By Mark Bevington, Tax Partner, Baker McKenzie

Having hinted strongly at a smaller budget for what is the last Spring Budget, the likelihood that the Government will introduce extensive new business tax measures are slim. The big questions that businesses in the UK are puzzling over, in light of Brexit, and would like to see the Government address next week are:

  • If the Government finds measures to raise revenue will that harm UK competitiveness?
  • What measures will be announced that attract technology companies - both start-ups and the global major industry players - and how will this be balanced with the Government's apparent desire to modify the tax system to cope with new digital business models?
  • Will the Government make any further signals on the headline corporation tax rate in light of Brexit and the possibility of US tax reform?

At the heart of the Government's dilemma regarding business taxation is that it needs more than ever to maximise what monies are collected. However, any taxing measure risks driving business and investment to other territories with the consequence that it has the opposite effect.

The Government (and the Coalition Government before it) has been pretty canny in how it has struck this balance so far. It has managed to make the case for low headline corporation tax rates (without too much public disquiet)  thereby gaining a reputation for the UK being a competitive jurisdiction.  This "open for business" message has resonated widely, particularly in the US, and some of the fruits of that success can be seen in recent press.

However, it is in the finer detail of the existing tax policy which really shows how cleverly the balance has been struck. The basic strategy in the last few years has been to protect and broaden the domestic tax base, making it increasingly hard for multi-nationals with significant UK operations to sustain low taxed profits 'offshore', and to create a range of policies that reward those who decide to concentrate profit and substance in the UK.

In this context, while the pace of legislative change can be expected to slow considerably, we expect there to be a continuing up-tick in tax audit activity by HMRC, using the new tools at its disposal, such as the Diverted Profits Tax introduced in 2015. There can be no doubt that there has been a manifest change in HMRC's approach to dealing with multinationals, and in particular, its willingness to assertively challenge multinational's transfer pricing arrangements where there is a perceived divergence of profits from the UK.  We expect this trend to continue and accelerate in the years ahead.  The UK is not an outlier in this respect - as multinationals face a significantly more hostile environment than they did in the past.  Some may say that HMRC is rather late to the party. One of the biggest challenges facing multinationals today is to mitigate the risk that they will pay tax twice on the same profits in different countries.

Therefore, one could say the UK has done a fine job of competing for tax dollars in the corporate sector in a cost effective way. But will this record be maintained in light of Trump and Brexit? 

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