The European Private Equity & Venture Capital Association has launched its fourth Benchmarking study of European tax and legal environments at EVCA??™s Policy Meeting in Brussels today.

The study, carried out in collaboration with KPMG??™s M&A Tax Services, assesses the tax and legal situation across 27 European countries for limited partners and fund management companies, investee companies, as well as the environment for retaining talent at both investment firms and investee companies.

The aim of the study is to enable comparisons between different regimes, to highlight industry (RC) best practice and to engender more efficient tax and legal frameworks across a more integrated internal European market.

The study found that the gap between Europe??™s most and least favourable tax and legal environments has widened considerably. This year the highest ranking country(1) achieved 1.23, compared with 1.27 in 2006, and the lowest achieved 2.40, compared with 2.35 in 2006.

France achieved the highest score in the study, followed by Ireland and Belgium, pushing the UK out of the top three countries for the first time.

The study also found:

• The total European average for 2008 is relatively unchanged at 1.85, compared with 1.84 in the previous study in 2006
• An improved environment for pension funds and insurance companies to invest in private equity and venture capital funds, with the European average rising to 1.54 and 1.33 respectively
• Fund structures remain an obstacle to international fundraising, with the overall European environment for funds slightly worsening from 1.47 to 1.51. While most EU Member States provide a suitable domestic fund structure for private equity and venture capital, some features may be sub-optimal when it comes to cross-border fundraising and investment
• The European average for company incentivisation has slightly improved from 2.36 to 2.25, although it continues to significantly lag the overall average of 1.85
• The European average for fiscal R&D incentives still lags the study??™s overall European average of 1.85 but has improved from 2.13 to 2.03 resulting from a rising awareness of the importance of R&D investment for a country??™s future growth and competitiveness
• The European average to retain talent has worsened further, with a fall from 1.89 to 2.19. This is partly due to the inclusion of several Central & Eastern Europe states with very low capital and income tax rates, which have reduced the overall European tax rate.

In terms of member states:

• France has replaced Ireland as the most attractive fiscal and legal environment for private equity in 2008, with Ireland dropping to second place
• For the first time the UK fell out of the top three countries, displaced by a rising Belgium, which has made beneficial changes to its pension fund environment and new fiscal R&D incentives
• Southern Europe countries Greece, Spain and Portugal consolidated their position in the top half of the table with continuous improvements to their tax and legal regimes. Meanwhile the environments in the Netherlands and Luxembourg deteriorated, particularly because of difficulties in retaining talent and incentivising companies
• Germany, Austria, and Italy all dropped further behind, as reform-friendly countries such as Latvia, Poland and Estonia continued to constructively reform their markets. Meanwhile Lithuania newly included in the study entered straight into the top half.

Commenting on the research, Javier Echarri, EVCA Secretary General said:

???Amid the current financial turmoil, the need for a strong private equity and venture capital market is more crucial than ever. Fiscal and legal frameworks that encourage long term business investment will help Europe??™s economies adapt to their changing economic circumstances.

???Several European countries have shown good progress in the past two years, in improving the environment for private equity capital. But those countries slipping down the rankings should take this as a wake up call that their long term economic health is in jeopardy.

???Private equity??™s proactive style of business ownership ensures that companies remain globally competitive, by embracing change and fostering innovation. Policymakers must give serious consideration to these important contributions as they review their legal and taxation initiatives.???

Methodology

The data for this research has been compiled by KPMG??™s M&A Tax Services. The research assesses each of the 27 European markets on seven criteria:

Those relating to the environment for limited partners and fund management companies ??“ pension funds, insurance companies, fund structures and tax incentives; those relating to investee companies ??“ company incentivisation and fiscal R&D incentives; and the retention of talent at fund management and investee companies.

Information on these criteria was collected across 30 different variables, with a cut-off date of 1 July 2008.

To enable comparison between different national environments, each country was allocated a score per variable, with ???1??™ representing the best possible score and ???3??™ the worst. An average was then calculated per criterion, based on the scores for the underlying variables. Finally, a composite score per country was calculated by taking the average score across all seven criteria.

Equal weight was accorded to each of the seven criteria when calculating the countries??™ composite score.

The results from previous assessments in 2006, 2004 and 2003 are also shown in the table. While broad comparisons across the years provide a meaningful picture of a country??™s evolution over time and relative to its peers, strict comparison across the years is inhibited by the development of variables and the inclusion of new countries.

