Southampton: BDO outlines Budget advice

Accountants and business advisers BDO Stoy Hayward look at some of the key issues facing the Chancellor and possible solutions, ahead of the Budget on March 21. All comments from Stuart Lisle, tax partner at BDO Stoy Hayward’s Southampton office:

Corporation Tax: UK plc losing out?

Problem: With many of the UK’s international competitors reducing their headline corporation tax rates (e.g Ireland 12.5%) the UK is losing its international tax competiveness. More and more businesses are considering locating to lower tax jurisdictions. Ironically, it was in Brown’s first Budget that he introduced proposals which reduced corporation tax to its current level of 30% from 33%.

What he should do: Reduce the headline corporation to no more than 25%. This much overdue measure would protect and enhance the UK as a location of choice for overseas investors and give a positive signal to UK business.

What he should not do: Eliminate key targeted reliefs designed to generate growth in key sectors - a very successful element of Brown's chancellorship. We would not want to see the sorts of measures being suggested by some commentators included in this budget, such as the elimination of the R&D tax credit to fund a reduction in corporation tax.

Inheritance Tax (IHT)

Problem: Spectacular house price inflation, coupled with a threshold that has only tracked inflation, has meant that though IHT raises less than 1% of total tax revenues, it is a deeply unpopular tax.

What he should do: Increased the exemption threshold to £500,000, making sure that the tax hits those it was meant to, and not moderately affluent houseowners.

He could even scrap IHT merely by treating death as a disposal for CGT purposes, applying the existing business asset taper relief, thereby limiting the effective tax rate to 10%. It would however be necessary to provide a sensible and generous threshold to, say, the first £100,000 of gains.

What he should not do: Merely exempt principal private residence from IHT, which would create economic distortions and stoke house price inflation at the expense of first time buyers.

Environmental taxation: A repeat dose?

Problem: The Pre-Budget in December saw the Chancellor increase air passenger duty and fuel duty, which angered many air travellers and motorists, but also largely failed to placate environmentalists. With ambitious Government plans to meet its green targets, Brown still has to prove his environmental credentials, by for example, providing tax reliefs for green, “friendly” expenditure as well as taxing bad, “harmful” expenditure i.e using the carrot as well as the stick.

What he should do: Increase tax allowances for environmentally friendly commercial buildings.

Income Tax

Problem: Chancellor has been criticised for introducing “stealth” taxation, and is in danger of leaving a poor legacy with individual taxpayers

What he should do: Increase both personal allowances and tax bands with earnings, so individuals are not dragged into paying higher rates of tax. In the medium term he should be targeting a 20% basic rate of income tax.

UK-Reits

Problem: January 1 this year saw the start of the UK-Reits regime, which has seen the leading listed property investment companies convert to UK-Reit status. Other leading REIT regimes such as Australia and USA permit privately owned REITs and these have flourished. The Treasury/HMRC have already indicated they would not rule out such a move in the future.

What he should do: Legislate to allow private unlisted UK-Reits, with a minimum number of unconnected shareholders, say 50.