Tomorrow's Budget poses a dilemma for the chancellor. Does he follow the habits of chancellors past and raise taxes in the first full Budget of a Parliament, or does he defer tax-raising decisions given the uncertainty of the EU vote on 23 June?
Whatever he decides, businesses will be focusing on the much-heralded Business Tax Roadmap, which will outline how companies will be taxed for the remainder of the decade. Three quarters of the firms in our pre-Budget survey said that the certainty of the Roadmap was needed to facilitate long-term planning. And the chancellor’s appetite for this plan follows the success of its predecessor at the start of the last Parliament, the Corporate Tax Roadmap, which foretold cuts in corporation tax, moving the UK onto a more territorial tax base, and ultimately making Britain more “open for business”. While this Parliament’s Roadmap may detail more B-roads than motorways, these smaller items form part of the infrastructure of the tax system and should not be ignored.
One area of particular interest is expected to be the engagement between HMRC and large businesses. In our recent report Building the balance, we argued that the administration of our tax regime is a key factor in the attractiveness of the UK as a place to live and do business. HMRC introduced the “Customer Relationship Manager” for large business a decade ago. This was a key step in seeking to achieve cooperative compliance, getting companies to engage up-front with HMRC, providing additional information to the tax authority far earlier in the process, and enabling HMRC to target its enforcement activities. This has proved successful but also controversial, with some arguing that such an approach demonstrates a “cosy relationship” and special treatment of big companies.
The Roadmap could provide the government with the chance to show that those concerns are misplaced, but it could also go further by reinvigorating that relationship. A decade is a long time and the government should take this opportunity to set out clearly what HMRC expects of large businesses and what large businesses should expect of HMRC. The tax system needs to be robust and, if the administration of it does not work effectively, there is a risk to both HMRC and UK businesses.
This new approach needs to move beyond rhetoric and commitments to build up trust. The development of what could be described as a Service Level Agreement (SLA) would show the government’s commitment to a constructive taxpayer/tax authority relationship. By setting out detailed parameters, both parties will have clarity around what is expected of them and what they can expect in return. In particular, the SLA should provide clarity over deadlines, where enquiries stand, when businesses should expect responses, as well as what is driving the tax authority’s concerns. Many of the UK’s larger businesses are necessarily complex, but that should not stop HMRC from focusing its resources appropriately, thereby saving everyone time and money.
Beyond this, we can expect the chancellor to provide his interpretation of the recommendations of the G20/OECD Base Erosion and Profit Shifting (BEPS) project, and how these will affect business. There should also be a long overdue response to the consultation on business rates, which represent an increasingly large proportion of business taxes, do not vary with profits, and penalise particular sectors, such as retail. The ability to change this will depend on the chancellor’s appetite for raising revenue elsewhere.
If the chancellor does decide to follow his predecessors and raise taxes, possible targets include fuel duty rises, measures to address the tax benefits from salary sacrifice, and reform to the rules that apply to individuals who provide services through companies. In terms of giveaways, the North Sea may see some reprieve from the super profits taxes, designed for a time when oil prices were double what they are today.
But whatever the chancellor’s choice of immediate changes, setting the right direction for the relationship with business can only bring long-term gains for the UK’s fiscal situation, the taxpayer and the country as a whole.