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KPMG Predicts Another Revenue-Raising Budget From Brown

by Robert Lee,, London

19 March 2007

UK Chancellor of the Exchequer Gordon Brown is likely to ignore recent warnings from Britain's business leaders that the growing complexity of the country's tax system threatens to choke the economy in his upcoming budget speech, and will instead undertake his "usual tweaking" in a bid to extract more revenue, predicts accounting firm KPMG.

"Undoubtedly there will be the usual tweaking of tax plans, raising a bit more here to spend a bit more there," said Adam Bainbridge, head of corporate tax at KPMG in the UK.

“And, now that we have the draft climate change bill with its emissions targets, there could well be moves around 'green' taxes designed to encourage more environmentally friendly behaviour," he added.

However, addressing Britain's growing tax complexity and the erosion of its tax competitiveness relative to other economies is unlikely to be on Brown's agenda, despite the fact that business is "crying out for simplification of the tax system," Bainbridge predicts.

"There is more and more noise around how uncompetitive our tax system has become and pressure is growing for the Chancellor to do something about this. Whether he will is open to debate as so far most of business’ pleas have fallen on deaf ears," he observed.

On the corporate tax front, KPMG expects reforms to focus on targeted anti-avoidance legislation aimed at certain planning brought to the attention of HM Revenue & Customs (HMRC) through the Disclosure of Tax Avoidance Schemes regime. KPMG also expects news on HMRC’s new approach to penalties for incorrect tax returns, which could introduce stepped penalties for understatements or over-claims in tax returns. The Chancellor could also release details of what a new risk-based approach from HMRC in dealing with business will mean for “low risk” businesses. It is understood that HMRC will be releasing a document at or around Budget time which will explain large business tax risk, describe the new risk assessment framework and set out what this change in approach will mean in practice, and specifically the situation for low risk businesses.

On employment taxes, KPMG is anticipating news on managed services companies legislation, with further tweaks to the construction industry scheme, which is being radically overhauled with effect from 6 April this year, also likely. More detail on the possible alignment of the rules governing income tax and national insurance contributions, addressed by Brown in last year's Budget, could also materialise.

Regarding employee share plans, KPMG said that it would welcome a move to widen access to enterprise management incentive plans. These plans are tax efficient and can be very suitable for incentivising and retaining key executives in smaller companies. However the eligibility rules mean that some normally suitable companies, particularly private equity backed companies, cannot qualify.

KPMG predicts that further tinkering with indirect taxes could result in new measures to iron out anomalies in the VAT system, while news on the government's approach to tackling missing trader Intra-Community fraud, or carousel fraud, through 'reverse charging' on certain goods is anticipated by the firm.

With much media coverage being given to the unfavourable views of smaller retailers in relation to cheap imports of CDs and similar goods from outside the EU to take advantage of the VAT free import threshold of GBP18, the government could act to reduce the threshold to as low as GBP7, but KPMG does not anticipate a total elimination of the exemption, despite threats from representatives of small retailers to seek a judicial review of the law.

On the wider question of the public finances and the economy, KPMG believes there is little reason to change December’s forecast of 2.75% growth in GDP in 2006 and expects the Chancellor to repeat his famous mantra that the 'golden rule,' whereby current spending must be matched by current revenues over the economic cycle as a whole, has been met.

“Some might argue that it will be a hollow victory in view of recent changes to the definition of the cycle," stated Andrew Smith, chief economist at KPMG in the UK. "The back-dating of its start to 1997 had the effect of cutting the Chancellor some slack at a time when it looked as if the rule would be broken. And it also means that the current cycle has been unusually long! Nevertheless, it makes for a rather neat ending to Mr Brown’s reign at the Treasury.”

However, Smith said there will be questions about the next cycle because public spending has risen much faster than the economy as a whole since the early 2000s, leading to the possibility of an expenditure squeeze in the coming years. While this means no immediate danger of tax hikes, equally Smith observed that there is no scope to cut taxes.

He concluded: “Overall, it is difficult to see any significant new measures or major new initiatives. And yet...if it was your last budget, what would you do?”

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