that no measures are being introduced to address the UK's decreasing international tax competitiveness. The outcome of the CFC consultation is awaited with interest.
The lack of increase to capital gains tax rates is welcome, but it will be interesting to see what comes out of the review on geared growth shares that was announced. With the increasingly large discrepancy between income tax and capital gains tax rates, the possibility of a broad clamp down on remuneration structures that aim to maximise capital growth is unfortunate. On top of the higher tax rates and reduced reliefs for high earners this is likely only to detract further from London's ability to attract and retain key business people."
Paul Hale, Simmons & Simmons
(See Profile for Paul Hale.)
"There were two announcements of interest in an otherwise quiet Budget for the asset management industry.
First, the investment trust industry will welcome the review announced into the tax legislation for investment trust companies. Recent developments in the tax regimes for authorised investment funds and offshore funds permit funds to opt into the applicable regime and, provided they meet their compliance obligations, remain within the regime without further involvement of HMRC. The investment trust industry has pressed for the same approach to be extended to it and for the conditions for eligibility to be modernised, and will welcome the review.
Second, the announcement of the formation of a working group to consult on whether establishing a tax transparent contractual fund vehicle would be beneficial for the UK will also be welcomed. This will enable a UK equivalent to the European fonds commun de placement (FCP) to be developed. It could also be used as a "master fund" in a UK master-feeder structure which is not currently possible to establish effectively."
Colin Hargreaves, Freshfields Bruckhaus Deringer
(See Profile for Colin Hargreaves.)
"High level view: what a disgrace. The headline provision is a residential stamp duty break. If what's needed is really encouragement to entry level house price inflation, rather than anything concrete on production, exports or reducing the deficit, then I'm a banana. A triumph of electoral politics over principle.
In the detail, there's much that was pre-announced or trailed and some that wasn't. There appears to be further fiddling with the scope of the bank payroll tax - some time after many of the relevant commercial decisions have been taken and implemented. A commitment to a legislative solution to the tangle on capital distributions (without rushing the legislation) is welcome. And the consultation on intra-group mismatches offers the tantalising prospect of sweeping away a number of fiddly provisions - perhaps even much of the arbitrage rules.
There will be the usual pre-election game of spotting which provisions are likely to survive, though this time round quite a bit of care seems to have been taken in saying whether provisions are destined for the imminent Finance Bill or later legislation."
David Harkness, Clifford Chance
(See Profile for David Harkness.)
"That this was not a very exciting budget for the tax practitioner is hardly surprising. In some respects what is of most interest is what is not in the Budget, for example where we will end up with CFCs and the taxation of foreign branches and what the proposed new patent box regime and revised consortium relief rules will look like. In the Budget itself, buried in the detail were a series of micro avoidance, evasion and compliance measures which will all need careful analysis. On a positive note, I welcome the legislation announced to clarify the treatment of capital distributions and hope it leaves no more uncertainty. The further tinkering with the worldwide debt cap rules to make them work properly, while welcome, somewhat confirms my initial view that the approach taken by the Government was indeed the proverbial sledge-hammer to crack a nut – the rules are just too complex for the target they are intended to hit. I await with interest the promised statistics on the number of financial institutions who have adopted the Code of Practice on taxation for Banks."
Matthew Hodkin, Norton Rose
"Although this could be described as 'the Budget that wasn't', there was some indication of HMRC's future direction on tax simplification in the publication of a Discussion Document on financial products avoidance. This shows a willingness on the part of HMRC to engage with those who have suggested principles-based drafting as the way forward and builds on the implementation of the transfer of income streams legislation. If followed through, this approach should genuinely simplify various areas of tax legislation."
Janet Hoskin, Pinsent Masons
"The announcement that the CGT entrepreneurs' relief limit will be increased to £2 million is very welcome but will leave some of those who were panicked by rumours of CGT increases and deliberately triggered gains before the Budget, feeling rather sick."
Ian Hyde, Pinsent Masons
"This Budget has announced a further wave of regulatory tightening by HMRC applying to tax evasion, tax avoidance and tax collection.
We have measures designed to punish off shore tax evasion by increasing the relevant penalties. In a slightly unfair move these new penalties will vary depending on the relevant tax haven's level of cooperation with the UK.
Tax avoidance (there is still a difference) is hit by the usual targeted moves but also by an expanded Disclosure of Tax Avoidance Schemes regime, making advisers tell HMRC more information and more often. Anyone implementing a scheme has to tell HMRC who advised them. Promoters will also have to report periodically on which clients have implemented schemes. In attempting to close the tax gap, scheme promoters are the cause, the clients are simply the symptom.
