Chancellor should "hold his nerve" on transfer pricing in this year's Budget, says expert

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, called on the Chancellor not to be persuaded to make "knee jerk changes" in response to public and political pressure ahead of his Budget speech on Wednesday. She warned that any changes to transfer pricing rules, which can apply where multinational companies deliberately transfer profits from a higher to a lower tax jurisdiction in order to reduce their tax liability, had to be made at an international level in order to be effective.

"This is an international issue that needs co-ordinated international action, and work is already underway at the Organisation for Economic Coordination and Development (OECD)," Self said. "Those who think that multinationals are not paying their 'fair share' of tax in the UK fail to recognise that this is a complex topic which needs co-ordinated action, not knee jerk changes in response to political pressure. Any change in this area in the Budget would be a bad idea."

"Some have suggested that there should be a sales tax to make sure that multinationals pay their 'fair share' of tax in the UK. Any such tax is likely to be passed on to customers, so will just increase prices rather than resulting in more tax being borne by companies. It would also be difficult to introduce under EU law - we already have VAT in the EU, so cannot introduce a UK sales tax as well," she said.

Self was one of a number of tax experts from Pinsent Masons commenting ahead of the Budget. Amongst other issues, the experts called for clarity about the tax treatment of shares issued to employees under the Government's new drive to increase employee ownership in the companies that they work for, and further announcements in relation to the UK's expanding network of double taxation treaties and information-sharing agreements with other jurisdictions.

Pinsent Masons has also called on the Government to postpone the introduction of new rules which will require companies bidding for public contracts to self-certify that they have not been involved in certain types of tax avoidance. The new regime, which is due to take effect from 1 April, was announced in the Chancellor's Autumn Statement in December, with the details released in February. However, the plans have been met with dismay from those likely to be affected, after the Government only allocated two weeks for consultation on the proposals.

"A two-week consultation period in February, for rules which are supposed to start on 1 April, is ludicrous," said Jason Collins of Pinsent Masons. "Whilst we understand the Government's wish to use its buying power to combat tax avoidance, it still needs to consult properly and get the rules clear so that they do not cause needless uncertainty for business."

In its response to the consultation, Pinsent Masons also argued that the Government's recommended 10-year disclosure requirement for any "occasions of non-compliance" would amount to an "almost impossible compliance burden" for businesses. The new rules, which are intended to apply to all companies bidding for Government above-threshold contracts, will see bidders asked to respond to a "simple question" on their tax compliance during the selection stage of the procurement process, according to the Government's consultation document.

New 'employee shareholder' contracts, which will see employees offered shares in their companies in exchange for giving up certain employment rights, were expected to be made available to employers from April, but the start date has been postponed to "Autumn 2013". The proposed new contract will allow employers to offer shares valued between £2,000 and £50,000 to new employee-shareholders. In exchange, the employee could be asked to give up rights including those in relation to unfair dismissal, redundancy and certain statutory rights to request flexible working and time off for training.

Any increase in the value of the shares awarded under an employee-shareholder contract will not be subject to capital gains tax (CGT); however, the Government has said that income tax will be due on the shares. Share plans expert Matthew Findley of Pinsent Masons said that it was not yet clear when the tax liability would arise or how it would be calculated, but said that it was likely that a "long awaited" announcement on this would be made as part of the Budget.

"The arrangement is likely to result in a number of unintended consequences," he said. "While some companies have examined it with a view to use on an 'all-employee' basis, there is much more interest among those who may be considered by some to be the 'wrong' people politically. The arrangement is likely to present management within privately-owned companies – be they family-owned or private equity-backed – with a potentially very tax-efficient way to receive shares in their employer."

"While the Government is rightly committed to extending share ownership within unlisted companies, it is doubtful this was the intention. It could therefore create a tax break for senior managers at a time when scrutiny of what amounts to legitimate tax planning is at its peak," he said.

A budget announcement on whether the Government will adopt the Office of Tax Simplification's (OTS) recommendations on unapproved employee share plans is expected. Among its recommendations, the OTS suggested simpler share valuation and PAYE processes, and the creation of an employee shareholding 'vehicle' or trust to enable companies to better manage share arrangements and encourage wider employee share ownership.  The OTS also proposed a radical change to the tax treatment of such plans by suggesting that the point at which employees are taxed on the value of shares is changed. It suggested that employees could be given the option of whether to pay tax on acquisition of the shares, or at the point when the shares become marketable or are sold.

On the OTS review of approved share plans, Matthew Findley said “While the previously announced technical changes resulting from the OTS review will be in the Finance Bill, of more interest is what the Government says in relation to the introduction of self-certification for approved plans."  The new regime for companies to self-certify certain tax-advantaged employee share schemes instead of having these pre-approved by HMRC is due to take effect during 2014. Findley said that "for it to be workable, greater clarity is needed on some of the more subjective features of the current HMRC approval process."  The Government is expected to announce further consultation on this.

From a personal tax perspective, tax investigations expert, Phil Berwick of Pinsent Masons said that recent information-sharing agreements signed by the UK with the Isle of Man and announced recently with Guernsey were "expected to be the first of many".

"Taxpayers with undisclosed assets or tax irregularities in the Channel Islands and British Overseas territories should get their tax affairs in order," he said.

"HM Revenue and Customs (HMRC) will be provided with a substantial amount of information, and in some cases may pursue a criminal investigation. The Liechtenstein Disclosure Facility (LDF) remains a good option for taxpayers wishing to regularise their tax affairs, particularly since existing assets in Liechtenstein are not required, and the process provides immunity from prosecution for tax offences," he said.

The LDF enables taxpayers with UK tax irregularities connected to a bank account, investment or structure in Liechtenstein to settle their tax affairs on favourable terms. Those who do not currently have an account in Liechtenstein, but have an offshore account located elsewhere, can now bring themselves within the LDF by acquiring a bank account or similar connection in Liechtenstein.