Corporate tax rates continue to fall worldwide, finds KPMG’s Global Corporate and Indirect Tax Rate survey

Corporate tax rates fall by just under one per cent worldwide to an average of 25.9 per cent (2009: 26.8 per cent)

Corporate tax rates across the world have continued their decline, with the average dropping 0.9 per cent to 25.9 per cent from last year’s 26.8 per cent, according to KPMG’s Global Corporate and Indirect Tax Rate survey 2008.

And despite a two percent cut this year, at 28 per cent, the UK’s corporate tax rate remains higher than this latest global average.

The UK also remains higher than the EU average rate which declined one per cent year on year to 23.2 per cent. According to this latest survey, the UK now has the 19th (equal with Sweden) lowest corporate tax rate of the 27 EU member states, a slight improvement on last year’s 21st position. At 23.2 per cent, the EU remains the global region with the lowest average corporate tax rates.

Sue Bonney, head of tax at KPMG Europe LLP, commented: “Undoubtedly, the corporate tax rate is an important factor for businesses but it is far from the only factor. Other issues such as political stability, infrastructure, access to new markets, a skilled labour force and so on are all huge considerations, as demonstrated in KPMG’s recent survey of Global Capital Flows*.

Chris Morgan, head of international corporate tax at KPMG in the UK, added: “Nonetheless, tax does play a role and its importance was highlighted recently with more companies announcing their intentions to relocate their headquarters outside the UK. But this is not about the rate itself - it’s about how the UK system is able to tax foreign profits. And the argument is not about whether these profits should be taxed at 28 per cent - it’s about whether they should be taxed by the UK at all.”

For the first time, not a single country raised its corporate tax rate

The survey revealed that, whilst not every country analysed had reduced its headline rate of corporate tax in the year under review, for the first time since 1994, not one single country in the 106-strong sample had raised its corporate tax rate.

According to KPMG in the UK, this continued downward pressure on worldwide and European corporate tax rates will add to the pressure on the UK authorities to address the UK’s perceived lack of competitiveness on tax.

Chris Morgan continued: “The challenge to the UK authorities is to find a way to improve the country’s tax competitiveness that is genuinely revenue-neutral. They can’t afford a tax giveaway but business will not welcome a major hit in terms of extra taxes. The only way to find an acceptable solution is for all parties to really engage in the debate. It’s important that the various working groups established have a mandate to make real proposals and are not just talking shops.”

Sue Bonney added: “As corporate tax rates fall worldwide and corporations become more fleet of foot in relocating to favourable jurisdictions, national governments can no longer rely on corporate tax receipts. But they still need to collect revenues and they are looking towards indirect taxes to do this.”

A switch to indirect taxes

For several years there have been signs that governments throughout the world have been switching their attention to indirect taxes, but this year that trend has become much clearer.

The generally accepted idea is that indirect taxes compensate for reduced corporate tax yields. From this, it could be expected that regions with low corporate tax rates have higher indirect tax rates. The survey supports this to some extent: against a global average indirect tax rate of 15.7 per cent, the EU (with its low average corporate tax rate) has the highest average indirect tax rate among the world’s regions at 19.49 per cent.

Looking at the UK, in contrast to its corporate tax rate (well above the EU average), on indirect tax, it is the 4th lowest in the EU at 17.5 per cent. This relatively low rate plus a system that has remained stable for several years are likely to be the factors behind the UK being voted the best country in the world to deal with from an indirect tax perspective in a recent KPMG survey **.

Taking a global perspective, whilst corporate tax rates have been falling worldwide, indirect tax rates have remained relatively stable, suggesting that if indirect tax yields are compensating for declining corporate tax yields, this is being achieved in other ways: namely a widening of the indirect tax base and a stricter application of the rules.

Sue Bonney concluded: “Although, indirect tax rates on the whole have not changed, while corporate tax rates have been pushed steadily down, more and more governments are introducing indirect tax systems. There are currently 135 countries with these systems in place and more in the pipeline. There is also a steady expansion of the transactions that these taxes are applied to, and a new focus from tax authorities on efficient collection of indirect taxes through corporate tax departments.”

Multinationals put the UK at the top of the VAT-friendliness league and three quarters of major global businesses believe that governments will rely more on indirect taxes (such as VAT or general sales taxes) in the future according to a worldwide survey of senior finance professionals at over 500 large corporations in 22 countries around the world commissioned by KPMG International.

