2011 Budget: Keep calm and carry on

Practical Law UK Articles 4-505-4000 (Approx. 27 pages)

2011 Budget: Keep calm and carry on

by PLC Tax

Business: we are all in this together. Except for the banks. Well ok, maybe the banks but definitely not the oil companies

It is fair to say that the general tone of contributors to this article is a good reflection of the public reaction to the Budget . Part of it is personality dependent, of course. Some are solemn, even dour; others (not as many) will remain upbeat all the way to the gallows. As for the 2011 Budget, the general tone might best described as: teeth gritted with the occasional flash of optimism. Accept the pain, hang on for dear life, and remember to enjoy what you can.

Certainly, everyone seemed to enjoy the surprise reduction of corporation tax. However, Kate Habershon, Morgan, Lewis & Bockius echoed the sentiments of many when she added "although it is a shame the CFC reform is taking so long".

And so full reform of the CFC rules rumbles on. Painfully. A number of contributors welcomed the announcement of a partial exemption for finance companies resulting in a charge of only one-quarter of the full corporation tax rate. However, Murray Clayson, Freshfields Bruckhaus Deringer LLP noted "there was no sign of this being extended to IP income, though the Roadmap papers had suggested a parallel approach". The view of Steve Edge, Slaughter and May was that "on the CFC side, it is critical that positive progress to date continues if we are to sustain and grow our multinational base". Ashley Greenbank, Macfarlanes expressed frustration at the scope and pace of reform: "the Government needs to be braver. The patent box remains a limited measure which can't compete with IP regimes in other countries and the CFC reforms have been slow in coming, and pragmatic rather than revolutionary".

The government has confirmed that interim reform of the CFC rules will include a statutory grace period for foreign subsidiaries that are not currently CFCs but have previously been so. Colin Hargreaves, Freshfields Bruckhaus Deringer LLP described it as "a sort of welcome home present for groups which return to the fold having gone offshore".

There were other, specific criticisms. Martin Shah, Simmons & Simmons LLP bemoaned yet further potential changes to the worldwide debt cap rules, saying: "Whilst the ability to "more easily apply" the debt cap rules would be attractive, one is led to wonder whether a more pragmatic approach would be their abolition, given that the rules do not meet any policy objective that could not be addressed through a combination of better targeted measures and the proper application of transfer pricing".

Tony Beare, Slaughter and May was unhappy about the announcement that the value shifting rules set out in draft legislation prior to the Budget are to be introduced without changes. He said: "It is frankly astounding that legislation which is so patently defective should simply be introduced without taking into account the comments received."

The big question is whether, in the context of multinationals, the proposed reforms will be enough to prevent companies leaving the UK, and ideally to tempt others back? In fact, the threatened exodus from the City of London for tax reasons has never really materialised, despite some pretty aggressive scaremongering, and it may be that the provisions having international effect will be enough to allay such fears. The conclusion of Steve Edge, Slaughter and May was that the government had a "good grasp of the situation affecting multinationals". Richard Sultman, Cleary Gottlieb Steen & Hamilton thought that "one consultation that may be of particular interest to multinational businesses relates to the proposed anti-avoidance measure around UK double tax treaties, which sounds like a new domestic law anti-treaty shopping rule".

Entrepreneurs: the engine of recovery?

In relation to smaller business, Angela Savin, Norton Rose LLP noted "a strong emphasis on backing entrepreneurs to kick start the recovery".

There were a number of substantive comments on the changes to entrepreneurs' relief. Mathew Oliver, Bird & Bird LLP said he was a "bit disappointed there were no detailed changes to the entrepreneurs' relief rules; in particular the 5% limit for shareholdings in personal companies has become a real hurdle for cashless takeovers of smaller companies". Colin Kendon, Bird & Bird LLP agreed, saying it was "a pity the Chancellor decided not to follow the recommendation of the Office for Tax Simplification by removing the anomalous 5% threshold which applies to shares but not business assets". Brenda Coleman, Weil argued also that "further relaxations to the conditions should still be made to encourage outside investment in entrepreneurial businesses".

Nonetheless, Charlotte Sallabank, Jones Day concluded that entrepreneurs had been "reasonably well treated", although Susan Ball, Clyde & Co noted that "the principal improvements are still being announced as "jam tomorrow" - we will have to wait and see".

Andrew Loan, Macfarlanes LLP welcomed the changes to EIS and VCT reliefs, including "the relaxation of some of the scheme’s conditions [which] will enable a wider range of companies to attract investment that qualifies for the reliefs". Darren Oswick, Simmons & Simmons LLP was also positive about the changes to EIS and VCT reliefs, but added that "one wonders if these measures are really the best way to do this, given the uncertainty that surrounds them due to the continual tinkering which they have suffered". David Jervis, Eversheds thought that the VCT and EIS changes for investors in solar developments were not unexpected but noted that "whether the SDLT bulk purchase arrangements may be relevant for these projects remains uncertain". The conclusion from Howard Murray, Herbert Smith LLP was a "bottom-up rather than top-down approach to economic growth, weighted towards entrepreneurs".

Conspicuous by their absence

In terms of what was not contained in the Budget, Jonathan Legg, Mishcon de Reya commented that "the property industry will certainly have breathed a sigh of relief that the government has not rushed to tax the sale of shares and units in land rich entities at higher rates of tax, although it is assumed that this has not fallen off the agenda".

Jonathan Cooklin, Freshfields Bruckhaus Deringer LLP pointed out that "the other essential piece of the jigsaw puzzle - retaining and attracting individuals with a competitive personal tax regime for the UK - does not receive enough emphasis in the Budget. That is disappointing." Daniel Lewin, Kaye Scholer LLP made a similar point, saying that "with the 1% increase in NICs we are now at a de facto top income tax rate of 52% and until this is reduced to a more acceptable level, a significant impediment to the UK’s competitiveness remains, particularly in the financial sector". However, others including Nikol Davies, Taylor Wessing LLP noted that "the Chancellor's comment that the 50% [income] tax rate is a temporary measure will be welcomed". Staying with international individuals, Paul Hale, Simmons & Simmons LLP commented that "Given the extremely unsatisfactory state of the current law on residence, compounded by HMRC's decision that it would no longer be bound by its published guidance on day counting, the proposed introduction of a statutory test of residence can only be welcomed".

Banks: your country needs you

On the increased bank levy, Charles Goddard, Berwin Leighton Paisner commented that "the City will be disappointed that banks have been singled out for taxes at a time when other industries are benefiting from reductions in their tax rates". Mark Sheiham, Simmons & Simmons LLP noted that "two increases in bank levy being announced in as many months may raise the possibility of further increases to the bank levy rate being announced in the future".

Clíona Kirby, Olswang LLP pointed out:

"the key question is who is actually bearing this cost? It seems many banks are reserving the right to pass on a percentage of the bank levy to borrowers either through the standard tax indemnities in the LMA loan agreement or through pricing - this surely cannot be what the government intended?"

Nonetheless, the news was not all gloomy for the banks. Jonathan Richards, Linklaters was "pleased to see that a working group is to look at the tax treatment of bank regulatory capital ....The UK's legislation on "distributions" places banks at a disadvantage when compared with their competitors on the continent, many of whose tax systems readily permit issues of deductible tier 1 capital".

Simplification: the merger of income tax and NICs?

The government has stated that it is an overriding goal that the tax system should be simple to understand and comply with. As James Ross, McDermott Will & Emery UK LLP pointed out "Repealing a few reliefs that were already spent or virtually obsolete doesn't really count". Kate Habershon, Morgan, Lewis & Bockius also doubted whether this would "really take us forward".

However, the possible future merger of income tax and NICs was described by Emma Bailey, Fox Williams LLP as "welcome", and by Nick Beecham, Field Fisher Waterhouse as "long overdue". Alexander Cox, Ashurst LLP agreed that "if the potential merger of the income tax and NIC regimes is a statement of intent in respect of the future direction of the tax system as a whole, this must be encouraged".

Jason Collins, McGrigors LLP thought that "the biggest question will be whether the government has the courage to abolish employer's - not just employee's NICs".

Again, this is an area where we must wait and see.

Avoidance: is the GAAR really coming?

Given the overriding government philosophy of We Are All In This Together, there was a big emphasis on anti-avoidance. Adam Blakemore, Cadwalader, Wickersham & Taft LLP said: "Given the focus on achieving a fiscally neutral budget within the constraints of the Comprehensive Spending Review published in October 2010, the attention given by the government to tackling tax avoidance was perhaps unsurprising".

The confirmation in the Budget that the government is continuing to consider a general anti-avoidance rule has sparked plenty of debate and a wide range of opinions. Many are arguing that we don't need one and we don't want one.

Stephen Hoyle, DLA Piper LLP said:

"This year's Budget proves again that the UK does not need a GAAR. The UK does need certainty in its tax system, which is incompatible with a GAAR ... There is a market for tax-leveraged products from promoters which should be protected but products can be found which are more like punts on the tax system. These are better dealt with by changing the economics of the punt than by institutionalising uncertainty under a GAAR".

