UK Pre-Budget Report
The Pre-Budget Report is an ideal opportunity for the Chancellor to take a fresh look at the fundamentals of UK tax policy. ACCA (the Association of Chartered Certified Accountants) calls for immediate action on several specific issues, allied to a commitment to a longer-term root and branch simplification of the tax system.
ACCA'S RECOMMENDATIONS – tax policy issues
1. Fewer Budgets
Annual Budgets add new regulations and undermine the process of strategic business planning. With the introduction of a Tax Policy Committee as outlined below (point 2), ACCA believes that there may no longer be a need for annual Budgets. This would best serve the interests of corporate and personal taxpayers and enable them to plan for the future. Government already sets long-term spending plans via its Comprehensive Spending Review, and a longer-term budget would complement this process. This would be accompanied by short, focused annual budgetary reviews.
2. A Tax Policy Committee
Tax change should be driven by a Tax Policy Committee (TPC) which would operate along the lines of the Monetary Policy Committee (MPC). Government would set the overall economic framework of the tax environment and the TPC would work on adjusting the tax system as appropriate, with a view to long-term simplification.
3. Tax avoidance – uncertainty is no answer
Tax legislation should be clear and unequivocal. It is unhelpful for businesses, individuals and tax practitioners to hear the Government use the term "unacceptable tax avoidance". Tax avoidance by definition is legal, tax evasion is illegal. There should be clarity in the Government's position and certainty in the legislation to avoid further confusion.
ACCA'S RECOMMENDATIONS – for action in the Pre-Budget Report
4. Tax Credits
The Tax Credits system requires more clarity and certainty. This overly-complex system should be overhauled to ensure that payment periods are fixed at, say, 13 weeks, and in that period there cannot be over - or under - payments. Government should explore ways in which the administration burden of the tax credit system placed on small firms could be lessened.
5. Inheritance tax – no longer just an issue for the rich
Rising property prices have drawn more people than ever into the inheritance tax regime. The Government should respond to this development by extending to inheritance tax a similar exemption to that which currently applies to the individual's main residence under capital gains tax. This simple change would remove one of the greatest inequities of the inheritance tax system and reduce the burden on ordinary taxpayers.
6. Self-assessment – give incentives and encourage e-filing
The move to self-assessment across most of the tax system is part of a global trend. But the UK system is largely sanctions-driven. It should be modified to create new incentives for early payment. For example, early filing could be rewarded by the tax inquiry 'window' being closed sooner. Although internet filing should be encouraged and simplified, it should not be made mandatory.
7. Regulation burden on small firms
Small businesses consistently rank taxation and employment legislation as the most important regulatory constraint on business performance. UK small businesses spend 60 times as much per employee dealing with tax compliance as multinationals do. ACCA believes they should be compensated for the additional costs that they incur when the inequalities between large and small firms cannot be addressed.
The cost to business of major post-1997 regulations is estimated as £40bn. Yet more than three-quarters of Regulatory Impact Assessments either fail to quantify the costs to business, or state that the costs are irrelevant. Quantification of the additional costs for SMEs is made in just 7% of RIAs. The Government must commit to developing a more realistic understanding of the impact of legislation on small business.
8. Allowing and enabling dynamic business structures
In a dynamic entrepreneurial environment, businesses should be able to change their structures when beneficial to do so. Incorporating from a business to a company occurs without tax cost, but there is a tax penalty on companies which decide to pursue a different structure by disincorporating. A tax penalty should not be levied and more flexibility would help to boost entrepreneurship.
9. UITF 40 (Urgent Issues Task Force)
UTIF 40 is a significant development, as it requires the valuation of work in progress for service businesses at sales value rather than cost - creating a substantial uplift in taxable profits. This proposed tax on professional partnerships will have a potentially seriously damaging effect on cash flow and we would urge the government to introduce 'spreading relief' over ten years for affected businesses.
10. Real Estate Investment Trusts (REITs ) / Property Investment
The introduction of Self-Invested Personal Pensions (SIPPS) in April 2006 will provide a tax efficient vehicle for private individuals investing in property. ACCA believes this should be complemented by the introduction of Real Estate Investment Trusts (REITS), which the government floated last year as a move of particular benefit to the small investor. At present such investors can find it difficult to gain exposure to the performance of investment-grade property asset without buying shares in an existing property company and thereby suffering the tax leakage inherent within the company structure. ACCA urges the Chancellor to move ahead with this proposal in the pre-Budget report.
Chas Roy-Chowdhury, Head of Taxation at ACCA, said: "There are both immediate tax issues and longer-term problems with the tax system that the Chancellor needs to address. The Pre-Budget Report gives him the perfect opportunity to do this, and ACCA urges him to adopt some of our recommendations, for the benefit of UK plc."
For further information, please contact the ACCA Press Office:
Samantha Jones, Press Office
Tel: + 44 (0) 20 7059 5989
Helen Thompson, Press Office
Tel: +44 (0)20 7059 5759