The research, some of the most extensive KPMG has ever commissioned on this subject, helps to provide further evidence of the increasing importance of VAT and other indirect taxes globally. It also provides evidence on the level of VAT which global organizations are struggling to manage every day, with 82 percent of those who responded indicating that their organization’s annual VAT throughput was between US$200m and US$1bn per annum.

Niall Campbell, KPMG’s Global Head of Indirect Tax and partner in the Irish firm, said: “This survey, one of the largest and most comprehensive we have ever commissioned on large multinationals’ views on indirect tax, helps to confirm what we have been seeing on the ground in recent years, namely that indirect tax is becoming increasingly important for global businesses as corporate tax rates decline.

“The levels of VAT which global businesses are now handling are quite staggering and are clearly causing finance directors and tax directors real concern. As the cost of getting VAT wrong is so material, it makes sense that errors in VAT compliance have now been identified as the biggest tax risk for these businesses - quite a shift in attitudes away from the traditional focus on corporate and income taxes.”

Within the UK, 70 percent of respondents forecast that government’s reliance on indirect taxation is set to increase in the next five years, just slightly below the overall sample’s 75 percent.

Commenting on the UK results, Gary Harley, Head of Indirect Tax at KPMG in the UK, said: “British businesses predicting a swing towards indirect tax is not surprising given both the efforts that HMRC have gone to in recent years to combat missing trader fraud, through a combination of legislative change and high profile litigation both here and in Europe, and the need to maintain the tax yield at a time of uncertain economic outlook and an increasingly uncompetitive tax environment.”

The concerns over VAT compliance reflect what KPMG has heard anecdotally. Gary Harley continued: “It is interesting that half of the global finance directors surveyed saw VAT compliance as their top global tax risk and certainly echoes what we are seeing on the ground with many organizations starting to think very objectively about how they manage their transaction tax obligations. Taking Europe as an example, despite having a common VAT code, the rules concerning VAT differ significantly from member state to member state, making compliance a real challenge.”

League table of VAT-friendliness

When asked which jurisdictions the respondents had found it most easy or most difficult to do business in from a VAT perspective, the UK came out as the most VAT-friendly with a net 10 percent of the sample saying it was easy. Italy was cited as the most difficult with the respondents remaining relatively neutral on other countries, according to the sample.

Gary Harley said: “The fact that the UK scored so highly is no doubt in large part due to the tax authorities’ approach to dealing with VAT errors. However this could be set to change as, on 1 April 2007, Her Majesty’s Revenue and Customs introduced a new, stricter, penalty regime which will be applied to VAT returns from April next year.

“If a company makes a mistake on a VAT return but tells the tax authorities first, pays any outstanding tax and takes steps to fix the problem, HMRC is usually quite reasonable and understanding. However, this could well change under the new penalty regime as HMRC seem to be adopting a harsher approach whereby they will levy a penalty unless the taxpayer can demonstrate that they acted with reasonable care.

“Given the likelihood of increased penalties in the UK and the global concerns over VAT compliance, minimizing the risk of VAT errors needs to be a priority for British businesses,” Gary Harley concluded.

Other Key Findings

• Complex VAT legislation is the number one issue for global businesses in the next five years, concerning two thirds of those interviewed, closely followed by compliance obligations (55 percent concerned) and the threat of penalties (45 percent concerned).
• Investment in training and technology key priorities for effective VAT management: 66 percent of global businesses believe that their organizations need to invest in training to raise employee awareness of VAT and 42 percent believe that investment should be made in improved VAT systems and technology.
• Low level of awareness of opportunities presented by VAT: only 11 percent of finance directors identified VAT as a potential source of competitive advantage.

Niall Campbell continued: “Our research indicates that while businesses are now becoming increasingly aware of the scale of their global VAT risks and obligations, there is still a gap between awareness and actually investing in effectively managing the issues on a global basis. The results deliver a very strong message that if businesses want to adequately deal with the challenges which VAT is expected to present over the next five years, they will need to seriously engage and invest in areas such as employee VAT awareness training, VAT systems and technology, additional internal resources and relationship building with tax authorities and regulators.

“There are also significant opportunities which more effective global management of VAT can produce for businesses. However, our research shows that there is currently a low level of awareness of those opportunities, especially amongst the finance directors in the sample group. Combined with the strain on internal resources within many organizations, this may be causing significant savings to be lost to many organizations.