Heather Gething (Herbert Smith) was no less clear when she said:

"Evasion and avoidance were obvious targets for the cash strapped Chancellor but straightened circumstances just like hard cases do not necessarily result in good law.... What is needed is education - education of officers at HMRC at all levels on construction of statute and the Rule of Law."

But Neil Woodgate, White & Case declared himself "coming around to the idea of a proper principles-based GAAR",

In the context of more targeted anti-avoidance provisions, Sandy Bhogal, Mayer Brown International LLP said that he liked the "more strategic approach proposed on anti-avoidance legislation ... it is important that anti-avoidance legislation is as targeted and sensible as possible. Cuts in headline rates of taxation may not in [itself] attract business to the UK". Clare Carpenter, Mishcon de Reya agreed that what was required was a "measured approach" to anti-avoidance.

Peter Sayer, Addleshaw Goddard LLP liked the de minimis provision in the announcement of anti-avoidance legsilation relating to group mismatches where the rules will only apply if (inter alia) there is no practical likelihood that the scheme will fail to give rise to a relevant tax advantage of at least £2 million. He notes that "such a de minimims number might need to be considerably lower in most cases, but even much lower numbers...could potentially take large sections of complex legislation out of play for smaller enterprises just trying to "get on with business". "

Greg Sinfield, Hogan Lovells International LLP was surprised to note that "the Chancellor has not promised any measures to counter VAT avoidance by businesses. Surely that cannot be because there isn't any avoidance? Perhaps it is because HRMC consider that they have all the anti-avoidance measures they need in the Halifax anti-abuse doctrine."

REITs: happy to be in this one together

There was a sense of genuine enthusiasm, even delight, from commentators in relation the proposals relating to REITs. Robert Kent, Freshfields Bruckhaus Deringer LLP described them as "fantastic proposals" and Heather Corben, SJ Berwin welcomed them as a "real opportunity to encourage new entrants and simplify and improve the regulatory regime".

John Challoner, Norton Rose LLP said: "In particular, the prospect of the abolition of the 2% entry charge, which has resulted in many property funds remaining, or setting up, offshore will make a big difference".

Michael Cant, Nabarro LLP agreed, saying:

" ... to do away with the 2% REIT entry charge is stunning and must be seen as a very bold move on the part of the government to encourage more companies to join the regime ... it is possible that investors will think very seriously about repatriating property taken offshore in the last 5 years or so".

John Christian, Pinsent Masons LLP also welcomed the proposals but commented that "It is a shame though that we have to wait until 2012 for the [REIT] changes- the property investment market would benefit now from the stimulus of a more market- friendly REIT regime."

Disguised remuneration

Whilst this was not generally a budget for apoplexy (a number of commentators claim to have found the whole thing very uninspiring), the disguised remuneration announcements did generate significant rage.

Simon Skinner, Travers Smith LLP said:

"It is hugely disappointing that the government and revenue appear to have decided to press ahead with their proposed new rules in broadly the form originally suggested, in the face of very vocal opposition from many corners ... If ever there was legislation that goes contrary to the government's mantra of predictability, stability and simplicity, it is this ... The proposed legislation should be torn up and a narrow anti-avoidance rules applied while the revenue decides what the real menaces to be targeted should be. I, for one, have little hope that common sense will prevail."

His partner, Simon Yates, Travers Smith LLP was similarly incandescent. He described the proposals as an "ongoing train wreck". In fact, these two partners were sufficiently incensed for their comments to arrive not only on the day of the Budget itself, but very soon after the Chancellor sat down.

They were not alone. David Harkness, Clifford Chance LLP also commented that "any solution which requires heavy reliance on HMRC practice would be unsatisfactory".

For now, Judith Greaves, Pinsent Masons LLP noted that "companies will have to wait for the Finance Bill to see to what extent the Government has been able to improve the draft disguised remuneration" legislation. Nicholas Stretch, CMS Cameron McKenna is concerned by the short timeframe in which the new rules are expected to take effect: "It is disappointing therefore that we still have to wait until the Finance Bill to be published on 31 March to know what the final proposals are....This will be only a week before the start of the relevant tax year. This is legislation whose impact has been very tricky to explain to the Revenue and also in fairness for them to target correctly, and so it can reasonably be anticipated that even in the redraft in the Finance Bill the legislation won't quite be right. Any further changes will then unfortunately have to be negotiated through the formal Parliamentary process".

Conclusions

Does the 2011 Budget achieve the government's goals of predictability, stability and simplicity? Simon Letherman, Shearman & Sterling LLP thought not, saying that "the surprise hike in tax rates on North Sea oil and gas (not so much a stealth tax, more a raid), and the continued tinkering with bank levy rates, show that there is still some way to go to achieve a stable corporate tax environment in the UK". Clive Jones, Eversheds agreed, concluding "in view of the number and piecemeal nature of the proposed changes, and the prospect of a GAAR without an adequate clearance procedure, achieving simplicity, stability and certainty seem a long way off". But it may be that we are on the way.

Patrick Mears, Allen & Overy LLP described the Budget as a "thoughtful, coherent approach which appears to be keeping faith with the Government's expressed desire for simplicity". Alexander Cox, Ashurst LLP must have a nautical background. He said: "If the Budget as a whole was intended to be "steady-as-she-goes", there were still some encouraging noises from the ship's horn to set against the shuffling of the ballast below decks". For those of us not familiar with the Royal Navy (not Murray Clayson - he knows about pink gin, apparently, see below), that roughly translates as the same thing.

In a similar vein, Nick Cronkshaw, Simmons & Simmons LLP felt that "business will welcome both the tenor of this Budget and the manner in which the coalition government is approaching tax reform" and Julian Hickey, Lawrence Graham LLP described it as "a budget designed to burst the deficit bubble by stimulating the economy".

For PLC's summary of the key business tax measures in the Budget, see Legal update, 2011 Budget: key business tax announcements. For all PLC's Budget coverage, including tailored practice area updates, see PLC 2011 Budget.

Comments in full

Emma Bailey, Fox Williams LLP

"After last year’s austerity budgets, this was (apparently) a budget to show the world that “Britain is open for business”. A number of the measures announced will be of benefit to the business community, including the further unexpected reduction in the rates of corporation tax, the broadening (and promised simplification) of the availability of enterprise investment scheme (EIS) and venture capital trust (VCT) reliefs and the increase in the lifetime limit for entrepreneurs' relief. The proposed consultation on the alignment of income tax and NICs is also welcome (though it is recognised that any reform will take a number of years), as is the introduction of a statutory residence test (though we await further details). Much needed clarification is also given as to the operation of the disguised remuneration rules (although the devil will no doubt be in the detail). And as expected, a raft of little used reliefs will be abolished which should reduce the compliance burden on smaller companies. Less helpful is the announcement that IR35 will be retained for personal service companies (though simplification and clarification is promised)."

Susan Ball, Clyde & Co

(See profile for Susan Ball.)

"There are some useful changes particularly to the various investment incentives and to entrepreneurs' relief. However the principal improvements are still being announced as 'jam tomorrow' - we will have to wait and see."

Tony Beare, Slaughter and May

(See profile for Tony Beare.)

"There was not much by way of interesting new material in yesterday's Budget. Most of the announcements were simply updates on existing projects.

The incremental 1% reduction in the rate of corporation tax is a welcome development for those who might be contemplating locating (or possibly relocating) in the UK although not of course good news for those companies which are already here and have carried forward losses.

A welcome development is the proposed consultation in relation to bank capital instruments given the difficulties in marrying up the somewhat archaic distribution rules and the new regulatory proposals on bank capital.

Another significant point was the paper on a strategic approach to tackling tax avoidance, which has as its buzz-words "prevention, detection and counteraction". Of particular interest in that regard was the proposal to remove the cash flow advantage of using high risk tax avoidance schemes by imposing an additional charge for late payment of tax on certain specified schemes if they are found not to work.

I think that the most disappointing feature of the Budget was the announcement that the new value shifting rules set out in a draft published prior to the Budget is to be introduced with no changes. It is frankly astounding that legislation which is so patently defective should simply be introduced without taking into account the comments received. If this Government truly is open for business as the Chancellor suggested, it needs to show that it takes the various consultation processes seriously and I am afraid that, in relation to this piece of legislation, HMRC's response has been woeful."

Nick Beecham, Field Fisher Waterhouse

(See profile for Nick Beecham.)

"The merger of income tax and NICs is long overdue. One welcome consequence of this could be that donations to charity obtain full relief in respect of the combined rate of tax rather than, at present, where there is no relief from NICs for charitable donations."

Sandy Bhogal, Mayer Brown International LLP

(See profile for Sandy Bhogal.)

"Given the state of the public finances and the increasing pressure to raise revenue, it was inevitable that the cuts in corporation tax rates would need to be offset with increases in other areas i.e. oil & gas. However, it is good to see that the Government recognises that the need for liquidity will increase (given the sheer volume of re-financings to be completed in the next few years) and is prepared to consult on the tax treatment of new financing and regulatory capital structures.

