Contact: Jamie Harley
Deloitte
Public Relations
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Bill Dodwell, head of tax policy at Deloitte, analyses the impact of the Budget on UK business:
“The Chancellor’s trump card – a cut in the UK Corporation tax rate from 30% to 28%, from April 2008 – certainly grabs the headlines, but the impact of all the Budget measures gives away no cash to UK business overall.
“While the cut - which will cost the Treasury over £2 billion annually - will please business, it will be offset by the reduction of the main rate of capital allowances to 20% from 25%.
“These changes represent the biggest changes to the capital allowances regime in the last 20 years and the real winners will be amongst the UK’s service companies, including banks and financial services companies, for which capital allowances have less impact.
“The losers may be manufacturers and possibly the hotel sector, and today’s announcement is a clear signal from the Chancellor that the future is all about services and R&D. It follows Nigel Lawson’s original reforms in the 1980s, when he cut the tax rate from 52% and reduced capital allowances.
“However, the changes in the tax system will benefit companies’ reported earnings in their annual financial statements. This is because they will benefit from the rate reduction (though their cash tax payments will be broadly similar) because of deferred tax accounting. It is expected that companies may be able to reflect the changes in financial statements issued after the law is substantially enacted – probably in July 2007. In many ways, this might be seen as a 'win-win' for business and the government.
“The Red Book states that the government will produce its consultation document on the taxation of international income by June 2007. This will cover double tax relief, controlled foreign companies and potentially measures to preserve the UK tax base, including possible restrictions on interest deductions.
"The Government states that UK companies have indicated a measure of support for a CFC regime charging tax on certain types of income, allied with a tax exemption for overseas dividends.
“Companies employing long life assets - such as the utilities – are likely to benefit from an increase in their rate of tax depreciation from 6% to 10% - although they will lose from the reduction in capital allowances for other assets. There is a reduction in the allowances for fixtures, down to 10% (or up from 6%, if currently long life). There will be a phased abolition of Agricultural Buildings Allowances (ABAs) and Industrial Buildings Allowances (IBAs), including hotel allowances.
“The initial step in this process involves neutralising the effects of disposals (which can trigger significant annual allowances for factories near the end of their 'life', preparatory to phasing out the relief altogether.
“This is very bad news for any company that has invested heavily in productive capacity recently as they will be denied tax relief for the cost of existing buildings. Perhaps it is a signal that that the Treasury no longer anticipate attracting new investment of this nature, or at least that tax will not be a factor in the decision making process.
“A new payable tax credit for losses due to capital expenditure on 'green technologies' may be introduced following consultation - at an estimated cost to the Exchequer of £40 million.
“While at the smaller company end, SMEs will be disadvantaged by the increase in tax rate to 22%, they will benefit from a new capital allowance to be introduced next year at an incremental cost of £920 million in the first full year. The scale of this relief suggests that all SMEs will be entitled to a 100% FYA for the first £50,000 of expenditure, but the details are subject to consultation.
“SMEs will also welcome the new environmental tax credit and the increase in the rate of R&D tax credits for small companies to 175% (from 150%).”
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In this press release references to Deloitte are references to Deloitte & Touche LLP, which is among the country's leading professional services firms. Deloitte & Touche is the United Kingdom member firm of Deloitte Touche Tohmatsu ("DTT"), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.
The information contained in this press release is correct at the time of going to press.
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