“In addition, our research shows that the majority of businesses view VAT as purely a compliance obligation. However there appears to be a growing number of businesses that see VAT in a more external, market focused way. There is a clear competitive advantage to be gained by those businesses that can achieve an optimal VAT position when making a range of business decisions from product pricing, outsourcing and new business locations. As shareholders continually challenge management to improve business performance, finance directors who now engage and invest in managing VAT risks and realizing VAT opportunities can deliver real shareholder value.”

Derrick Parkes, Energy Tax Partner at KPMG comments on the oil tax reforms in this year’s Budget:

???UK oil companies will be pleased that the Chancellor resisted the urge to increase tax rates on their profits despite very high oil prices.

???But the Government has stopped the offset of investment management costs against UK oil and gas profits. In doing so the Chancellor expects to raise an additional ??150m per year.

???At the same time, long-life assets will now qualify for 100 per cent ???first year??™ allowances (up from 24 per cent) as will mid-field life decommissioning costs. There are further technical changes including a fairer system for tax deductions for the costs of abandoning North Sea fields and the possible opting out of fields that will not pay Petroleum Revenue Tax.???

“Overall, these reforms increase tax overall whilst bringing some welcome relief”

Professional services firm KPMG is celebrating being named the ‘Best Big Company To Work For’ in the prestigious Sunday Times Best Companies awards. Described as ‘unparalleled’ by the Sunday Times, it is the second time that KPMG has won the award, and the fourth year in a row that it has come in the top three. The Sunday Times Best Companies awards are the biggest survey of workplace opinion in the UK, and this year encompassed 868 organisations in total, capturing the views of over 180,000 employees. KPMG topped the ‘Best Big Company’ category for organisations with more than 5,000 employees.

John Griffith-Jones, chairman of KPMG in the UK, said:

“We are extremely proud to have been named Best Big Company to Work For, especially as it is the first time any company has won the award twice. Our people are our greatest asset, because they are at the heart of all our services to clients. That is why it is so important to us to create an environment where people can flourish and their talents can grow. The firm has been expanding and developing rapidly in recent years and we are delighted that our people have given us this vote of confidence through their feedback in the awards. We recognise that creating a great place to work is a never-completed task, something that needs to continually evolve and develop.”

KPMG was also very proud to win two further awards ‘Most Improved’ and ‘Best For Giving Something Back’. KPMG puts considerable emphasis on supporting communities and local causes. In 2007:

• GBP 5.7m was donated to causes in cash or in kind
• Over a third (35%) of KPMG people gave their time and expertise to projects
• They contributed a total of 38,000 hours
• Over GBP500,000 was raised for KPMG’s staff-selected charity, Help the Hospices
• KPMG began an innovative programme of free energy audits at hospices around the UK, helping them to reduce their energy costs and lower their carbon footprint

Opportunities and innovation

The last year has been a significant one for KPMG due to the launch of KPMG Europe - a joining of the UK, German and Swiss practices which has created exceptional opportunities for KPMG’s people to work internationally, both internally with their colleagues in Europe and externally in client-facing teams. This innovative step was a first in the accountancy profession.

The firm continued to invest considerably in training and development. Over 200,000 staffing hours were invested in training last year, and 550 people managers were given development training.

Colin Cook, chief executive of KPMG in the UK, said:

“It is our people who make KPMG a great place to work. It is their proactivity and energy that actually drives our profitability. Managing people is crucial to the performance of any business - we need to keep on challenging ourselves to improve, and always to look for further innovations in the future.”

An inclusive place to work

KPMG is an inclusive company, and that is one of its strengths. There has been a major focus on retaining talented women over the past 12 months there has been an increase in the percentage of senior women managers, which stands at over 30%. The firm is shortly to expand and enhance its package of support for prospective and new parents and carers. It actively supports flexible working practices, with 98% of requests accepted last year. Thirty percent of the firm’s graduate intake is from ethnic minority and overseas backgrounds. The firm has a training programme specifically on diversity, Daring To Be Different, which enables partners to take a lead on creating an inclusive workplace. Almost 70% of partners have now completed the programme, and a further 650 people management leaders in the firm have also completed diversity training in the last 18 months.

Rachel Campbell, Head of People at KPMG in the UK, said:

“This is a fantastic result for the firm. It is especially pleasing to win the ‘Most Improved’ award, as continuing to develop is a constant challenge for any company. We know that there is still much to do, especially with the expansion of the firm through the merger in Europe. We are determined to keep our people at the heart of all we do, and to provide them with the opportunity to develop rewarding, varied and satisfying careers - whatever their working pattern and work/life balance needs.”