It is also good to see a more strategic approach proposed on anti-avoidance legislation. Historically, where such measures are introduced there has not been a consistent approach to consultation and implementation (for example, contrast the way in which this was done for group mismatch rules and disguised remuneration) and hopefully this will change. The changes to branch taxation, CFCs and intellectual property taxation are a step in the right direction but it should also be noted that corporate taxpayers will not simply consider each part of the UK tax code in isolation so it is important that anti-avoidance legislation is as targeted and sensible as possible. Cuts in headline rates of taxation may not in itself attract business to the UK."

Adam Blakemore, Cadwalader, Wickersham & Taft LLP

"Given the focus on achieving a fiscally neutral budget within the constraints of the Comprehensive Spending Review published in October 2010, the attention given by the Government to tackling tax avoidance was perhaps unsurprising. What was unexpected, however, was the focus on unifying a number of sometimes disparate initiatives and approaches employed by HMRC and marshalling these in a common cause and approach. The overall impression throughout “Tackling Tax Avoidance” is of the desire for a consistent, comprehensive and determined campaign to get to grips with the “problem” of tax avoidance. However, notwithstanding the examples given in that document of schemes, arrangements and transactions which are perceived as constituting tax avoidance, considerable discussion is likely to continue concerning the proportion of the so-called “tax gap” of £42 billion which is attributable to avoidance (and which the Government’s statistics estimate is 17.5%). Moreover, there is clear room for at least some debate concerning the type and nature of the perceived avoidance comprised in that proportion. For example, a distinction can be drawn between the highly artificial, circular, contrived schemes referenced in “Tackling Tax Avoidance” and arrangements which are merely alleged at some point in time in correspondence or negotiations by HMRC to constitute “avoidance”.

The Government continues to wrestle with the detail of the elective regime for overseas branch profits. “Significant changes” are expected to the existing draft legislation and it remains to be seen whether the anti-diversion rule can be made to work in a way which both does not unduly discourage participation in the regime and which aligns the proposed regime with the equivalent, but shifting, protections against base erosion under the existing and proposed CFC regimes.

More positively, the news that the (previously announced) three year “period of grace” for parent companies migrating to the UK will now apply where foreign subsidiaries have previously been within the UK’s CFC regime, is a welcome extension of the proposed exemption. The immediate effect may be to tempt groups that have migrated away from the UK to return with the “carrot” that they will not, in practice, be subject to the existing CFC regime, but only to the new rules to be introduced from 2012.

The announcement that HMRC will work with industry and representative bodies to explore the tax treatment of new capital instruments which banks may create as a result of the Basel III proposals on banks’ capital requirements is to be welcomed. The Basel III loss absorbency requirement raises numerous complicated questions from a practical and legal standpoint which need to be considered from the perspective of existing tax legislation (both in the UK and in other jurisdictions), as well as in the context of accounting treatment, banking regulations and company law. HMRC’s openness in looking to discuss and resolve these questions should be of substantial practical benefit to banking clients."

Conor Brindley, Pinsent Masons LLP

"Whilst the Budget contained few surprises for tax advisors, it did contain some unexpected good news. The long overdue announcement that there is to be a statutory test for UK tax residence of individuals is to be welcomed as it should remove the current uncertainty surrounding residence following the Gaines-Cooper case and HMRC 6. However, it remains to be seen what the statutory definition will look like and it could be a case of be careful of what you wish for.

The reduction in the rate of corporation tax to 26 per cent for the Financial Year commencing 1 April 2011 (and not 27 per cent as previously announced) will be a pleasant surprise for many corporates. However, it wasn't all good news. The launch of the new HMRC anti-avoidance strategy is likely to result in more instances of taxed by law but untaxed by concession."

James Bullock, McGrigors LLP

(See profile for James Bullock.)

"A radical and wide-ranging budget which covered everything from wholesale reform of the planning system to merging income tax with national insurance.

Of great significance is the reform of the non-dom regime, linking future tax benefits with investment in UK PLC.

But there will be interesting times ahead for anyone looking to undertake aggressive tax planning, with the potential for a surcharge if the disputed tax is not paid up front. In addition - and as widely anticipated - the Litigation & Settlement Strategy has been adjusted to reflect a more pragmatic approach, which should also bring in more cash in the short term.

The shape of fiscal policy for the next few years is now clear."

Michael Cant, Nabarro LLP

(See profile for Michael Cant.)

The point which has caught my eye is that relating to possible changes to the REIT regime. As HMRC are only to "informally" consult I think they will drive through some very welcome and major changes.

I think it is fair to say that, although there has been a great deal of lobbying for change to the regime over the last couple of years, nobody really thought there would be the level of change suggested by Para 3.22.

In particular to do away with the 2% REIT entry charge is stunning and must be seen as a very bold move on the part of the Government to encourage more companies to join the regime. For instance it is possible that investors will think very seriously about repatriating property taken offshore in the last 5 years or so.

I imagine these changes are driven by the desire of the Government to allow the creation of Residential REITs but the suggested changes do not appear to be restricted to residential property.

It is also very welcome that they are to relax the need for a listing on a recognised stock exchange. Get ready for REITs listed on AIM!

Clare Carpenter, Mishcon de Reya

The increase in the lifetime entrepreneurs' relief limit to £10m (representing a ten-fold increase within three years) will be welcomed, in particular by entrepreneurs. Whilst this increase combined with the reduction in the headline rate of corporation tax to 26% and the relaxation of the qualification criteria for EIS and VCT schemes will provide a much needed boost to the economic recovery, overall a measured approach to the application of anti-avoidance legislation and the reform of the CFC rules is more likely to have a long-term impact on the willingness of businesses both here and overseas to start and continue to do business in the UK.

John Challoner, Norton Rose LLP

(See profile for John Challoner.)

"The announcement of a major relaxation of the REIT rules is very good news. In particular, the prospect of the abolition of the 2% entry charge, which has resulted in many property funds remaining, or setting up, offshore, will make a big difference. It is just a shame that we have to wait until 2012 for the changes."

John Christian, Pinsent Masons LLP

(See profile for John Christian.)

REITS

"The promised review of the REIT rules- including the possible abolition of the conversion charge and allowing non-listed REITs- may finally give the UK a truly flexible real estate investment vehicle.

It is a shame though that we have to wait until 2012 for the [REIT] changes- the property investment market would benefit now from the stimulus of a more market- friendly REIT regime.”

VAT

"Unsurprisingly the VAT conundrum for university and charity shared services has still not been cracked. We are promised another consultation on the introduction of the EU cost sharing exemption – but this of itself will not solve the VAT barrier for many shared service arrangements.

Murray Clayson, Freshfields Bruckhaus Deringer LLP

(See profile for Murray Clayson)

"On the international front, the prospect of an effective 5.75% rate on CFC finance income (a quarter of the 2014 23% CT rate) is attractive, presumably implying a "fat cap" debt equity ratio of 3:1. (If that's ok, why not have an equally competitive onshore interest box?) There was no sign of this being extended to IP income, though the Roadmap papers had suggested a parallel approach; again, that sat somewhat awkwardly next to the 10% patent box. The tax treaty anti-avoidance proposals are curious - maybe a sort of statutory Indofood principle? And perhaps also anti dual residence planning or anti Padmore style techniques? Will that entail naughty express treaty overrides? The Royal Navy and other devotees of pink gin may be irritated by the removal of Angostura bitters relief next year."

Brenda Coleman, Weil

(See profile for Brenda Coleman.)

"There are signs that the Chancellor is focussed on keeping the UK open for business with the lower rate of corporation tax, interim improvements to the CFC rules, more certainty for non doms and hints that the top rate of income tax is only temporary.

The increase in the lifetime limit on gains qualifying for entrepreneurs' relief to £10m is welcomed but further relaxations to the conditions should still be made to encourage outside investment in entrepreneurial businesses."

Jason Collins, McGrigors LLP

(See profile for Jason Collins.)

"The Chancellor's announcement to consult about merging NIC and income tax is courageous. National Insurance was seen by the last Government as the perfect "stealth" tax. Studies have shown that the public see National Insurance as the least-worst tax, given its perceived connection to the safety nets for ill health, unemployment and retirement. Raising NI has the same effect on tax receipts as raising income tax, but without risking public outrage.

The biggest question will be whether the Government has the courage to abolish Employer's - not just employee's - NIC. Many forms of tax planning involve creating self-employment as opposed to employment - primarily to avoid Employer's NIC. Removing Employer's NIC would stop this form of planning outright - which costs the Exchequer billions both in lost tax and the cost of trying to police the system. However, Employer's NIC brings in the major part of NI revenue and it is difficult to see how this revenue stream from employers could be replaced, particularly with corporation tax coming down.

And, whilst announcing the consultation, the Government could not resist the use of National Insurance as a perfect stealth tax by announcing that NI bands will increase in line with CPI rather than RPI, raising an additional £1bn by 2015-16.

