Tax reforms will increase red tape, say companies

Business reacted with incredulity yesterday to the Chancellor's claims to be cutting red tape, saying his company tax reforms created huge new regulatory burdens with no benefit to the public finances.

Employers and the accountancy profession rounded on Gordon Brown's reforms of corporation tax, buried in the detail of Treasury and Inland Revenue press releases. They were sceptical of the Chancellor's economic forecasts, claiming higher taxes are inevitable.

One proposed shake-up relates to the tax rules governing transactions in goods and services between sister companies owned by the same group, known as transfer pricing.

The new rules, which stem from a recent European Court of Justice ruling, are designed to stop companies paying tax abroad rather than here by imposing stricter accounting procedures on the transactions. Most bizarrely, they will include accounting for the amount of time head office spends dealing with matters in different subsidiaries. This would include trying to account for the value of services provided by a central accounts department, for example, to the rest of a company.

Philip Gillett, chairman of the CBI's tax committee, said: "It is an administrative nightmare for what is a zero sum game in terms of tax. We are not aware of any other European member state to have imposed transfer-pricing requirements on domestic transactions.

"It is a whole new level of bureaucracy. I hear Mr Brown saying he will stop red tape coming from Europe yet we are doing Europe's job for them by imposing the red tape ourselves." Mr Gillett said his own company, ICI, would now have to calculate and prepare 130 tax returns in the UK instead of 30 at present.

Claire Hartnell, a tax partner at Grant Thornton, said: "It will create a huge amount of extra work and costs for companies but for what gain? It won't make a difference to the tax take. The cost of complying with these new rules will shoot up."

The Government has always imposed transfer-pricing rules on transactions between related companies based in different countries. This was to make sure UK businesses did not disguise profits by shifting them to lower tax regimes through meaningless inter-company transactions. But these rules are now being imposed on domestic transactions.

A Treasury spokeswoman said only companies with more than 250 workers and a turnover or balance sheet value of more than €43m would be affected. This meant 95 per cent of business would be exempt.

"We are concerned about the need to mitigate against any extra burden and we have consulted with industry to achieve that," she said.

Not all Mr Brown's business and tax measures were met with such ire. Widely welcomed were plans to boost venture capital trusts (VCTs) to increase funding for small businesses. These include increasing income tax relief on investments in VCTs from 20 per cent to 40 per cent. The Government also intends to increase the annual maximum VCT investment for individuals to £200,000.

Mr Brown also announced an extension to the system of tax credits for research and development by simplifying the Treasury's definition of what counts as R&D. He also announced an increase in the small and medium-sized company thresholds which qualify for 40 per cent capital allowances worth £400m over three years. But Digby Jones, the director general of the CBI warned over plans to extend workforce training. "Employers want reassurance the Government is not considering a statutory right to paid time off," he said. Business also remained sceptical of Mr Brown's economic forecasts.

David Frost, director general of the British Chambers of Commerce, said: "The Chancellor has taken on the role of Santa today but we are concerned it will only be a matter of time before his borrowing forces him to become Scrooge tomorrow."