Key KPMG UK statistics:
Staff numbers: 11,872
Male/female ratio: 53:47
Average age: 33
Staff bonus (2006/07): GBP100m
UK offices: 22
Graduate recruits: 914 in 2007 (up 18% from 2006). Targeting 1000 in 2008
Volunteers: 35% of staff, giving over 38,000 hours

In a closely-argued examination of the interaction between environmental taxes and modern economies, ‘Taxation and the Environment’, a new study from KPMG’s Tax Business School in the UK, quotes figures from the Organisation for Economic Co-operation and Development (OECD) which show that in many economies environmental taxes as a proportion of Gross Domestic Product (GDP) have fallen in recent years.

OECD figures show that between 1996 and 2005 (the last year for which figures are available) the proportion of GDP accounted for by environmental taxes across 29 of the world’s largest economies has fallen by an average of 0.2 percent. (See table attached).

“Given the increase in government rhetoric on green issues in the past ten years, and the enthusiasm among campaigners for new environmental taxes, it is odd to see that the apparent importance of environmental taxes in so many economies has actually fallen,” said KPMG global head of tax, Loughlin Hickey.

Frank Sangster, Head of the Environmental Tax and Incentives Group at KPMG in the UK added: “If green taxes are being used as a tool of environmental protection, we would expect to see them rise as a proportion of GDP. Some might say that GDP growth has been very strong across these countries in the period we have examined, so it’s not surprising that green taxes should seem to decline. But even if we look instead at environmental taxes as a proportion of the total tax income for these countries, we see the same thing; green taxes seem to be falling in importance.”

Is tax an effective tool?

It is not clear why this has happened. Governments may have discovered that tax can be a blunt and possibly ineffective tool if it is used to pursue the single aim of reducing environmental damage. Or it may be so effective in making people change their behaviour that the revenue from these taxes has fallen. It is even possible that governments are not as committed to environmental protection as their rhetoric suggests.

Looking at the effectiveness of tax as a green tool, the study examines the widely accepted idea that governments can and should switch the focus of their tax policy from taxing ‘goods’ like work or savings, to taxing ‘bads’ like pollution.

Supporters of this idea claim that it provides a double dividend, by simultaneously raising revenue and reducing undesirable activity - the ultimate alignment of tax policy with green policy. But the study shows that its effects are more complex.

“Pollution, climate change and the use of scarce natural resources are not the result of attempts to harm the environment in which we live, but the side effects of activities intended to enhance our enjoyment of it.” the study says, “Any attempt to tax these activities has the potential for harmful as well as beneficial effects on human welfare. The challenge is how to tax the pollution while minimising the impact on the activity.”

Changing priorities

It points out that in the case of the UK, the fall in receipts is very largely attributable to a fall in real terms in duties on road fuel. This is separately confirmed by the OECD’s analysis of its own figures, which goes on to show that this is also true for many other large economies, particularly in Europe.

Frank Sangster said that this change may not be due to a lack of government commitment to cutting emissions from road transport, but to a change in priorities for raising revenue. Governments may decide instead to tackle environmental problems through other means such as direct regulation, as the US is proposing to do with legislation on car fuel efficiency, or via market mechanisms like the carbon trading scheme.

He added that a reason for choosing these alternatives may be that taxing environmental problems can have undesirable side effects. These forms of taxation are often regressive, in that by raising prices they have a greater impact on the poor than on the rich. They can also be unreliable sources of revenue, because the more effective they are in persuading people not to pollute, the less revenue they will raise.

UK business increasingly concerned about climate change

UK business is becoming increasingly concerned about climate change: according to a recent KPMG survey of 200 senior UK business executives, 85% think that climate change is a significant business issue and 77% think it will grow in importance.

However, despite acknowledging its rising importance 82% admit they still don’t have a strategy in place to respond to climate change.

Frank Sangster commented: “Business is looking for improved communication and a clear regulatory framework from the Government to provide certainty so that they know where to focus their emission saving efforts. And next week’s budget provides a key opportunity for the Chancellor to give some clarity in this area. Any significant investment in new carbon efficient business practices or energy saving technology is unlikely to go ahead until they fully understand the impact of regulation.”

Case study: the Irish plastic bag tax

One example of a green tax wrestling with these problems is the Irish plastic bag tax. When this was introduced on 4th March 2002 the levy had an immediate effect on consumer behaviour - plastic bag per person usage decreased overnight from an estimated 328 bags to 21.