Although the headline increase in the levy for non-doms who have been resident in the UK for more than 12 years from £30,000 to £50,000 will make some headlines, fears that there would be a clamp down on non-doms did not come to fruition. In fact, the tax exemption for income and gains brought in to invest in UK business - and the commitment not to alter the basis of taxation on non-doms for the life of the Parliament - will provide a reason for staying.

However, the measures are budgeted to bring in an additional £110m in the first year of operation, but £70m then £50m in the following years. The Government appears to be anticipating that the levy will raise less in future years due to a reduction in the number of people paying the levy, whether because there is an increase in non-doms leaving the UK or, for those that remain, it becomes uneconomic to pay the charge."

Jonathan Cooklin, Freshfields Bruckhaus Deringer LLP

"The Technical Note on Solvency II and insurance tax heralds extensive changes to the tax treatment of both life and non-life companies from 2013. Although the fundamentals of insurance tax remain intact - including the retention of a somewhat slimmed down I-E regime for life companies - the proposed changes are very significant for the industry, will need to be carefully monitored and their financial impact modelled. A further consultation document to be issued in April 2011 will flesh out the proposals.

The continued emphasis on making the UK an attractive place for multinationals (through tax rate reductions and reform of the CFC regime) is, of course, hugely welcome. However, the the other essential piece of the jigsaw puzzle, retaining and attracting individuals with a competitive personal tax regime for the UK, does not receive enough emphasis in the Budget. That is disappointing."

Heather Corben, SJ Berwin

"The increase in the lifetime limit for entrepreneurs' relief will be a welcome change for entrepreneurs.

The informal but wide ranging consultation with the real estate industry in relation to the REIT regime is a real opportunity to encourage new entrants and simplify and improve the regulatory regime.

There has been widespread concern about the draft legislation on disguised remuneration. We await with interest the publication of the revised draft legislation and the explanatory note to see to what extent they deal with these concerns."

Alexander Cox, Ashurst LLP

"If the budget as a whole was intended to be 'steady-as-she-goes', there were still some encouraging noises from the ship's horn to set against the shuffling of the ballast below decks. The reduction in the headline rate of corporation tax is clearly a heartening message for business in an increasingly competitive international tax environment, so too the promotions for investment and enterprise in the form of changes to the EIS and VCT regimes, entrepreneurs' relief and the potential tax free remittance of income and gains for non-domiciles investing in UK business.

It is unfortunate, however, that so many of the incentives for manufacturing came in the shape of tweaks here and there - the capital allowance regime on short life assets doubling from four years to eight years (against a drop in the main and special rates of capital allowances from 20% to 18% and 10% to 8%), R&D credits for SMEs, business rate discounts in new enterprise zones - rather than as part of a comprehensive package combined with the reduced rates of corporation tax, especially when the budget follows so closely upon the heals of the recent report from the Office of Tax Simplification. Nonetheless, if the potential merger of the income tax and NIC regimes is a statement of intent in respect of the future direction of the tax system as a whole, this must be encouraged.

The only concern for investors must be if my business does well or becomes a political target in the near future, will I suddenly be asked to support the holes and changes in the next budget, alongside oil and gas and the financial sector? A concern the Chancellor would do well to assuage and one that he can only properly do if the system carries certainty and really is 'steady-as-she-goes'."

Nick Cronkshaw, Simmons & Simmons LLP

(See profile for Nick Cronkshaw.)

"If one can ignore the hyperbole ("A Britain carried aloft by the march of the makers"…), taken as a whole, business will welcome both the tenor of this Budget and the manner in which the Coalition Government is approaching tax reform. But the real test will be whether the measures introduced in this and future Budgets manage to halt a different kind of march, that of companies and individuals leaving the UK".

Nikol Davies, Taylor Wessing LLP

(See profile for Nikol Davies.)

As was widely anticipated, in his Budget Speech George Osborne sought to send the message that Britain is open for business. In this regard, we welcome the commitment to full reform of the CFC regime so as to restrict the CFC charge to overseas profits artificially diverted from the UK and await the consultation in May. We also welcome the reduction in the effective tax rate for finance company CFC's to one quarter of the main tax rate. In other positive news, the additional 1% reduction in the corporation tax rate to 26%, the increase in the entrepreneurs' relief from £5m to £10m, the increase in and the widening of the scope of the EIS and VCT reliefs as well as the increase in R&D tax credits for SMEs should assist to encourage individuals to establish and invest moneys into new and existing businesses. The government's commitment to introducing the 10% rate for profits from patents from April 2013 is also welcome, although it would provide more of an incentive for businesses to establish their operations and retain their IP in the UK if the favourable tax regime could also be extended to profits from other forms of IP.

The Chancellor's comment that the 50% tax rate is a temporary measure will be welcomed by individuals as will the ability of non-domiciled individuals to remit foreign income or capital to the UK without incurring a tax charge where it is used to invest in UK businesses. Unfortunately, this is to be accompanied by an increase to £50,000 in the annual charge to non-domiciliaries who have been UK resident for 12 years.

It was a welcome acknowledgement by the Chancellor that the UK tax legislation is now the longest in the world and its complexity is certainly disadvantageous for those seeking to doing business in the UK. Whilst some 100 pages of law is to be removed by the abolition of some of the reliefs identified in the Office of Tax Simplification Report, this is not enough and, indeed, the announcement of additional anti-avoidance measures will simply continue to add to the length and complexity of the legislation

Steve Edge, Slaughter and May

(See profile for Steve Edge.)

"Generally an encouraging budget for business, re-affirming the general direction of travel on a number of fronts and confirming that the government has a good grasp of the situation affecting multinationals. On the CFC side, it is critical that positive progress to date continues if we are to sustain and grow our multinational base. Another key area is to make sure we don't prejudice our comparative advantage in the financial services sector in reacting to popular sentiment or in making regulatory reforms after the financial crisis."

Kate Featherstone, Pinsent Masons LLP

"The commitment of the coalition to make the UK an attractive place to do business is clear. The long overdue CFC reforms and the additional cut in corporation tax will be well received by big business – but this budget is also a big deal for small businesses and entrepreneurs. Although there is content to digest, for the first time in a long time it seems that the devil is unlikely to be lurking somewhere amongst the detail."

Heather Gething, Herbert Smith LLP

Evasion and avoidance were obvious targets for the cash strapped chancellor but straightened circumstances just like hard cases do not necessarily result in good law. The General Anti Avoidance Rule (GAAR) sounds sensible but it is not needed when the legislation on the books has to be construed purposively and applied to the facts "viewed realistically". A GAAR ought not to be able to achieve more than that. A GAAR enacted in 2011 ought not to be able to sweep away the intentions of past Parliaments. So why are we still considering one?

What is needed is education - education of officers at HMRC at all levels on construction of statute and the Rule of Law .

The same applies to the disguised remuneration changes. The receipt of any benefit for a third party is an emolument under UK law and has been for over 10 years. Provision of benefits from third parties does not need to be legislated for. If as the Chancellor said the aim is to tax "loans" which are not intended to be repaid, again this is not needed, as if the money is not intended to be repaid the arrangement does not involve a loan. The only issue is when the tax is paid and by whom. Small changes are all that is required. But undoubtedly we will have another schedule to replace the few pages of otiose reliefs which will be repealed. Plus ca change mais plus c'est le meme chose.

Removing the "upside only" position in relation to the use of marketed tax avoidance schemes was the obvious way to discourage those participating in these schemes. One wonders why it has taken so long.

The adoption of powers to allow enforcement of foreign tax debts in the UK pursuant to the Mutual Assistance and Recovery Directive sounds sensible but the idea of possies of foreign tax officials coming to the UK to assist in the administrative enquiries is disconcerting.

Charles Goddard, Berwin Leighton Paisner

"There were many welcome announcements in the Budget, including the consultation on merging NICs and income tax and the extra cut in corporation tax. However, the City will be disappointed that banks have been singled out for taxes at a time when other industries are benefiting from reductions in their tax rates. The proposed Enterprise Zones should have the potential to stimulate growth, provided that they are accompanied by real tax incentives. This will be a key area to watch."

Judith Greaves, Pinsent Masons LLP

"As expected, companies will have to wait for the Finance Bill to see to what extent the Government has been able to improve the draft disguised remuneration – to stop the unintended effects on normal arrangements involving neither disguise nor tax avoidance. Help is promised "where it is possible to identify arrangements that cannot be used for tax avoidance purposes" - that sounds as though some normal commercial arrangements may still be caught and companies will need to review whether they need to change how they do things."

Ashley Greenbank, Macfarlanes

"One test for this Budget will be whether it is successful in encouraging inward investment into the UK. The Government has clearly signalled its direction of travel. Few predicted the further reduction in the corporation tax rate. The extension to the temporary exemption from the CFC rules is blatantly targeted at multinationals who have recently left the UK. But the Government needs to be braver. The patent box remains a limited measure which can't compete with IP regimes in other countries and the CFC reforms have been slow in coming, and pragmatic rather than revolutionary."