HMRC have also had a go at securing their revenues - HMRC will be able to apply VAT like powers to require employers to provide security for PAYE and increased penalties will apply to late returns and late payments."
David Jervis, Eversheds
"Importantly, the rate of capital gains tax has not been increased and indexation allowance (for companies) not withdrawn, although there was no increase in the capital gains tax annual exemption. Entrepreneurs relief has also been extended to the first £2 million of qualifying gains which is welcome. However the distinction between CGT rates and income tax rates remains large and consultation was announced on the taxation of shares received by employees and directors which could make capital gains planning more difficult for owners and managers of businesses even if CGT rates are not increased in the future.
There was little in the Budget Notes directly affecting the funds industry, but the Budget Report restates the Government’s commitment to it.
While it is good that the Government has listened to the industry’s requests for a tax-transparent vehicle, it is disappointing that the Budget Report says only that it will launch a working group to consult on whether to establish one. It needs to move fast on this to avoid the UK missing the boat and seeing a substantial part of its funds industry go sailing off to Dublin and Luxembourg. "
Geoffrey Kay, Baker & McKenzie
"Notwithstanding the length of the Chancellor's speech and the volume of material produced by the Treasury and HMRC, the Budget contained very little that was new and of interest to business. I do have some comments on a couple of specific proposals, however.
The announcement of a new tax relief for computer games developers, while short on detail, will nevertheless be welcomed by that sector. The UK has a disproportionately large share of this market, including both the large players and many independents, and this relief should help to consolidate the UK's position.
The Budget contained one or two proposals that clearly indicate Government concern about planning designed to convert the income of individuals into capital gain, to take advantage of the wide gulf between future income tax rates and the capital gains tax rate. These proposals include amendment to the scheme for the disclosure of tax avoidance schemes and the anti avoidance provisions relating to share incentive plans. And yet the Government has decided to retain that gulf by leaving untouched the capital gains tax rate, at least for the time being.
Perhaps there will be more of interest in the second Budget for 2010, if we have one."
Colin Kendon, Bird & Bird
"There were some ominous signs for executive compensation, particularly the proposed consultation on geared growth shares and carried interest arrangements. Whilst there is no doubt some abuse here, I hope that the Government does not lose sight of the fact that rewarding employees in the form of shares in the company for which they work is something that should be encouraged."
Robert Kent, Freshfields Bruckhaus Deringer
"The flexibility for REITs to satisfy their mandatory distribution requirements by way of stock dividends is a tax-neutral common sense measure and is long overdue. Given its deferral to a post-election Finance Bill, let's hope George Osborne agrees.
The further SDLT anti-avoidance rules for partnerships will increase unfairness, linked as they are to the draconian section 75A of FA 2003 which applies regardless of whether any tax avoidance motive exists."
Cliona Kirby, Olswang
"The real winner in the Budget was the UK video games industry with the Government announcing a games tax relief. The particular reason for our interest is that I have been active in lobbying Government and Opposition to buy-in to a video games tax credit in conjunction with the trade bodies and games industry. This is fantastic news for the UK games industry whose position as one of the world leaders in games development has gradually been being eroded as other countries such as Canada and France encouraged games companies and developers to relocate with the offer of targeted tax breaks. Whilst we have the UK election and EU approval to get through first, this is a very positive step in the right direction which should encourage new and innovative games across a range of platforms to be made in the UK and stop the brain drain. As always, the devil is in the detail so we will watch this space with interest. Amidst a raft of further anti-avoidance legislation announced in the Budget it is nice to hear some good news for a well deserving industry."
Daniel Lewin, Kaye Scholer
"The fairly tame nature of the pre-election Budget makes it comparatively welcome for the investment funds industry from the point of view that there were no further adverse surprises on tax rates; the real question is what measures we will see in the Post-Election Budget of whichever party will be in power. Also, notwithstanding great effort on the part of HMRC to improve the attractiveness of the UK funds tax regime over the last few years (including yesterday’s announcement to consult on the introduction of a new tax transparent fund vehicle), the damage that has been done to the UK alternative investment funds industry through the non-dom changes and the tax rates affecting the managers is now starting to show its effects by managers increasingly looking to other jurisdictions in which to base their operations."
Patrick Mears, Allen & Overy
(See Profile for Patrick Mears.)
"Perhaps not surprisingly given the economic backdrop and the impending election, the 2010 Budget was a conservative budget from a Labour Chancellor: light on giveaways, (relatively) light on gimmicks, and light on additional sources of tax revenue.
