TAX NEWS - June 2010

UK Emergency Budget: Shape of things to come

UK Emergency Budget is to be delivered on 22 June 2010. The two issues that have attracted the most interest are covered separately below. In addition to these two headline items, there are a number of areas where change is to be expected in the short to medium term.

The Government has expressed its desire to have the most competitive tax regime in the G20 while protecting manufacturing industries. Part of this will be a reduction in the corporation tax rate and key to businesses will be the calculation of the profits to which that tax rate is to be applied. Simplification of the capital allowance system is promised along with changes to the research & development tax credit to focus the relief more tightly. It is clear that there will be winners and losers from these changes.

The previous Government started a review of the controlled foreign companies legislation and a move to a more territorial basis of taxation. The current expectation is that the review will continue in the same direction under the new Government.

Before the election, the Conservatives proposed further restrictions on interest deductions and we wait to see whether there will be any announcements on this in the Emergency Budget.

A proposal to introduce a general anti-avoidance rule was explored in 1998 but subsequently abandoned. However, the Liberal Democrats made reference to it in their pre-election proposals and the Coalition are committed to making 'every effort to tackle tax avoidance including detailed development of the Liberal Democrat proposals'. It may therefore resurface for consideration over the medium term.

In light of the likely uncertainty in the medium term, companies should consider whether any of their own forecasting and other commercial decisions such as contract pricing and M&A transactions are affected by potential tax changes and whether any of their current modelling should be refined to reflect this risk.