Kate Habershon, Morgan, Lewis & Bockius

"The Chancellor's stated aims of making the UK a more competitive place to do international business are welcome. The reduction of corporation tax, together with changes to the taxation of foreign branch income and modernisation of the CFC rules, is clearly a step in the right direction, although it is a shame the CFC reform is taking so long. However, a question remains of whether reducing the headline rate and bringing the taxation of foreign profits more into line with other states goes far enough. To provide the most competitive tax system in the G20, with the lowest corporate tax rate in the G7 is a very noble goal, but regard will also need to be had to the non-G20 jurisdictions that are competing so effectively in the market for international holding companies. There must be the possibility that the limited substantial shareholders exemption remains a disincentive when compared with more favourable participation exemptions in other regimes. I am also strongly in favour of simplification of the tax code, but wonder whether repealing a number of complex and potentially outdated reliefs will really take us forward. It is not yet clear that we will see a wholesale change in the way new legislation is drafted, with plain English and clear principles and purposes.

Paul Hale, Simmons & Simmons LLP

(See profile for Paul Hale.)

On the consultation paper on a statutory residence test to be released in June: "Given the extremely unsatisfactory state of the current law on residence, compounded by HMRC's decision that it would no longer be bound by its published guidance on day counting, the proposed introduction of a statutory test of residence can only be welcomed."

Colin Hargreaves, Freshfields Bruckhaus Deringer LLP

(See profile for Colin Hargreaves.)

Balancing act 1: Further reductions in the corporation tax rate (this time not linked to reductions in capital allowances) will be generally welcomed. But for the banks, the effect is offset by an increase in bank levy. And some will also have to mark down the value of deferred tax assets.

Balancing act 2: Cuts to fuel duty are matched by a whacking increase in supplementary charge for North Sea oil producers.

So, will the banks and the oil companies feel they are getting the predictability and stability heralded by the June 2010 consultation document? Probably not.

For non-doms there is consultation on relief from remittance charges where money is remitted for the purpose of commercial investment in UK businesses, partly offset by an increase in the annual charge to £50,000 once they have been here for 12 years or more - not a huge point for the wealthiest. But the top income tax 50% rate remains, although we are told that it is to be temporary. So the wealthy non-dom is encouraged to be here (sensible enough, they do spend their money here) but the high earner in a mobile line of business is encouraged to make, and spend, their money in Zug or somesuch. A balance of sorts.

On CFC reforms, an effective rate on financing income of 5.75% is eye-catching, and indeed is positively trumpeted by the Government. Also noteworthy is extension of the grace period to companies that are not currently CFCs but have previously been so - a sort of welcome home present for groups which return to the fold having gone offshore.

David Harkness, Clifford Chance LLP

(See profile for David Harkness.)

"An interesting Budget. Full CFC reform appears to be heading in the right direction and the eventual rate reduction to 23 per cent can only be good news for UK PLC, although tempered for banks by the Bank Levy increase. If the UK Government can now deliver on stability and simplicity then the whole package is starting to look good. The jury will still be out though until we see the final CFC proposals for 2012 – I think the Government needs to be slightly more bold on final CFCs reform if we truly want one of the most competitive tax systems. It was interesting too to see that the competitiveness measures were not just about attracting new business to the UK and curbing further migrations but also aimed at attracting back groups that have already migrated from the UK.

It is encouraging that the UK Government is also supporting the UK Funds industry and continuing in its commitment to promote the UK as a centre for Islamic Finance. The consultation on the REIT regime is more good news as are the proposals for new Enterprise Zones.

The moves on anti-avoidance were not that unexpected. The Tackling Tax Avoidance paper shows how the Government and HMRC intend to continue tackling avoidance. On the proposal to tackle high risk areas like Income Tax losses through new legislation, I wonder if the Courts have already done that job recently under the widening umbrella of "purposive construction"? Also of interest are the behavioural approaches to tackling tax avoidance. The policy paper highlights that 200 banks have signed up to the Code of Practice. Will the Government now be tempted to try to persuade corporates to sign a similar Code?

It would be useful to see further details of the Government's thinking on the "avoidance" Tax Treaty override proposal. In light of all the good measures to promote the UK's tax competitiveness it would be unfortunate if one of our best assets for inward investment – our Treaty network – is diluted. Likewise, A GAAR would be a significant dent in the UK's tax competitiveness.

The final legislation on Disguised Remuneration needs to be fit for purpose and any solution which requires heavy reliance on HMRC practice would be unsatisfactory.

Finally, it seems like the "Bank bashing" is over (for now) with the only banking measure being an increase in the Bank Levy to offset the Corporation Tax reductions. There were no rules to restrict the carry forward of losses as some had predicted. It may be though that we see the EU proposals for a Financial Activities Tax developed in the near future."

Julian Hickey, Lawrence Graham LLP

"Overall a budget designed to burst the deficit bubble by stimulating the economy. Key policy tools deployed are: cutting the main corporate tax rate progressively to 23% by 2014; increasing income tax relief to 30% for EIS investors; raising the lifetime limit to £10 million for entrepreneurs' relief; confirming commitment to introducing incentives for technology (i.e. a 10% rate for Patent Box income); and increasing the R&D deduction for SME expenditure to 200%. These incentives are balanced by fairly seeking to tackle extreme forms of tax avoidance detrimental to the UK economy."

Louise Higginbottom, Norton Rose LLP

(See profile for Louise Higginbottom.)

"Whatever else the Chancellor achieved, he seems to have generated some useful occupational therapy for tax advisers, with the word "consultation" being lavishly distributed through the Budget releases; whether HMRC can devote sufficient resource to make these worthwhile remains to be seen. The (non Green) energy sector and the banks will no doubt feel that they are being targeted to make up for benefits in other areas. However, a more cynical view might be that since these sectors are generally able to compensate for increased costs through increasing their prices to the consumer, the consumer may find that it is they ultimately that pay the price".

Matthew Hodkin, Norton Rose LLP

A redistributive budget: redistributing money from the high-carbon economy to the low-carbon. How much of this cost will eventually be borne by consumers remains to be seen."

Janet Hoskin, Pinsent Masons LLP

On Entrepreneur’s Relief: "The rise in the threshold to £10m will have been a welcome surprise for management teams. However, the qualifying requirements remain quite restrictive and therefore this reinforces the importance of careful structuring to ensure that managers are able to benefit – especially in circumstances where they would not otherwise meet the 5% tests. In addition, where a sale is imminent and the managers expect to realise large gains, they may wish to consider whether it can be deferred until 6 April in order to take advantage of the new higher threshold."

On EIS/VCT:"The relaxation in the various thresholds for EIS and VCT relief will be welcome news as it substantially expands the class of companies who can benefit, breathing new life into a relief which had seemed increasingly less relevant over recent years. However, the web of complex qualifying conditions will remain, and these reliefs remain a minefield that requires careful navigation. In addition, EIS relief will still be of little benefit in the private equity setting, where managers will frequently have previous connections with the business, thereby disqualifying them from relief."

Stephen Hoyle, DLA Piper LLP

"This year's Budget proves again that the UK does not need a GAAR. The UK does need certainty in its tax system, which is incompatible with a GAAR. Those familiar with leasing company sales will recognise the transactions dealt with in the draft legislation amending the sale of lessor company rules. Statutory disclosure and targeted anti-avoidance delivered what the Exchequer needed. A further alternative to a GAAR is contained in HMRC's document on tackling anti-avoidance, through the planned removal of 'the cash-flow advantage of using … [high risk] avoidance schemes'. There is a market for tax-leveraged investments from promoters which should be protected but products can be found which are more like punts on the tax system. These are better dealt with by changing the economics of the punt than by institutionalising uncertainty under a GAAR."

Karen Hughes, Hogan Lovells International LLP

(See profile for Karen Hughes.)

Some pleasant surprises, some "tweaking", more consultations and more anti-avoidance.

The further reduction in the main corporation tax rates is a pleasant surprise for large businesses other than banks which see the bank levy go up to compensate.

The increase in entrepreneur's relief is also good news. Feedback from consultation processes has resulted in some "tweaking" and further consultations documents are due shortly - May and June are looking busy!

It would have been good to have had an official start date for the foreign branch exemption but presumably only another week to wait and the Finance Bill will confirm the Jan 2012 start that everyone is expecting.

Interesting to see the new distributions working group set up. Experience last year suggests that this is needed, though what a shame. An example of simplification not being "what it says on the tin"! Also interesting is the piece on unauthorised unit trusts tucked away at the back of the budget pack. The scope of this measure remains to be seen but could have some significant implications.