However, income from the levy increased, and surveys showed that plastic bag usage rose to 31 bags per person during the course of 2006. This prompted the Irish government to increase the levy from 15 Euro cents to 22 Euro cents in July 2007, against a background of calls for a much greater increase.

The explicit aim of the increase was not to raise revenue but to reduce usage to the level achieved in 2002 or lower. “This raises the question of whether people’s underlying behaviour really can be changed by a tax change alone,” said Frank Sangster.

“The plastic bag levy seems to be having the desired effect, but the Irish Government uses the money raised by the levy to support environmental education and waste management programmes, so it may be a combination of education and taxation that is working, rather than just taxation. I do wonder how high the tax would have to be to have the same effect if there were no education schemes as well, and at what level the regressive nature of the tax would start to produce undesirable social effects. The Irish plastic bag levy is is a clear demonstration that green taxes have to be balanced against the other effects that they have before governments can decide whether, and at what level, they should be imposed.”

Frank Sangster added. “KPMG’s Tax Business School study argues that there is no such thing as a pure environmental tax, just taxes with environmental effects. Governments may decide that tackling environmental problems requires a much more sophisticated set of responses than simply devising a new tax. Getting the balance right between taxation and other measures, is a major challenge, perhaps the biggest single challenge, for governments throughout the world.”

With less than two weeks to go before the Chancellor delivers his first full Budget speech, KPMG says now’s the time to do more for small to medium-sized businesses.

Tom McGinness, head of middle market tax at KPMG in the UK, said: “With economic conditions getting tougher, now is the time for the Treasury to act in helping ensure the UK is a great place to do business. In the run-up to the budget, we would urge the Chancellor to focus on simplification and certainty.”

Simplification
The proliferation of tax law is a major issue for all businesses in the UK but it is one which affects smaller companies disproportionately hard for two main reasons. Tom McGinness explained why:

“The first issue is the ‘law of unintended consequences’ - legislation designed to tackle a particular issue can often end up affecting lots of other areas. And the second is that tax law tends to affect all companies in the same way regardless of size but the larger companies usually have more in-house expertise to help them through the minefield of legislation.”

Certainty
The lack of certainty around tax is the third issue KPMG would like to see addressed in the budget. Tom McGinness said:

“Recent announcements and subsequent amendments to proposals around the capital gains tax rules and the tax regulations surrounding non-UK domiciled residents, have received an extremely negative response from business. And we still don’t have the final legislation. This leaves businesses operating in the dark - a position they find extremely uncomfortable, and also leaves them feeling uneasy about what future changes might be introduced without prior consultation.. And, while these are fairly extreme examples, they are not isolated incidents. It’s important for business to know where it stands and to be confident that a decision based on today’s environment will still make sense tomorrow. If the rules keep changing then it’s almost impossible to keep up.”

There is considerable uncertainty around the shape of likely proposals to reform the way in which British companies’ foreign profits are taxed by the UK authorities. Mooted proposals issued in a discussion document last June have proved to be one of the most talked about developments in the corporate tax world in recent memory. The authorities have held a series of meetings with representative bodies, advisers and individual taxpayers. They are still inviting real examples of where proposals could cause issues. There could well be an update in the budget. We would expect a further consultation document to be published on budget day or shortly thereafter.

A “Green Budget”. Back in December the Chancellor declared that it is sustainability that will be at the heart of the next budget. Areas likely to see changes are around employment taxes, company cars and travel.

A change to the way that the Authorised Mileage Allowance Payment (AMAP) scheme operates would not be a surprise. This is the scheme which allows employees to claim a tax free amount (currently 40p up to 10,000 business miles in a year, and 25p thereafter) when using their own car for business mileage. The Government have been consulting on this area for sometime and in the 2007 Budget said:

“The Government will consider the case for changing the structure of AMAPs to align the tax and NICs treatment and ensure that the rates and thresholds are set at an appropriate level to promote environmentally friendly business travel.”

It’s not clear what changes the Government might make in this area, but a higher rate for lower mileage, combined with a lower rate for higher mileage has been suggested.

Looking at travel more widely, KPMG notes that there is currently no income tax or NIC payable where an employer offers:

* free or subsidised work buses

* subsidies to public bus services

* cycles and safety equipment made available for employees

* workplace parking for cycles and motorcycles

Tom McGinness said: “We would like to see the green transport options broadened to include all forms of public transport, so that an employer could make using public transport at least as attractive as driving to work.”