Given that background and the measures which had been either announced prior to the Budget or flowed from consultation prior to the Budget this was a fundamentally lightweight, wait and see Budget for the corporate tax practitioner. Of particular interest will be what progress is made on CFC and branch tax regime reform, and what makes its way into the next Budget (whenever that might be).
For those focussed on the competitiveness of the UK, and its tax system, the Budget was particularly boring, there was nothing of significance to incentivise business (or individuals) to come to, stay in, or leave the UK."
Jennie Newton, Pinsent Masons
"It is unsurprising that the SDLT changes apply only to residential property, possibly to avoid stifling any recovery in the commercial property sector. Both measures reflect the political importance of housing issues in the context of the impending general election, and the rate increase on £1+ million residential property purchases will probably partly fund the first time buyer's relief, albeit that the increase won't come in for another year."
Mathew Oliver, Bird & Bird
"For me the key point of interest was the lack of any real points of interest. The main points have already been announced. If anything, I'm surprised that there was no increase in the CGT rate but suspect that this is simply because of the up-coming election. I expect this to rise after the election but would hope that this will be combined with a more generous relief for entrepreneurs than a £1m rise in the limit for entrepreneurs' relief."
Jeremy Reynolds, White & Case
"Although there are specific measures that would be of great interest to narrow business areas, generally in relation to business taxation there are no headline-grabbers. However, as well as the usual round of targeted anti-avoidance measures, a number of less glamorous announcements, particularly in relation to employment and share incentives, could cause headaches for businesses. A variety of measures (such as doubling the annual investment allowance, and extending VCT/EMI legislation to comply with EU requirements) will help in improving the prospects for small businesses and encouraging entrepreneurs."
Jonathan Richards, Linklaters
"I feel some unease at the idea of principles based legislation on "group mismatch" schemes. Any tax system that taxes profits of individual companies, rather than groups, will contain mismatches. Some of these benefit the Revenue (such as the inability to group relieve carried forward losses, or a less generous deductibility regime for companies not carrying on a trade); some can benefit taxpayers. I believe that the focus should be on removing anomalous mismatches rather than following a path that is likely to lead to the enactment of woolly and vague legislation that in effect confers a discretion on HMRC to tax or not. These days there is too much legislation like that. Business should be entitled to expect legislation that is clear and certain in its application."
Charlotte Sallabank, Jones Day
"A rather dry budget from a corporate tax perspective with little to excite. The 'new' announcements relate mainly to personal tax such as the doubling of entrepreneurs' relief and linking ISA limits to inflation. One to watch is the new defintion of 'qualifying aircraft' for VAT zero- rating purposes, which will affect supplies under existing aircraft leases from 1 September 2010."
Tim Sanders, Skadden, Arps, Slate, Meagher & Flom (UK)
(See Profile for Tim Sanders.)
"With the one eye on the election, the Chancellor could not afford to make any major changes much as he may have wanted to. Thus, there are no changes to the rates of corporation tax, income tax, inheritance tax and capital gains tax beyond those already announced, although by freezing income tax personal allowances and basic rate bands, which have moved in line with inflation in the past, there is a hidden increase.
The more interesting changes for lawyers were announced but as they are in technical areas are hard to evaluate properly until draft legislation is available, notably: changes to the debt cap rules introduced last year; the announcement of a wide package of tax avoidance measures to strengthen the disclosure regime, to prevent schemes exploiting mismatches in tax treatment within groups, to attack the use of certain employee trusts and the use of geared growth employment related securities."
Tom Scott, KPMG
"Forget jam tomorrow, there's not even any jam today. The Budget is a missed opportunity for big business. While there is a raft of measures aimed at individuals and small businesses, the mistaken political assumption seems to be that big companies don't have votes. Nothing addresses the concerns around the competitiveness of the UK corporation tax system for multinationals. Far from signalling any willingness to debate lowering the rate and increasing the base to pay for the reduction and reduce complexity, we have over 40 new anti-avoidance measures; how many more pages of legislation will that generate?
In terms of the stability of the tax system, hands up if you believe that the differential between capital and income for individuals will continue - or that VAT won't go up."
Martin Shah, Simmons & Simmons
(See Profile for Martin Shah.)
"We welcome the acceptance of the judgment in Philips Electronics and the decision to extend consortium relief so that EU and EEA resident companies engaged in UK consortia will be allowed to pass on the losses of those consortia to their UK resident subsidiaries. However, there are other, bigger questions concerning the compatibility of the UK group relief rules remaining. Some of these are raised in the EU Commission infringement proceedings and others relate to the decision by the UK to limit the extension of group relief and consortium relief following the ECJ's Marks & Spencer decision to 75 per cent subsidiaries."