Michael Hunter, Pinsent Masons LLP

"The changes made to LVCR seem to be very much a holding response pending a more long-term solution to be agreed with the European Commission. The impact of the change (reducing the limit of the relief from £18 to £15), is likely to be marginal at best as most CDs and DVDs sold online are priced at under £15 but the Treasury have pledged to review the limit in Budget 2012 if unsatisfactory progress is made in discussions with the Commission. The limit can legally be reduced to £9 under current rules, which would have a far more extensive impact but at the cost of a greater administrative burden in collecting the tax."

Ian Hyde, Pinsent Masons LLP

"The new Enterprise Zones appear to be rather different from the creatures of the 1980s and 90s. Tax relief is not centre stage and it remains to be seen whether business rates and planning relaxations will be enough to drive growth."

David Jervis, Eversheds

"The proposed VCT and EIS changes for investors in solar developments is perhaps not unexpected, but there is a window of opportunity for such investors; whether the SDLT bulk purchase arrangements may be relevant for these projects remains uncertain."

Clive Jones, Eversheds

"There are a number of positive measures for businesses, including the reform of the CFC and foreign branch rules, reduction in the rate of corporation tax and changes to the REIT regime. However, in view of the number and piecemeal nature of the proposed changes, and the prospect of a GAAR without an adequate clearance procedure, achieving simplicity, stability and certainty seem a long way off."

Geoffrey Kay, Baker & McKenzie LLP

"The modern approach of extensive consultation on corporate tax reform has rendered Budget Day almost a non-event for the corporate tax professional. Instead we await with interest the publication of the Finance Bill in a week's time, when we will see the final, or near final, versions of the interim CFC reform and the foreign branch exemption; and the publication in May of further consultation documents on the full CFC reforms, the patent box and R&D tax credits. That Budget Day has become a date of much less significance in the tax adviser's calendar looks like a trend which is set to continue."

Colin Kendon, Bird & Bird LLP

"Whilst the increase in the lifetime limit for Entrepreneurs' Relief to £10 million is welcome, it is a pity the Chancellor decided not to follow the recommendation of the Office for Tax Simplification by removing the anomalous 5% threshold which applies to shares but not business assets. Ominously, there was no re-assurance the consultation on integrating income tax and NICs will not result in a new higher combined rate being imposed on shares which are not readily convertible assets (which are currently NIC free)."

Robert Kent, Freshfields Bruckhaus Deringer LLP

REITS

There are some fantastic proposals for REIT reform to be covered in the forthcoming consultation, so let's hope the Government turn those suggestions into actual law changes come FB 2012.

VAT

It's good to learn that the special VAT rules for public bodies are likely to end up in a more user-friendly location than the London Gazette.

The "if not when" language used in relation to the question of introducing a VAT cost sharing exemption, which is mandatory under EU law, speaks volumes about how far the constitutional penny has yet to drop in Whitehall despite umpteen expensive ECJ defeats for the UK.

Clíona Kirby, Olswang LLP

"The Chancellor's Budget announcements could be a great starting point towards making the UK a more attractive place to do business for the creative and technology industries and encourage early stage finance although the key question is does it go far enough to have a real impact? We welcome the enhanced rates of R&D expenditure for SMEs although consider the R&D rules could be updated to ensure that the qualifying expenditure tests keep up with innovation. EIS and VCT will become much more interesting with the higher £10 million annual limit although it remains to be seen how the Government will ensure that such reliefs are targeted (as they were originally intended) at high risk start up companies and whether this will result in a crackdown on EIS and VCT products which contain significant downside protection. Business angels may be encouraged to invest due to the welcome changes permitting non-doms to remit monies to the UK tax free provided they invest in British businesses combined with the doubling of Entrepreneur's relief to £10 million. It will be interesting to be see whether the proposed 23% corporation tax rate by 2014 and fairly restrictive patent box are enough to encourage companies to hold their IP in the UK with more competitive headline rates of tax and "R&D" or "innovation" boxes being available in other European jurisdictions.

On a separate note the potential relaxation of the REIT rules could be a very interesting development for the real estate industry and impact upon how they structure their investments and do business in the UK. The increased Bank Levy may be unpopular with financial institutions but the key question is who is actually bearing this cost? It seems many Banks are reserving the right to pass on a percentage of the Bank Levy to borrowers either through the standard tax indemnities in the LMA loan agreement or through pricing - this surely cannot be what the Government intended ?"

Jonathan Legg, Mishcon de Reya

The property industry will certainly have breathed a sigh of relief that the Government has not rushed to tax the sale of shares and units in land rich entities at higher rates of tax, although it is assumed that this has not fallen off the agenda (and Budget has committed to look closely at the use of "unauthorised unit trusts" which is likely to include looking at the plethora of UK property holding structures involving unit trusts).

The clampdown on the sharia based schemes was unsurprising, although the amendments to the SDLT "exchange" rules (ostensibly to close schemes which artificially reduced the market value of land) seem to have the unfortunate consequence that SDLT now has to be accounted for on the VAT-inclusive element of "exchange" transactions, such as sale and leasebacks (under previous practice, HMRC accepted that SDLT only arose on the VAT-exclusive amount).

Simon Letherman, Shearman & Sterling LLP

"While clearly too dry to keep everyone awake at the back, key corporation tax issues for multinationals are moving in the right direction (the instant reaction on this from WPP is encouraging). But the surprise hike in tax rates on North Sea oil and gas (not so much a stealth tax, more a raid), and the continued tinkering with bank levy rates, show that there is still some way to go to achieve a stable corporate tax environment in the UK."

Daniel Lewin, Kaye Scholer LLP

"There are some helpful measures in the Budget for the investment funds industry, and the improved incentives for entrepreneurs such as the doubling of the lifetime limit for entrepreneurs’ relief and the increased availability of EIS are also likely to have a beneficial impact. However, with the 1% increase in national insurance contributions we are now at a de facto top income tax rate of 52% and until this is reduced to a more acceptable level, a significant impediment to the UK’s competitiveness remains, particularly in the financial sector."

Andrew Loan, Macfarlanes LLP

UK businesses should generally be happy with the announcements in the Budget today. UK companies will be pleased to see that the headline rate of corporation tax will fall faster than previously announced, and business owners will be delighted that the lifetime limit of capital gains taxed at 10 per cent under entrepreneurs’ relief has been doubled for a third time, reaching £10 million. Investors in small companies will also welcome the additional income tax relief available for investments in EIS companies, and the relaxation of some of the scheme’s conditions will enable a wider range of companies to attract investment that qualifies for the reliefs. But mobile individuals considering moving to the UK may still be deterred by the 50 per cent top rate of income tax, plus 2 per cent in national insurance contributions from this April.

Patrick Mears, Allen & Overy LLP

"The 2011 Budget was better news for the large corporate wanting to do (or wanting to carry on doing) business from the UK than might have been expected, unless of course that business was banking or UK upstream oil and gas.

It is noteworthy that Ambition 1 in the joint HMT/BIS Budget Day paper titled "The Plan for Growth" is for the UK to have "the most competitive tax system in the G20". That is further elaborated with three "measurable benchmarks", being: A the lowest corporate tax rate in the G7 and among the lowest in the G20; B the best location for corporate headquarters in Europe; and C a simpler, more certain tax system.

As to the first measurable (tax rate), the initial 2% (rather than 1%) reduction in the main rate of corporation tax and the ultimate reduction to 23% (rather than 24%) are obviously welcome steps. Not only does a low rate look good in the UK's marketing material but HMRC will feel the lower the rate the lower the incentive corporates have to seek tax savings.

As we get closer to full CFC reform so we will get a better idea as to how the UK will fare on measurable B (HQ location). The equity to debt ratio for the proposed group financing company has moved in favour of the taxpayer from 2:1 to 3:1, but it will remain to be seen whether the effective rate of 5.75% (when corporation tax is at 23%) is low enough to be attractive and how robust this, and other elements of the final CFC package, are in the face of potential EU challenge. The Chancellor would have loved to be able to announce that a UK group which redomiciled out of the UK had seen the light and was returning to these shores. There was no such announcement, but the interim CFC reforms contain a carrot – a returning group which had moved its CFCs out from under the UK can on its return to the UK take the benefit of a 3 year CFC exemption. Up to now these exemptions were available only where the CFC in question had not previously been UK owned.

On measurable C (simple and certain) there are some clouds on the horizon. These clouds relate, in particular, to the taxation of individuals. While a commitment has been given not to make further substantive changes to the non-dom rules for the remainder of this Parliament, the top rate of income tax looks high at 50% and will look even higher if the proposal to amalgamate NICs with income tax goes ahead. The new disguised remuneration rules cannot be described as either simple or certain although progress has been made since they were first published in December 2010. Although there are good arguments in favour of a statutory definition of residence for individuals until the legislation is understood there is bound to be heightened uncertainty.

All in all the Chancellor has set the UK a challenging ambition and in his 2011 Budget has shown a thoughtful, coherent approach which appears to be keeping faith with the Government's expressed desire for simplicity."

Howard Murray, Herbert Smith LLP

(See profile for Howard Murray.)