According to KPMG, the Chancellor could take the opportunity in this budget to make working from home more tax-efficient. Currently employees can be paid up to ??104 per year towards the additional household costs incurred by working at home without supporting evidence of the costs. Any additional payment requires that evidence is obtained and retained. The additional administrative burden discourages both employer and employees from being willing to claim more, but the ??104 payment is not significant enough to encourage home working.

By increasing the level of tax free payments available without additional evidence, the government could make it easier to encourage employees to choose to work from home.

Tom McGinness concluded:
“Where green issues are concerned, there are currently more sticks than carrots. The more people feel that they are already paying for climate change through a multitude of taxes, the less incentive they will have to be proactive. So for each increase in tax on a bad behaviour that the budget includes, we would like to an equal reduction for good behaviour.”

KPMG says that over 1,700 London-New York flights’ worth of CO2 could be saved if employees switched back to company cars.

The UK could save annual CO2 emissions equivalent of just over 1,700 Boeing 747/8 flights from London to New York - if all employees who have opted out of company car schemes chose to take advantage of ‘green’ tax breaks and opt back into their employer’s schemes.

According to KPMG’s Company Car team, since 1999 there has been a decline in the number of company cars, with HMRC figures indicating 400,000 employees having opted out in preference of purchasing their own vehicles. KPMG research** suggests that 52 per cent of employees who opt for cash instead of a company car use the money to purchase a second hand car, with emissions estimated at 30-40 plus grams per kilometre higher than the average company car driven by their colleagues.

If all 400,000 employees that have opted out opted back in, assuming they currently emit the national private car average of 191g/km**, driving a typical distance of 18,000** miles per annum and they drop to the average company car with emissions of 165g** on the same mileage the UK would save total annual CO2 emissions of 301,000 metric tonnes the equivalent to just over 1,700 Boeing 747/8 flights from London to New York.

Harvey Perkins, director within KPMG’s Company Car team commented:

“Changes made by the Government in 2002 to the company car tax rules were received with mixed reviews. For a minority driving relatively low business mileages in relatively high emissions vehicles, the changes had a negative financial impact and a number of people chose to opt out of the company car regime and buy their own cars instead. However, there is no doubt that the effect of the Government’s foresighted approach to use these rules to help employees make the right environmental choices has been to drive down CO2 emissions in company cars.

“Recently we have been seeing a change in mood with the number of company cars beginning to grow again. This seems to be driven by employees being more aware of the advantages of company cars both to the environment, and by extension their own pockets and, to some extent, employers’ concerns over the potential health and safety implications of their staff using privately owned vehicles for work purposes.”

A move towards consumers demanding greener vehicles is forecast to continue according to the 2008 annual global automotive survey by KPMG LLP in which senior global auto executives reported increased demand for vehicles using alternative fuel sources: 65 percent of respondents said this was important or extremely important to consumers, a significant increase on 53 percent in 2007.

Further changes to company car tax rules will come into force from April this year, and will allow for a much lower tax and national insurance charge in respect of vehicles that emit 120 grams of CO2 per kilometre or less. These ultra low emission vehicles allow employees to benefit from the lowest tax charges on company cars in a generation.

According to Harvey Perkins employers are looking to respond by improving their company car options. He said:

“Employers are keen to ensure their schemes offer employees the best options by featuring cars in the lowest emissions bracket. As manufacturers continue to strive towards delivering viable environmentally friendly alternatives, the financial and environmental benefits could be significant.”

The Australia-Japan tax treaty signed by Australian Foreign Minister, Stephen Smith, in Japan yesterday is a long overdue overhaul that will be a boon for businesses on both sides, according to KPMG Australia Tax partner, Rick Asquini.

“As Japan is a major source of foreign investment in Australia, the improvements in this new agreement around withholding taxes on dividends, interest and royalties will be a very positive step towards maintaining and attracting further investment. We will see more Japanese yen flow into Australia.

“Until now we’ve been operating under an agreement established nearly 40 years ago, business has changed dramatically over this time and this new treaty reflects the strength of the trading relationship.

“I would strongly encourage all Australian companies operating in Japan and Japanese companies here to review how they are financing their operations and assess their dividend and royalty arrangements immediately in light of these changes,” he said.

Mr Asquini said the energy and natural resources sector may face a shake up in light of the short timeframe in which Japanese companies may engage in the exploration of natural resources tax-free.

