Taxing times
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CHANCELLOR Alistair Darling faced a difficult balancing act this year, with the risk that tax rises would potentially damage growth but the pressure of a widening deficit preventing a tax giveaway. So a neutral, “steady as you go” Budget was always likely. That proved to be the case, with the net effect of the Budget policy decisions being less than £1billion.
Indeed, the Chancellor’s mantra was “stability”, which appeared repeatedly throughout his speech.
Looking at the business environment, it is hard to remember a time when the UK’s tax competitiveness has been more in the spotlight than in the lead-up to a Budget. The Chancellor focused on this when discussing business taxation in his speech and asserted that the UK had a “stable tax regime”.
This was followed immediately by HM Revenue and Customs publishing an extraordinary 107 separate Budget Notes, many of which were on the subject of corporate tax. Anti-avoidance measures and finalisation or updates on numerous pre-announced areas dominated the content.
The Chancellor also stated that “the reduction in the main rate of corporation tax to 28% will deliver the lowest rate in the G7, improving competitiveness and encouraging investment”.
This is wholly at odds with the view expressed by the CBI in its recent report, UK Business Tax: A Compelling Case for Change.
Introducing that report, Richard Lambert, the CBI’s director general, stated: “Our corporate tax system has become too burdensome, too complex and too changeable to provide the right environment for British businesses.”
Despite the Chancellor’s comment that the UK has “the most competitive corporation tax regime in the G7” and “a stable tax regime”, the fact is that, since 2000, the UK’s corporate tax rate has fallen from the fourth most competitive in 2000 to about 20th in the enlarged EU – and has dropped from the eighth most competitive to 20th among OECD (Organisation for Economic Co-operation and Development) countries.
Furthermore, in a KPMG survey last year, just 2% of respondents thought the UK had the most competitive tax regime. It’s true to say the Chancellor had little room to manoeuvre this year; but, nonetheless, what we need is recognition that our ranking is slipping and a commitment to reversing this decline.
The Budget contained some very mixed messages for Scottish businesses.
On the one hand, he made many references to how he intends to help and develop the entrepreneurial spirit in the UK with initiatives such as the Entrepreneurs Relief and an extension to the Small Firms Loans Scheme to include all SMEs – which is good news.
But the fact remains that SMEs are going to be hit by a tax hike next year when the small companies’ rate of corporation tax goes up by 3%, and the Chancellor also did not address the issue of how an 18% flat-rate capital gains tax will be bad news for small business.
While any attempt to encourage entrepreneurial business in Scotland is very welcome, we have to remember that many of Scotland’s entrepreneurs are also non-doms and, despite much debate on the subject, the Chancellor’s failure to back down or offer any concessions to his proposed £30,000 levy will surely act as a major deterrent to them building their business in Scotland.
From an industry perspective, oil&gas companies in Aberdeen will be pleased that the Chancellor resisted the urge to increase tax rates on their profits, despite very high oil prices.
Moreover, measures that will lead to a simplification of the petroleum revenue tax regime, enhance relief for decommissioning expenditure and incentives to maximise production are being welcomed with open arms.
But the UK Government has stopped the offset of investment costs against UK oil&gas profits – in doing so, the Chancellor expects to raise an additional £150million per year.
Some of the Budget’s announcements are steps in the right direction, and the absence of any windfall tax is a relief.
But as has been shown in the past, the UK’s oil&gas industry cannot be confident that the fiscal environment in the North Sea will remain stable in the medium to long term.
Overall, there is no getting away from the fact that, by the nature of our economy, Scotland has a higher percentage of small to medium-sized businesses than the rest of the UK, which is why it’s disappointing that this Budget offered very little to support the lifeblood of our economy.
Martin Findlay is head of tax for KPMG in Aberdeen
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