This paper is a commentary on some of the taxation measures contained in the Chancellor's 12 March Budget speech, associated Press Releases and other papers. It does not attempt full analysis and cannot be exhaustive.

  Whatever the economic impact of the 2008 Budget, it will have a considerable impact on the UK's tax system as the 107 Budget Notes and multiplicity of accompanying documents are put into effect. Whilst it was good to see progress on simplification (eg BN4 on Associated Companies and BN35 on Repealing Anti-Avoidance Provisions), the overall package does point to a still more complex system.

CONSULTATION

  One general lesson to be drawn from this Budget is surely on the importance of consultation—consultation that is timely, properly managed, includes working with the right people and organisations, and having regard to what they say.

  The steady progress on the reform of HMRC's powers is a testament to good consultation; a number of other measures of considerable significance (Income Shifting, Residence and Domicile, CGT and Principles-based drafting) show welcome evidence of listening and an ability to make some changes in consequence. However, the process in all these areas would have been so much more effective for the development of the UK's tax system had consultation taken place in the right sequence—before the announcement of how changes would be made, not afterwards and against a background of decisions already largely made.

RESIDENCE AND DOMICILE

  HMRC is to be congratulated on listening to the (strongly expressed) concerns with the original proposals on Residence and Domicile and moving to alleviate many of them. The result is a package that no longer acts as a deterrent to investment in the UK; nor will it act retrospectively. However, three areas still need attention:

(i)  Personal allowances—the doubling of the de minimis amount of foreign income to £2,000 does not solve the unfairness or impracticality of the denial, from day one, of personal allowances for anyone on the remittance basis. This will catch two groups in particular:

—  The UK employer (often a foreign bank) of non-domicileds who are on a tour of duty to the UK. The employer will potentially have to monitor every such employee's position, modify the payroll accordingly and in most cases compensate affected employees through a tax equalisation payment or face a demand for higher pay. It is not enough for the Treasury to say employees have a choice in this area; the fact is that many will end up paying additional UK tax and look to their employers for compensation, thus increasing employment costs.

—  The low paid, who will, in great numbers, unwittingly breach the new rules and so risk a future penalty. The de minimis amount is unlikely to cover everyday situations such as the rent on the let-out flat back home, or earnings from helping with the family farm in the summer, or a student's summer vacation job at home. HMRC is simply not in a position to cope with the practicalities of educating and coping with this community.

    The only fair and practical solution to this issue is to harmonise this loss of personal allowances with the £30,000 charge, to come in after seven years rather than immediately.

(ii)  Residence test—the modification to only count days where the individual is in the UK overnight is welcome and sensible but has to be set against the lack of a UK statutory residence test. We are still largely dependent on case law and on HMRC practice. This also orientates towards a 91 day test, out of line with other countries. The UK needs a statutory test of residence that is clear and easy to work with; there needs to be a commitment to develop such a test.

(iii)  Confidence rebuilding—the changes to the original proposals will contribute significantly to reducing an exodus of non-doms. However, many in that community have, rightly or wrongly, gained the impression that the UK no longer welcomes them as much as it used to. There is work to be done to ensure that the UK is still perceived as an attractive location for work and investment, especially in relation to the financial sector.

RETROSPECTION

  It is one of the general principles of UK tax law that tax changes are not made with retrospective effect. That said, the Paymaster General's statement that accompanied the December 2004 Pre-Budget Report gave warning of possible retrospective action against avoidance schemes—but only in a limited area and only back to 2004.

  To find that a measure (BN 66) is being introduced which will have retrospective effect back to 1987 is unacceptable. It is not even on an area dealt with by the PMG's statement. The subject of the change may be an avoidance scheme, but that is not an excuse for such far-reaching action which is well beyond "clarification", as claimed by the note. This is a dangerous precedent for the integrity of the UK's tax system.

SMALL BUSINESS

  The decision to postpone the impractical and unworkable income shifting proposals is very welcome. It is to be hoped that the opportunity will now be taken to have a proper review of the principles of small business taxation. The result should be a taxation system that rests on practical, workable rules for the small business community, rather than resorting to a sticking plaster solution to the perceived problem.

  This sector is concerned with the continuing rise in corporation tax, albeit that the Annual Investment Allowance is welcome. However, the success of that initiative needs to be kept under review and assessed against the alternative of a simple, lower tax rate in due course.

LARGE BUSINESS

  The key Budget issue for large business, given that the change in rate of corporation tax and the revamping of the capital allowances system were inexorable, was how and when the Foreign Profits discussion document was to be taken forward. Whilst the proposed dividend exemption was broadly welcomed, significant concerns were raised by business around the interest cap and the tightening and extension of the controlled company regime, especially in relation to the taxation of intangibles. Concerns have centred on the potential for a significantly increased compliance burden and the fact that the proposals seem unlikely to be revenue-neutral in their current form. It is to be hoped that the delay in progressing the ideas points to careful reconsideration.

  The consultation document on a "principles-based approach to financial products avoidance" (mainly covering disguised interest payments), published last December, has several overlaps with the foreign profits proposals and the possibility of double taxation arises. It also represents a fundamental change in approach which needs careful exploration rather than rushed implementation. The announcement that implementation of the principles-based approach is being deferred to 2009 is welcome and allows more time for the issues to be debated and any changes to be aligned with the introduction of legislation on the taxation of foreign profits.

  Overall, the concern is that these proposals will have an adverse effect on the competitiveness of doing business in the UK. In this regard, the commitment " . . . to maintain the most competitive corporation tax rate of any major economy . . ." is welcome but the commitment needs to be in terms of the whole business tax system, not just the rate of corporation tax.

HMRC POWERS

  As noted above, the proposals on HMRC powers are the result of a good consultative process. The latest round of consultations, relating to the measures in BNs96-98, has only just closed and so it remains to be seen whether and how the various areas of concern that respondents raised have been answered. The concerns include areas such as HMRC's access to premises; ability to assess and take away records; debt offset powers; and the operation of penalties for late notification.

  The development of proper, modernised powers is, of course, very necessary to enable HMRC to police effectively the tax system. But this process also highlights the need for proper safeguards for the taxpayer. To that end, the commitment by the Government to start discussions on a Taxpayer's Charter/Bill of Rights is especially welcome and it is to be hoped that this can be brought to fruition in parallel with the general powers review.

TAX AND THE ENVIRONMENT

  The various changes under this heading are all valid, but what business (and, one suspects, individuals) would welcome is a clear framework that will be used to develop the UK's "green" tax agenda. In simple terms, will the tax system be used to raise money or change behaviour? If the latter, will there be a solid and consistent system to allow businesses to plan, long-term, accordingly?

OTHER MATTERS: COMMUNICATION

  There are a number of other matters that deserve to be noted. These include welcome measures such as:

—  The transitional Gift Aid rules.

—  The tax credit on overseas dividends.

  As a final point, it has to be noted that many of the changes to income tax and NICs that are about to affect taxpayers were announced a year ago. Some aspects, especially relating to the 10% tax band and the savings rate, remain a source of considerable confusion. It does demonstrate the need for an effective communication strategy over tax changes, so as to ensure as far as possible that taxpayers understand what is happening and that the risk of surprises in the pay packet are minimised.

March 2008