The UK chancellor of the exchequer can no longer excite or surprise the country's multinational taxpayers with his annual budget statement. It is almost as if he does not want to.

The 2006/2007 Budget, published on March 22, contained more plans to curb tax avoidance, updated proposals on real estate investment trusts, the announcement of a review of the relationship between large business and the tax authorities, but no change to the corporate income tax rate. Legislation to deal with group loss relief after the Marks & Spencer judgement at the European Court of Justice is also on the way. None of this rocked tax directors back in their chairs in company offices around the country. The corporate tax detail in this budget was low-key and, for the most part, expected.

It was more notable for the potential for the development of a more competitive tax system to achieve the government's economic competitiveness goals.

Without impact

The pre-Budget report and regular updates during the year, such as on tax avoidance and how the tax authorities interpret court judgements, have replaced the power of the budget to excite and surprise.

"There were a lot of anti-avoidance provisions again for specialist areas and if you were affected here then you would have a lot of work," said Tim Voak, head of tax at Unilever, a consumer products group. "But for most people there wasn't much. Most of it, such as the new disclosure rules, was in the pre-Budget report."

Richard Baron, head of tax at the Institute of Directors, wanted more action on corporate tax. "It was a bit disappointing from a tax point of view," he said. "There was no real strategy. There was a lot of playing around and what is the point of that really. We need a serious drive to simplify and a lower corporate tax rate."

"I think from an ICI perspective it's fairly neutral," said Philip Gillett, the company's group taxation controller. "We'll have to look at the anti-avoidance legislation as it is so complex that we might end up doing something illegal on what we think is an entirely innocent transaction."

"The only little wrinkle was the pre-April 2002 non-UK resident companies getting picked up in order to effectively prevent access to inverting companies overseas," said Ian Brimicombe, head of tax at AstraZeneca, a pharmaceuticals company, "so the CFC net will still catch those companies that became non-resident even before April 2002. That was the only surprise I think,"

This refers to the widening of the rules for CFCs (controlled foreign companies) to include certain companies. At the moment a company that is incorporated in the UK but is considered to be non-resident because of a tax treaty before April 1 2002, does not come under the CFC rules. The authorities changed this from March 22 this year to place those companies within the rules when certain events, to be specified in the Finance Bill, occur. "That's quite significant," said Mark Schofield, a corporate tax partner of PricewaterhouseCoopers. "Here they're trying to make life difficult for people," said Voak.

Financial avoidance targeted

The anti-avoidance measures this year covered financial arrangements, including the payment of income tax and national insurance through the use of options rather than shares or securities; the use of group continuity rules for loan relationships and derivative contracts; the de-recognition of profits on loan relationships and tax avoidance on interest.

The steps against avoidance also addressed missing trader intra-community value-added tax fraud and capital gains tax avoidance.

The authorities also announced that, from July 1 this year, the disclosure regime would be extended to include income tax, value-added tax and capital gains tax arrangements.

"The overall tone on tax avoidance is more balanced than in previous years," said Patrick Mears, senior tax partner of Allen & Overy. "In past years all sorts of adjectives were put in front of avoidance, such as 'artificial' and 'abusive'.

Reit conversion

Real estate investment trusts will start operating from January 1 2007 and the Treasury announced at budget time that the charge for any property company to convert to the new structure will be 2% of the gross market value of investment properties. It said that this would meet the aim of introducing Reits at no overall cost, or on a tax-neutral basis, to the exchequer. "That's not as bad as it could have been," said Ben Eaton, senior tax associate of Allen & Overy. "It's not an unreasonable price for tax exemption."

Easing the burden

Even if there was little of immediate significance in the budget for non-property companies, a review of the relationship between HM Revenue & Customs (HMRC) and large businesses could have important effects for corporate taxpayers in the long-term. Sir David Varney, the chairman of HMRC, will lead the review, which will look at ways at how the concerns of large businesses can be considered in the administration of the tax system.

"I think that in all likelihood that these discussions will just cover a specific area of the ECJ which is fine and I would always want to discuss things with HMRC," said Gillett, "but I would rather it was broader. I want them to bring something back like the corporate tax forum from four or five years ago. But this seems to have been put on hold."

HMRC is hoping to reduce the burden on business in dealing with forms, returns, audits and inspections over the next five years. The deputy chairwoman of the Better Regulation Commission will head an Administrative Burden Advisory Board that will work with HMRC on the complexity of the tax system.

More competitive

Other government initiatives to make the UK more competitive could, and should, also have an impact on the tax system, according to Schofield, of PwC. The chancellor announced the establishment of a taskforce to promote London as the world's leading finance and business location. And the day before the budget, the chancellor set up the International Business Advisory Council, made up of UK and international business people, to advise him on the challenges that globalization, particularly the growth of the Chinese and Indian economies, presents.

"Tax cannot be ignored in the context of competitiveness," said Schofield. "It's not only about rates and things such as double tax and CFC rules, but also about incentives. The UK has to be attractive to invest into and out of."

The 2006 UK Budget may have lacked immediate tax sparkle, but if it leads to a globally competitive system in the long-term, taxpayers will be glad they were bored this year. RC & CJ