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2007 Budget Commentary
First there are the headlines and then there is the detail!
Whilst many people will be concentrating on the reductions in the mainstream corporation
tax rate and the basic rate of income tax and the increase in the inheritance tax
threshold, there are a number of other matters that need closer inspection.
Reform of capital allowances
One of the more surprising items in the Budget is the reduction of the allowances available
in the general pool on plant and machinery from 25% to 20% from 2008/09. This will impact
all businesses and will make the correct identification of qualifying expenditure far
more important to ensure that the adverse cash flow effects are minimised. Initially
it appears that, subject to further consultation, Short Life Asset claims may be
unaffected, although the stated aim of a 20% rate is likely to be extended to all
categories. However, the appropriate systems to track and monitor all claims will
become vital in protecting and maximising tax deductions.
A small bonus however for utility and manufacturing companies is the increase of the rate
for writing down allowances on long life assets (those assets with a useful life when new
of 25 years or more) from 6% to 10%. However, this is tempered by the phased abolition
of Industrial Buildings Allowances. The abolition of both IBAs and ABAs (Agricultural
Buildings Allowance) will be phased over four years from 2008/09. However, the provisions
relating to balancing adjustments and the calculation of second hand buildings allowances
ceases today (21 March 2007), leaving many businesses with significant balances of
unrelieved expenditure on which allowances were expected.
With businesses no longer getting tax relief for the fabric of their buildings under the
IBA and ABA regimes, they are likely to pay more attention to the fixed plant and machinery
installed within their properties. However, the Chancellor appears to have headed this
route off at the pass as well with a proposal, again subject to further consultation, to
introduce a 10% writing down allowance for fixtures integral to buildings.
Finally, the capital allowances on cars are to be banded based on CO2 emissions with a new
pool for those with the highest emissions with a lower writing down allowance than the
general pool. Yet again, this is subject to further consultation.
The full tax reporting implications of these changes is still to be quantified, but it
appears that the management of asset tax bases and the calculation of timing differences
over the next 4-5 years will only become more complex.
Tax Risk Management
Quietly released at the same time as the Budget Press Releases is the HMRC Large Business
Service document "HMRC approach to compliance risk management for large business",
signifying a step change in their approach to managing the tax risk associated with
larger businesses. A key driver identified in this document is the need for robust,
auditable financial systems. In particular, HMRC will be looking for systems and
processes that:
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make appropriate use of software; |
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deal correctly with the volume of transactions and issues in the business whose tax
treatment will be clear and uncontroversial; |
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are capable of identifying transactions and issues where tax treatment is complex
or uncertain, or requires use of judgment; and |
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are regularly reviewed, appraised and developed. |
The guidance published today means that HMRC will be identifying their high and low risk
taxpayers between now and the end of the 2007. If you are defined as a high risk taxpayer,
you can expect:
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At least annual tax risk reviews from HMRC; |
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Increased emphasis on significant risk assessments; and |
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More real-time working with your HMRC customer relationship manager. |
There is an increasing need therefore for large businesses to ensure their systems
and processes are robust and well defined.
For more information, please contact:
Nigel Rainer or Bryony Clinton
Tax Automation Limited
0118 988 0241 |
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