KPMG Looks At Darling's Business Tax Options

by Jason Gorringe, Tax-News.com, London

26 November 2009

With the pre-budget report just over two weeks away, KPMG in the UK has published its expectations for what Chancellor of the Exchequer Alistair Darling might announce in the business tax arena.

Facing a large and growing borrowing requirement and plunging tax revenues on the one hand, and the need for ongoing fiscal stimulus on the other as the economy shows tentative signs of emerging from recession, Darling faces a tricky balancing act in what is being heralded as one of the most significant budget announcements for many years.

However, KPMG believes that the Chancellor must use the PBR to shore up UK company tax competitiveness, which has taken something of a battering over the past couple of years.

"Anything that improves the UK's attractiveness from a tax perspective would be very welcome," commented Sue Bonney, head of tax at KPMG Europe LLP. "We've seen a number of businesses exit the UK in a series of high profile departures. While corporations have shown their willingness and ability to vote with their feet, the onus is on the authorities to make the UK more competitive on tax."

Following on from a 2009 budget announcement, KPMG would like to see Darling propose measures leading to a special tax regime for intellectual property, akin to the 'patent box' regime in operation in the Netherlands, which separates IP-related income and expenditure and subjects it to a lower rate of tax (10% in the Netherlands). The firm believes that this would encourage businesses operating in this field to locate in the UK.

"The most likely development in our view would be some sort of system whereby income derived from patents is ring-fenced and taxed at a more favourable rate than corporate profits more generally," Bonney observed, adding:

"In our view a wider ranging regime extending to other types of intellectual property such as brands, royalties and trademarks would be even better but a patent system would be a good start and potentially would be a great boost to the UK's tax competitiveness."

However, while the Chancellor may be willing to give with one hand, he is equally likely to take with the other, possibly through restrictions on the way losses can be utilized.

Currently, there are no limits on the number of years which a company can carry forward trading losses to offset against future profits. This could change as a result of the upcoming PBR, with the putting in place of a time limit within which losses must be used.

"Less welcome would be any sort of restrictions on the way in which losses can be utilized," Bonney noted. "There is a long held principle that losses are able to be offset against taxable profits. While the temptation to limit this may be strong from the authorities' side, this would be a radical shift in policy and very unpopular with businesses that have already suffered. A 'sale' of losses however, might be feasible."

Some form of extra taxation on the financial services sector could also be announced in the PBR, given Prime Minister Gordon Brown's recent public support for a 'Tobin tax' at the G8 conference in Scotland. The government is also not expected to extend the temporary 2.5% cut in value-added tax beyond January 1, 2010.

"Overall though, it is clear that the economy is in a deep hole and there are some unpleasant decisions ahead on both the tax and the spending side if we are to rebuild public finances," Bonney observed, concluding that: "Timing is crucial. Squeezing business too soon may jeopardize recovery."

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