Simon Skinner, Travers Smith
"For private equity, venture capital and entrepreneurs, there will be significant relief that the rate of CGT has not increased (although the question remains as to whether a differential of 32% between top rate income tax and CGT can remain), and even pleasant surprise at the extension to entrepreneurs' relief. And the process for simplification of the Transactions in Securities rules is to be strongly encouraged – a sensible and balanced set of rules there, reflecting the modern world, would be a real step forward. On the other hand, those same sectors will look with some trepidation at the ominous noises coming out the Employee Shares and Securities Unit of the Revenue – while measures targeting the use of EBTs and FBTs and the extension of the Disclosure Regime are neither unexpected or without some merit, the Revenue's desire to reopen the treatment of "geared growth arrangements connected with employment-related securities", notwithstanding previous advances and retreats of the Revenue in this area, is regrettable."
Greg Sinfield, Lovells
(See Profile for Greg Sinfield.)
As predicted, this is a rather dull budget for indirect taxes. No significant changes to VAT. It was widely trailed that there would not be any increase in rate now but it is generally thought that the standard rate will go up to 19.5% or 20% after the general election. Other changes (imposition of VAT on certain postal services supplied by Royal Mail which were previously exempt and restriction of zero rating to supplies of aircraft for use on international routes) are minor and give effect to judgments of the ECJ.
In relation to stamp duty land tax, the Chancellor has given with one hand (increasing nil rate band for residential property from £125,000 to £250,000 for first time buyers for two years) while taking away with the other (increasing SDLT on residential properties over £1 million from 4% to 5% for ever). Finally, it could be the final rat in the barrel for cider producers as duty on cider is increased 10% above inflation and it is difficult to see why the Chancellor should hit this sector of the drinks industry in particular while whisky duty only increases by 2%. Could the clue be that there is no Scottish cider industry?
Nicholas Stretch, CMS Cameron McKenna
(See Profile for Nicholas Stretch.)
"Share incentive practitioners will be chiefly drawn to the Treasury's proposal to consult in 2010 on geared growth schemes which use employment-related securities but deliver returns taxed as capital. This sounds ominous. It potentially catches JSOPs, growth shares, partly-paid shares and carried interest and other schemes, which have become valuable workstreams for many practitioners, but also arrangements where employees' equity has a much lower upfront value than the investments being made by other investors. While we first will have to wait to see what proposals the Treasury have, what will be really challenging over the year will be to see what justifications for capital treatment practitioners and the private equity industry are able to come up with in a harsh political climate and also whether the uncertainty during the consultation period (which may in effect last until the 2011 Budget) will stymie these schemes unless and until their long-term treatment is clarified. It is even possible that the 2011 Budget will be like the 2003 Budget which heralded such a change in the incentives regime that for a while it was feared that tax-favoured employee incentive arrangements apart from the specific Revenue approved schemes would die completely - except that this time, it might actually happen."
Dominic Stuttaford, Norton Rose
"Like most of us here, I am struggling to find much of great interest in the Budget. Leaving aside the political measures, it is a hotch-potch of changes, with much of the detail missing. It would have been nice for instance to have seen revised legislation for the bank payroll tax and for the changes to the rules on transactions on securities."
David Taylor, Freshfields Bruckhaus Deringer
(See profile for David Taylor.)
"Essentially, a pretty quiet Budget for technical tax changes that have not been trailed in advance. This is a source of some relief, of course, though we will need to see what happens after the election.
It is not unusual to find quite important items that are given little publicity in the Budget announcements. On this occasion there are a couple of brief announcements relating to employment taxation that fall into this category. For the private equity and venture capital sectors, in particular, there is a need to watch carefully for how a consultation about the taxation of geared growth arrangements in connection with employment related securities develops. This is likely, for example, to cause the HMRC/BVCA MOU relating to management equity to be revisited."
Sue Taylor, Eversheds
"It came as no surprise that the Budget extends SDLT anti-avoidance legislation to block SDLT planning which exploits the partnership rules for land transactions. HMRC had already announced that such planning was under scrutiny. But the width and uncertain scope of the general SDLT anti-avoidance provision in section 75A FA 2003 will continue to cause concern for property partnerships and increase pressure on HMRC to introduce a clearance procedure for this legislation."
Eloise Walker, Pinsent Masons
"In a Budget as dull as anticipated, there's been no particular surprises for corporate taxpayers and a lot of items we were expecting to see - notably an overhaul of the transactions in securities regime, yet further tidying-up amendments to the "debt cap" rules, changes to the insurance premium tax rules on premium splitting, and (thankfully) HMRC are clearing up the uncertainty they recently caused around the treatment of capital distributions. The bank payroll tax is lumbering ahead as predicted, and there is the (almost inevitable) annual expansion of the disclosure rules for tax avoidance schemes. HMRC have also finally caught onto some of the SDLT avoidance schemes exploiting the rules for partnerships.
