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Tom McGinness, head of middle market tax at KPMG in the UK, said, “With economic conditions getting tougher, now is the time for the Treasury to act in helping ensure the UK is a great place to do business. In the run-up to the budget, we would urge the Chancellor to focus on simplification and certainty.”

Simplification

The proliferation of tax law is a major issue for all businesses in the UK but it is one which affects smaller companies disproportionately hard for two main reasons.

McGinness explained that the first issue is the ‘law of unintended consequences’ – legislation designed to tackle a particular issue can often end up affecting lots of other areas.

He added that the second is that tax law tends to affect all companies in the same way regardless of size but the larger companies usually have more in-house expertise to help them through the minefield of legislation.

Certainty

The lack of certainty around tax is the third issue KPMG would like to see addressed in the budget.

McGinness said that recent announcements and subsequent amendments to proposals around the capital gains tax rules and the tax regulations surrounding non-UK domiciled residents, have received an extremely negative response from business.

“And we still don’t have the final legislation. This leaves businesses operating in the dark – a position they find extremely uncomfortable, and also leaves them feeling uneasy about what future changes might be introduced without prior consultation,” he added.

While McGinness admitted that these were fairly extreme examples, he said they were not isolated incidents.

“It’s important for business to know where it stands and to be confident that a decision based on today’s environment will still make sense tomorrow. If the rules keep changing then it’s almost impossible to keep up,” he noted.

There is considerable uncertainty around the shape of likely proposals to reform the way in which British companies’ foreign profits are taxed by the UK authorities.

Mooted proposals issued in a discussion document last June have proved to be one of the most talked about developments in the corporate tax world in recent memory.

The authorities have held a series of meetings with representative bodies, advisers and individual taxpayers.

“They are still inviting real examples of where proposals could cause issues. There could well be an update in the budget. We would expect a further consultation document to be published on budget day or shortly thereafter,” McGinness explained.

A “Green Budget”?

Back in December the Chancellor declared that it “is sustainability that will be at the heart of the next budget”. Areas likely to see changes are around employment taxes, company cars and travel.

A change to the way that the “Authorised Mileage Allowance Payment” (AMAP) scheme operates would not be a surprise.

This is the scheme which allows employees to claim a tax free amount (currently 40p up to 10,000 business miles in a year, and 25p thereafter) when using their own car for business mileage.

The Government have been consulting on this area for some time.

It said in the 2007 Budget that it would consider the case for changing the structure of AMAPs to align the tax and NICs treatment and ensure that the rates and thresholds are set at an appropriate level to promote environmentally friendly business travel.

KPMG said it was not clear what changes the Government might make in this area, but said that a higher rate for lower mileage, combined with a lower rate for higher mileage had been suggested.

Looking at travel more widely, the Big Four firm noted that there is currently no income tax or NIC payable where an employer offers:

• free or subsidised work buses
• subsidies to public bus services
• cycles and safety equipment made available for employees
• workplace parking for cycles and motorcycles

McGinness said he would like to see the green transport options broadened to include all forms of public transport, so that an employer could make using public transport at least as attractive as driving to work.

According to KPMG, the Chancellor could take the opportunity in this budget to make working from home more tax-efficient.

Currently employees can be paid up to £104 per year towards the additional household costs incurred by working at home without supporting evidence of the costs.

More sticks than carrots

Any additional payment requires that evidence is obtained and retained. The additional administrative burden discourages both employer and employees from being willing to claim more, but the £104 payment is not significant enough to encourage home working.

By increasing the level of tax free payments available without additional evidence, the Government could make it easier to encourage employees to choose to work from home.

KPMG said that where green issues are concerned, there are currently more sticks than carrots.

“The more people feel that they are already paying for climate change through a multitude of taxes, the less incentive they will have to be proactive. So for each increase in tax on a bad behaviour that the budget includes, we would like to an equal reduction for good behaviour,” McGinness concluded.

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Related links

• KPMG
• HM Treasury