"As had already been flagged, a bottom-up rather than top-down approach to economic growth, weighted towards entrepreneurs. Apart from the extension of entrepreneurs' relief, the better than expected corporation tax reduction, the moves to simplify the tax system for both corporates and employees, and various measures to encourage investment in the UK, catch the eye.

There are also significant proposals affecting the financial services sector. For example, whilst there will be varying views in the industry as to how welcome some of the changes are, it is good to see the Government moving on and endeavouring to give insurance companies more certainty on the shape of the insurance tax regime post-Solvency II, although by their own admission, there remains over the next 2 years a substantial amount of consultation and work to be done in the job of constructing an effective new regime.

I am also interested in the proposed establishment of a working group to consult on whether the legislation needs to be adapted to cater for Basel III compliant capital instruments."

Jennie Newton, Pinsent Masons LLP

"The government hinted back in June 2010 that it would attack SDLT planning structures on high value property transactions, and today it did so. However, alongside the predictable closing down of two popular SDLT schemes, the measures affecting land exchanges are likely to catch many innocent transactions. The SDLT liabilities on complex regeneration transactions will increase, and developers will pass the cost onto councils, so that some projects may become unviable."

Mathew Oliver, Bird & Bird LLP

"I think the budget should generally be welcomed by businesses outside the banking and oil sectors. For SMEs, a much more attractive EIS/VCT regime, further enhancements to the R&D relief rules and higher limits for entrepreneurs' relief should be a boost for investment. However, I was a bit disappointed that there were no detailed changes to the entrepreneurs' relief rules; in particular the 5% limit for shareholdings in personal companies has become a real hurdle for cashless takeovers of smaller companies. For larger businesses, the reduced rate of corporation tax and measures previously announced in relation to foreign profits should go a long way to reversing the decline in attractiveness of the UK for business. If HMRC can be made more transparent, user friendly and business focussed then we might have a reasonably comptetitive corporate tax system."

Darren Oswick, Simmons & Simmons LLP

"Governments seem to be unable to decide on whether EIS and VCT investment is to be encouraged or discouraged. After significant narrowing in the scope of such reliefs during previous years, the Government is now going to make the reliefs more generous to help smaller, riskier companies to compete for equity finance. Encouraging investment is to be applauded, and is in keeping with the Government's commitment to encourage private sector growth, but one wonders if these measures are really the best way to do this, given the uncertainty that surrounds them due to the continual tinkering which they have suffered."

Jonathan Richards, Linklaters

"It was not the centrepiece of the Budget, obviously, but I was pleased to see that a working group is to look at the tax treatment of bank regulatory capital. The UK's legislation on "distributions" makes it at best extremely difficult for a UK bank to issue capital that both qualifies as Tier 1 (following the Basel III changes) and entitles the bank to a tax deduction for its finance return. That places UK banks at a disadvantage when compared with their competitors on the Continent, many of whose tax systems readily permit issues of deductible tier 1 capital."

Catherine Robins, Pinsent Masons LLP

"What a refreshing change: simplification, stability, promotion of growth, encouragement of investment in areas where it is most needed and even a few welcome surprises thrown in for good measure. What more could we ask from a man stuck between a rock and a hard place? (Well, an update on the geared growth consultation would have been nice, but one can’t have it all.)"

James Ross, McDermott Will & Emery UK LLP

So much for simplification: it seems that George Osborne has discovered (as most Chancellors do) that it is much easier to talk about simplifying the tax system than actually to do so. Repealing a few reliefs that were already spent or virtually obsolete doesn't really count. Indeed, this was oddly reminiscent of a Gordon Brown budget. There was a bit of tinkering round the edges of the venture capital, R&D and capital allowance regimes and a couple of loudly trumpeted raids on politically tempting targets (this time, it's the turn of the banks and the oil companies). All of this probably had a rather familiar feel to those in practice during the last decade.

For larger companies, the main event is yet to come, with the publication of consultation papers on the patent box and final stage CFC reforms due in May. The Chancellor did announce an effective 5.75% tax rate under the CFC rules for offshore finance companies (and also IP holding companies?), which is a reduction from the 8% proposed in the corporate tax roadmap: but major corporates will want to see that the redrafted CFC rules are capable of giving them the certainty that they fall within this regime.

The proposed reduction in the corporation tax rate for Northern Ireland is an interesting concept, but will presumably have to be hedged with a series of anti-avoidance measures to prevent Belfast-based finance and IP holding companies from springing up and eroding the tax base of the rest of the UK: which may restrict the appeal. The same goes for the exemption from tax on income remitted by non-doms to invest in the UK: nice idea, but how will the Government target it at the sort of investments it wants to see, and will it be EU-law compliant? Dealing with these issues is likely to require yet more complexity.

Charlotte Sallabank, Jones Day

(See profile for Charlotte Sallabank.)

"The reduction in the rate of corporation tax to 26% is good news for businesses. Entrepreneurs have been reasonably well treated with the extensions to the Enterprise Investment Scheme, R&D tax credits and CGT entrepreneurs' relief. There is no revival of CGT taper relief, however, which many entrepreneurs had been seeking.

There is the usual shut down of aggressive leasing schemes but the abolition of the option to elect out of the charge on a leasing company sale is somewhat surprising.The election was introduced as recently as December 2009 to help prevent the sale of leasing company anti-avoidance legislation from deterring commercial transactions. It is surprising that the economic climate is considered to have improved so much that this option is no longer necessary.

There appears to be good news coming for REITs in 2012, including the possibility of unlisted REITs or at least junior market REITs and the talk of the abolition of the conversion charge. It will be interesting to read the conclusions of Graham Aaronson's study group on a GAAR in the autumn."

Angela Savin, Norton Rose LLP

A strong emphasis on backing entrepreneurs to kick start the recovery: the reduction in the rate of Corporation Tax, boosts to Entrepreneurs' Relief, R&D allowances for SMEs and the Enterprise Investment Scheme, coupled with encouraging non-domiciliaries to remit money to the UK for investment in business.

Peter Sayer, Addleshaw Goddard LLP

The 'Overview' document runs to nearly 200 pages. Accepting that this also covers proposed changes to tax legislation for future years as well as for Finance Bill 2011 (which is a good idea), there is an irony here. Many of the key measures - R&D tax credits for SMEs, increase in lifetime limit for Entrepreneurs' Relief, increasing the attractions of EIS and VCT - are intended to benefit the small private sector businesses from whom future growth in the economy is hoped to come. Yet these small businesses consistently say that a major factor holding them back is the amount and complexity of State legislation and regulation.
Maybe there is (or should be) a wider role/application for the sort of specific 'de minimis' approach to the application of tax (anti avoidance) legislation such as is included in the proposed 'Group mismatches' legislation (see para 2.23 of the HMRC/HMT 'Overview'): this legislation will only be 'activated' where the expected tax saving from the scheme is at least £2m. Such a 'de minimis' number might need to be considerably lower in most cases, but even much lower numbers - set at a sensible level in the context of the particular anti avoidance provisions - could potentially take large sections of complex legislation 'out of play' for smaller enterprises just 'trying to get on with business' (and reduce adviser time and cost).
In the Funds arena, good to see that Finance Bill 2012 will 'establish a tax transparent fund vehicle' in the UK to reflect and take advantage of the EU's UCITS IV directive, intended to further open up the EU wide market for retail funds. Many hedge funds are relocating to within the EU (from traditional 'offshore' places of establishment like the Cayman Islands), under pressure, post Madoff, from investors to obtain a UCITS 'badge' and a much greater degree of regulation of their activities. It always seems crazy that so many of the fund management teams are in London, yet the fund vehicles themselves are established offshore or, increasingly, elsewhere in the EU (Luxembourg, Ireland etc). And the new UK fund vehicle will provide some counter balance to the announced Finance Bill 2011 measure - following the EU's UCITS IV Manco passporting arrangements - which will allow foreign UCITS to be treated as not resident in the UK, even where they might otherwise be UK tax resident by virtue of having a UK resident fund manager.
The Influence of the EU: noteworthy that a number of what seem to be the 'flagship' measures designed to boost growth (R&D tax credits for SMEs, increasing the attractions of EIS and VCTs) have to be announced in the Budget subject to their receiving future approval from the EU Commission. And interesting that the Press Releases are quite 'coy' about this (they simply say 'subject to State aid approval'). By comparison, some of the releases on less 'newsworthy' measures (which presumably the general Press don't look at) - such as the proposed reinstatement of an aggregates levy credit scheme in Northern Ireland - use the rather more precise formulation of: "subject to European Commission State aid approval". Or is this too much conspiracy theory?

Martin Shah, Simmons & Simmons LLP

(See profile for Martin Shah.)

On the announcement of changes to the worldwide debt cap rules: "Legislate in haste, reform at leisure. Since their introduction by the previous Government in 2009, the much maligned debt cap rules have been amended on a number of occasions. That they still do not operate correctly is evidenced by the further cycle of consultation and potential reform announced in Budget 2011. Whilst the ability to "more easily apply" the debt cap rules would be attractive, one is led to wonder whether a more pragmatic approach would be their abolition, given that the rules do not meet any policy objective that could not be addressed through a combination of better targeted measures and the proper application of transfer pricing. Perhaps it is now time for the Government to grasp the nettle on this one."