One piece of good news, though only likely to be of much practical interest for smaller companies, is the increase in the annual investment allowance to £100,000, which will be particularly welcome in the current climate.
Finally, a piece of populist propaganda so obviously aimed at the election it would be laughable (except it's no laughing matter for industry) is the announcement that the Government intends to take a leading role in the international work on a "systemic risk tax" and enhanced disclosure of remuneration in the financial services sector, and greater shareholder controls over executive remuneration. We'll have to wait and see if anything comes of it post-election time."
Miles Walton, Allen & Overy
(See Profile for Miles Walton.)
"SMEs may find some cheer in a random set of fairly small benefits such as the doubling of the Investment Allowance and of the entrepreneurs' relief, and the loss carry-back extension.
But larger and international businesses may still wonder if the UK tax regime is sufficiently friendly for them. They will be relieved that the Government intends to confirm the income nature of most dividends and that the CFC regime and taxation of foreign branches should be settled in 2011. But this Government takes every opportunity to complicate our legislation with new anti-avoidance rules - it's the turn of group mismatches this time. Businesses will be disappointed that the main corporate tax rate, now relatively high in comparison with our competitors, was not reduced; and there seems to be no material change in the tax disputes environment, where the Litigation and Settlement Strategy still makes the expeditious resolution of enquiries a rare event.
Finally, for banks, while there are now few outstanding unresolved issues in relation to the Payroll Tax, all parties seem bent on bringing in some sort of tax or levy on banking profits or transactions - no doubt a popular move but probably not best suited to allowing the banks to facilitate a faster recovery in the economy."
Neil Warriner, Herbert Smith
(See Profile for Neil Warriner.)
"There was very little of interest for business generally in the Budget yesterday, though there were a number of measures for small businesses that will be welcomed, such as additional small business rates relief, continuation of tax payment deferral arrangements and increased annual investment allowance.
One item that will inevitably cause eyebrows to be raised for groups of companies was the discussion document on whether to introduce what was said to be 'a generic rule to counter schemes for creating tax mismatches within a group as a result of the differing treatment of loans or derivatives', which would appear to be another way of describing a targeted anti-avoidance rule for loan relationships and derivatives generally.
Overall, it was very much an electioneering Budget and, notwithstanding Mr Darling's protestations when he introduced the stamp duty land tax rate changes, it has a flavour of old Labour party ideology."
Simon Yates, Travers Smith
"As expected, the Budget focussed mainly on the spending side with little in the way of eye-catching tax measures. Those of us active in the property sphere will note the promise to close down a variety of SDLT saving schemes which utilise the partnership rules: given that many of these schemes were first disclosed to HMRC two or three years ago, the inevitable response is "what took you so long?". Might there even have been a deliberate tolerance of the schemes as an unofficial stimulus for the flagging property market? However, we must await the draft legislation with some trepidation. Previous efforts in this area have been lamentable, from the apportionment formula that worked backwards in the days of stamp duty, through anti-avoidance rules that opened bigger holes than they closed, to the blunderbuss of the first cut of the property investment partnership provisions – all of which actually made the statute book. Given the history, well targeted and effective drafting would be a pleasant surprise.
Elsewhere, on bank payroll tax, the tension mounts. With draft legislation conspicuously absent from the Budget package at the time of writing, will this be the first tax to make it through its entire charging period without the publication of so much as a final draft of its provisions – and in particular those relating to who has to pay it? This from a Government that has listed Stability and Certainty as one of the five key policy principles against which it will test proposed tax measures. Physician, heal thyself. This is no way to govern."
Robert Young, Taylor Wessing
"In a Budget of relatively few surprises, one of the main talking points from a practitioner perspective concerns a tax left unchanged. There has been no increase in the rate of capital gains tax, a move predicted by many; instead we have a welcome increase in the gains threshold for entrepreneurs' relief to £2m. In an interesting departure from the norm, those planning disposals of qualifying assets before the end of the current tax year might now be advised to wait until after 6 April in order to access the increased limit.
One disappointment in the detailed announcements concerns the new 100% first-year capital allowance for zero-emission goods vehicles, regarding which it has been confirmed that the allowance will not be available for expenditure on assets for leasing (despite the fact that such expenditure incurred on low emission cars can in principle qualify). This discrepancy seems odd, given that the substantial capital outlay required on such vehicles points to arrangements for pooling and leasing as being the most economic route for businesses to switch to greener means of commercial transportation."