Pre-budget Report: Predictions from Allen & Overy's UK Tax Partners

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Allen & Overy's UK tax partners predict the contents of this year’s pre-budget report

On Wednesday 9 December at 12.30pm the Chancellor of the Exchequer, Rt Hon Alistair Darling MP, will present his 2009 Pre-Budget Report (PBR) statement.

This year's report will be made in unique circumstances. There is a large fiscal hole for the UK Exchequer to manage; increased tax revenues will be needed. A general election will take place within the next six months, so some of the possible measures mentioned below may fall by the wayside.

What could come out of this year's PBR?

Allen & Overy's UK tax partners have provided their thoughts on what we might see:

1. There could be a VAT rise to 20% as a one step increase from the temporary 15% rate – there is a not insignificant cost to business associated with VAT rate changes even though VAT may largely be a "pass through" tax for those businesses.

2. There is some talk of a curtailment of the generous corporation tax carry forward of losses rules with a time limit on carry forward losses (with refreshing of the losses anti-avoidance provisions).    

3. The new dividend exemption has given rise to some uncertainty as to what amounts to a dividend, especially in relation to overseas entities. It may be that there will be an initial move to bring some clarity to this issue.

4. One element of the foreign profits changes that has not yet been dealt with (other than the issue of CFCs, which has been postponed until later) is the current taxation of foreign branches, which is out of line with the concept of dividend exemption. There may be a further announcement on this, perhaps the start of a further consultation.

5. It will be a rare year if there are no proposed changes to the rules relating to the sale of leasing companies. And draft legislation in relation to rules relating to latent capital allowances (announced earlier this year) is expected.

6. One element in the past of trying to boost the economy has been to give enhanced capital allowances, either across the board, or in relation to SMEs or in relation to certain asset classes. This could be combined with a payable credit facility to assist those with current or carry-forward losses.

7. If the Chancellor intends to address taxpayer behaviour and/or the relationship between HMRC and taxpayers, then we may see an update on the proposed Banking Code and the first public indication that Alternative Dispute Resolution may be used to reduce the current HMRC/taxpayer dispute mountain. One approach to the Code would be to make it less onerous, so as to encourage more banks to sign up to it. Alternatively, there could be an attempt to make it mandatory for banks to adhere to it.

8. Following the decision in the HSBC case that the 1.5% SDRT season ticket charge is unlawful, there is likely to be a further announcement about how the issue of shares into clearing systems and depositaries is to be taxed.

9. The new 50% income tax rate makes the 18% CGT rate look particularly attractive. There is a danger that the new rate will lead to a reduction of tax on certain profits from 40% to 18% rather an increase from 40% to 50% – this suggests either an increase in the general rate of CGT or the introduction of a higher CGT rate for "short term" gains.

10. We may see some anti-avoidance rules relating to the introduction of the 50% tax rate.

11. The recasting of the rules relating to MPs' expenses could give rise to some change in the rules relating to the principal private residence relief.

Further information

http://www.allenovery.com/tax

Please contact Avnee Vyas, tel +44 (0)20 3088 2540

Notes for Editors:

1. Allen & Overy is an international legal practice with approximately 5,000 staff, including some 450 partners, working in 31 major centres worldwide.

2. In this press release 'Allen & Overy' means Allen & Overy LLP and/or its affiliated undertakings.

3. The term 'partner' is used to refer to a member of Allen & Overy LLP or to an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.

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Avnee Vyas
Allen & Overy
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