Alistair Darling's Pre-Budget report 2007

Once again the company car is likely to be under the spotlight. A green initiative, launched by HMRC, to encourage the use of environmentally friendly vehicles within company car fleets has backfired although it offered significant incentives and tax reductions.

In spite of the best intentions, there was a reduction in employees using company cars from 1.6 million in 1999 to 1.2 million in 2005. Report on the Evaluation of the Company Car Tax Reform: Stage 2, Her Majesty’s Revenue & Customs, 22 March 2006 as employees found them less economically viable due to changes in tax and employers found the cost and complexity of running a fleet prohibitive.

In its place, many employees opted to purchase their own vehicles under the 'Employee Car Ownership Scheme' (ECOS), which saw large numbers of cars not deemed environmentally friendly being bought.

According to senior manager Anil Patel, "Legislation is likely to be reviewed on car ownership schemes facilitated by employers as well as the mileage rates paid to employees to discourage the use of gas-guzzlers and benefiting from a perceived attractive rate of compensation from using their own car rather than other forms of transport."

Tax reduction and simplification to increase UK competitiveness

Following the cut to the headline rate of corporation tax announced in the last budget, Grant Thornton continues to call for an overall reduction in the tax burden to ensure the UK's competitive position in Europe.

According to international tax partner Heather Self, "The UK's rate of corporation tax ranks 19th in terms of competitiveness in the European Union. We want to see neutral tax reforms and changes in the core tax rates to give a boost to small and medium businesses."

In terms of simplifying corporate tax, a change is expected to the rules for calculating tax paid by associated companies. Despite HMRC's dislike of film partnership style structures, there is strong pressure to review the impact of taxpayers being treated as 'associated' with entities to which they have little real linkage.

An existing concession in this area is ripe for review and the hope is that HMRC will announce some changes in this area.

One simplifying measure would be to tax commercially linked companies on a consolidated basis, which would simplify claims for loss relief as there would be an automatic offset and remove the need to consider transfer pricing in a UK context.

Tackling private equity

The taxation of Private Equity has received a lot of press this year and Alistair Darling has said that he will make a statement on this area in the PBR.

Tax Partner Stephen Quest predicts that, "While there may be some minor technical changes announced which will have limited application, there should not be a substantive change to the general Capital Gains Tax rules."

"It's expected that the 10% CGT rate will remain and the time period of two years will not be adjusted to gains made on monies invested to ensure the UK retains a competitive tax environment for entrepreneurs and financial investors alike."

Taxation of Foreign Profits and Family Businesses

In June, the Government published a discussion document: 'Taxation of the foreign profits of companies' to ensure that the Treasury is receiving its fair share of tax on profits from multi-nationals with controlled foreign companies (CFCs) as well as ensuring the UK regime is consistent with EU law on this issue.

CFC rules are designed to stop UK companies avoiding tax by diverting income to subsidiaries (CFCs) in lower tax countries by requiring UK companies to pay CFC tax equal to any tax that would otherwise be avoided.

Heather Self anticipates that taxation of foreign profits is likely to be addressed in the Pre-Budget: "The Government has a careful balance act to perform; it wants to protect the tax system whilst ensuring that complex legislation does not drive companies offshore. There are lessons to be learned from the changes made to the double taxation relief system introduced to make the UK more competitive, which in fact proved complex to administer. With the final legislation due for launch in the Finance Bill 2009, it is crucial for the Government to listen to business in order to get it right."

Following the Artic Systems case, the Treasury will be taking a close look at family owned businesses as it perceives it is losing a substantial amount of income from the way these arrangements are currently structured.

Her Majesty's Revenue and Customs views income splitting as tax avoidance and according to Mike Warburton, senior tax partner, "the most likely change will be the abolition of ITTOIA section 626 concerning the tax exemption of outright gifts between spouses which are not caught by the trust rules."

"The reality for the average family business is that everyone gets involved by picking up the phone or discussing strategy over the kitchen table, which makes it difficult for the revenue to assess these businesses with the basic rules as they are. Labour is likely to make life even harder for businesses set up this way."

The outcome of Alistair Darling's Pre-Budget Report will show whether he will make his mark on the Treasury or simply rubber-stamp the path set out by Gordon Brown before his move to number 10.

Given Brown's notoriety to micro-manage, and the necessity of keeping the economy on an even keel, the report is unlikely to set the world on fire.