Mark Sheiham, Simmons & Simmons LLP

"The Chancellor's budget speech suggested the increase in bank levy from 2012 is intended to offset the benefit banks will receive from the further reduction in mainstream corporation tax rates outlined above – though how this was calculated is not immediately apparent. Two increases in bank levy being announced in as many months may raise the possibility of further increases to the bank levy rate being announced in the future – particularly as mainstream corporation tax rates are reduced further over time."

Greg Sinfield, Hogan Lovells International LLP

"The Budget did not contain any surprises in the area of VAT and indirect taxes as almost all of the measures had been trailed in advance.

As predicted, the Chancellor said he would tackle low value consignment relief (footnote) which has been widely used to supply goods such as DVDs and CDs free of VAT and duty from the Channel Islands to consumers in the UK ordering online. In the event, the Chancellor simply reduced the relief from £18 to £15 from 1 November 2011. That hardly seems to deal with the problem and is not much help for retailers in the UK high streets. It is not clear why the Chancellor did not do more as the Directive on which the relief is based allows Member States to exempt imports of goods from VAT on providing the total value does not exceed 22 Euro. The Chancellor could, therefore have reduced the relief to £10 or £5 or abolished it completely.

Footnote: (Item 8 of Group 8 of Schedule 2 to the Value Added Tax (Imported Goods) Relief Order 1984 (SI 1984/746) based on Article 143(1)(b) of the VAT Directive (Directive 2006/112) which refers to Council Directive 83/181/EEC).

More surprisingly, given the emphasis on tax avoidance in his speech, the Chancellor has not promised any measures to counter VAT avoidance by businesses. Surely that cannot be because there isn't any avoidance? Perhaps it is because HMRC consider that they have all the anti-avoidance measures they need in the Halifax anti-abuse doctrine.

Disappointingly, the Budget documents reveal that HMRC will be consulting on options for the VAT cost sharing exemption with no date for implementation indicated. The cost sharing exemption is based on a provision that has been in the VAT Directives since 1977 and it is a scandal that it has not been implemented into UK legislation before now."

Simon Skinner, Travers Smith LLP

"In an otherwise dull Budget, the stand-out announcement (for all the wrong reasons) is the proposed "Disguised Remuneration" rules. It is hugely disappointing that the Government and Revenue appear to have decided to press ahead with their proposed new rules in broadly the form originally suggested, in the face of very vocal opposition from many corners. The sad thing is that there is great sympathy for the problem the Revenue face, in an area where there has been aggressive planning. That, though, can't justify what is proposed.

If ever there was legislation that goes contrary to the Government's mantra of predictability, stability and simplicity, it is this. The legislation starts out from a flawed logical position - "in essence", that there is a problem (everyone agrees on that) and so the right response is to punish everyone and everything other than "arrangements that cannot be used for tax avoidance", regardless of whether there is in fact any tax avoidance going on. This starting point forces the Revenue into legislation with bizarrely wide concepts, and a series of opaque and ill-targeted exclusions. The idea that the "administrative burden" is thought to be "negligible" and "compliance costs" to be "insignificant" would be laughable, were it not so deluded.

The proposed legislation should be torn up and a narrow anti-avoidance rule applied while the Revenue decides what the real menaces to be targeted should be. I for one have little hope that common-sense will prevail."

Nicholas Stretch, CMS Cameron McKenna

(See profile for Nicholas Stretch.)

"For share scheme lawyers, there is focus on one thing only at the moment - the effect of the disguised remuneration legislation. What share scheme lawyers were looking forward to in the Budget (or even earlier as the Revenue have been consulting on this for some months now) was definitive comfort that standard employee share scheme arrangements are not affected by the disguised remuneration legislation. This is scheduled to take full effect on 6 April, now only a matter of a fortnight away.

Promising sounds have been heard from the Revenue but the actual concessions proposed in the recent FAQs appeared to limit the relief artificially and in an unworkable manner. It is disappointing therefore that we still have to wait until the Finance Bill to be published on 31 March to know what the final proposals are. There are also genuine difficulties on partly-paid or deferred share payment arrangements which need to be addressed. This will be only a week before the start of the relevant tax year. This is legislation whose impact has been very tricky to explain to the Revenue and also in fairness for them to target correctly, and so it can reasonably be anticipated that even in the redraft in the Finance Bill the legislation won't quite be right. Any further changes will then unfortunately have to be negotiated through the formal Parliamentary process.

Dominic Stuttaford, Norton Rose LLP

(See profile for Dominic Stuttaford.)

"I think that the welcome absence of major new structural changes is a vindication of the Government's approach to policy-making - even when there is to be a potentially significant change (such as the introduction of the statutory residence test), there will be consultation and time for reflection. Hopefully the revised draft CFC rules when they emerge in May will show the benefits of this as well."

Richard Sultman, Cleary Gottlieb Steen & Hamilton

"Although it was a Budget of many and varied tax aspects for business, it is encouraging to see a theme of forward planning through consultation and the pursuit of simplification and clarity. The results of consultation will hopefully be seen in the amendments announced to the CFC and foreign branch taxation regimes, while for employees and entrepreneurs the proposed consultations on a statutory residence test and the relationship between income tax and NIC are especially welcome. One consultation that may be of particular interest to multinational businesses relates to the proposed anti-avoidance measure around UK double tax treaties, which sounds like a new domestic law anti-treaty shopping rule."

Eloise Walker, Pinsent Masons LLP

"There was some very good news in the Budget for corporation tax payers – obviously the increased reduction in corporation tax rates and creation of new enterprise zones – but many of the announced changes, though welcome, came as no surprise and announcements in particular around CFCs and the debt cap will have caused many to sigh resignedly and think "here we go again, please just get on and fix it (finally)". The corporate funds sector will be pleased at the reform of UCITS residence and informal consultation on REITs. For investors it was a bit more of a mixed bag – changes to EIS and VCT relief will be welcome (at least, if we get state aid approval they will be), and the doubling of the entrepreneurs’ relief lifetime limit will be an unexpected boon for that whole sector (it’s nice for once to see a measure that encourages entrepreneurial activity in the UK without an accompanying 25 pages of anti-avoidance), but the non-dom tax reform (though not unexpected) will not be as welcome to many".

Neil Warriner, Herbert Smith LLP

(See profile for Neil Warriner.)

Overall, this was a positive Budget for business, unless you're a North Sea oil producer.

The further cut in the CT rate will be welcome as will the potential for enhanced capital allowances and business rates relief in the 21 new enterprise zones. The informal consultation on relaxing the rules for REITs, including possibly scrapping the 2 per cent entry charge, is also good news for the real estate sector, not just for established REITs but also for existing and potential new real estate funds.

Neil Woodgate, White & Case

(See profile for Neil Woodgate.)

"I read the new "Tackling Tax Avoidance" paper with much interest and am coming around to the idea of a proper, principles-based GAAR (sometimes called a GANTIP by clever people): indeed, in this Brave New Tax Policy World, proper, principles-based legislation might also be a thought for both the loan relationship and derivatives rules too – these codes are ever more alarming, both before and after current amendment proposals. The efficacy of the "Code of Practice on Taxation" (which 200 banks have adopted) as a tax avoidance prophylactic will doubtless be of on-going interest to City tax practioners and politicians alike. Shame about the "Schedule 10 Election"!"

Simon Yates, Travers Smith LLP

"Overall this was a Budget with a few eye-catching headlines, but not too much of technical substance to talk about behind them. Most of the significant measures had been explicitly trailed, although amongst those the formal statement of intent to abolish National Insurance can only be welcome, even if there is much to be done before it can happen. Few of the unleaked items were especially surprising – in particular, given David Cameron's speech a few days ago about how entrepreneurs and new businesses would be the bedrock of the recovery, the increase in entrepreneurs' relief and extensions to the EIS and VCT regimes were very much on the cards.

Elsewhere the instruction to HMRC to review how much revenue is raised by the now officially temporary 50p income tax rate is welcome if taken at face value, since the answer is likely to be "hardly any, at best". The politics of removing it remain very difficult, however, not least within the coalition. Whether this is effectively a statement of serious intent to remove it in a year or two, or just an attempt to look like that it might be, remains to be seen.

Most disappointingly, the ongoing train wreck that is the disguised remuneration legislation continues on its sorry way, in defiance of all the government's noble stated principles about how to make tax policy and what makes an effective tax system. If I could have nominated one measure for the Budget it would have been to abandon this ill-considered and hugely damaging attempt at generalised legislation, and to replace it with a TAAR aimed at the genuinely offensive planning which first led to the proposals. Ah well. You can't always get what you want, in the words of a famous singer once driven abroad by the absurdities of the UK tax regime."

2011 Budget: Keep calm and carry on | Practical Law