KPMG’s Transfer Pricing Partner, Anthony Seve said that Japanese companies in Australia would be relieved by the newly established time limit on transfer pricing reviews.

“In the past, there was no time limit on these reviews and that meant there was a high degree of uncertainty and administrative burden for many companies. Now that uncertainty has been removed, it will help Japanese companies to better manage their transfer pricing risk in a more practical and efficient manner,” said Mr Seve.

In addition, through the interpretative notes of the treaty, a clear intention is stated as to the application of OECD principles and methods to resolve Australia/Japan transfer pricing cases.

“It is hoped that this affirmation of approach between Australia and Japan will assist in resolving some difficult transfer pricing cases that are currently under examination,” said Mr Seve.

Britain’s fraud problem shows no sign of abating, with over GBP1bn of fraud coming to court in 2007 according to KPMG Forensic’s Fraud Barometer - the highest value since 1995 and the second highest in the 20 year history of the Barometer. The number of cases coming to court fell to 197 from 277 in 2006, but this remains a higher number than seen in any year prior to 2005.

With fears that the credit crunch will lead to a period of protracted economic slowdown, there is the potential that personal and corporate pressures may fuel fraudulent behaviour making the situation worse in 2008 rather than better, KPMG Forensic warns.

Hitesh Patel, partner at KPMG Forensic, said: “Levels of fraud continue to remain disturbingly high. Organised gangs have been more active than ever, with a proliferation in VAT frauds, ID thefts and other forms of white collar crime, to the tune of a huge GBP889m or nearly 90 percent of fraud by value. The sophistication of organised fraud in the UK is certainly extremely concerning. More fraud cases have been coming to court in recent years than previously, but one fears that this is just the tip of the iceberg. 2007 saw a respite in prosecutions for frauds against banks and other corporates, but now that the economy looks set to slow, we could see more people attempting frauds to ease their financial burdens. As companies tighten their belts in the harsher conditions and take a closer look at their operations and related expenditure, it is highly possible that a greater number of frauds may be detected.”

Gangs aggressively targeting the Government
Organised criminals accounted for nearly 90 percent of fraud by value in 2007 (GBP889m), with the Government agencies having been the primary target (GBP833m). This represents an enormous jump from 2006, when professional gangs accounted for GBP221m of fraud. Once again last year, carousel fraud on items such as mobile phones represented a substantial proportion of the value of organised fraud. It remains to be seen whether the reverse charging mechanism introduced by the Government last summer for domestic supplies of mobile phones and computer chips, combined with the continued success of their operational efforts, will have a material impact on the scale of carousel fraud cases, or whether gangs will simply move their focus to other goods.

ID theft continues to have an impact
Gangs have also aggressively exploited ID theft to perpetrate scams, making false benefit or tax credit claims. One husband and wife team claimed benefits for no fewer than eight adults and forty six children at a one bed flat in London, defrauding the public purse of over GBP1.1m. Other gangs targeted the transport system, organising large scale frauds on fake bus and tube passes.

Some criminal groups have become creative and brazen in the manner in which they steal and utilise ID’s. One gang stole homeowners’ identities by posing as would-be buyers, collecting enough details on the house to apply for title deeds from the Land Registry and then remortgaging the properties. A Midlands-based gang got away with some GBP500,000 in this way.

Another Surrey-based man simply took down details of passing cars and then approached car brokers claiming to be an agent working on behalf of a non-existent customer, and set up financing agreements with the money going into an account he controlled.

Banks and companies need to remain vigilant
Whereas the Government suffered heavily in 2007, financial institutions and other corporates enjoyed a fall in the value of frauds against them. GBP37m of fraud against banks came to court in 2007, substantially down from over GBP140m in 2006, while commercial business suffered GBP24m of fraud compared to GBP81m a year earlier. Nevertheless, particularly in the current economic climate, corporates need to remain extremely vigilant to the fraud threat.

Employees and management carried out roughly the same number of frauds (36 and 34 respectively), again down from 2006 (54 and 48). Once again though, management inflicted significantly more damage on their companies with their frauds totalling GBP54m, double the GBP27m that employees perpetrated.

Taking the rap
Other fraudsters were more creative in their efforts, such as the Northern Ireland man who routinely removed barcodes on items in a hardware superstore and replaced them with his own false barcodes so that he paid less then the items were worth. He then sold the goods on eBay and made an estimated profit of GBP100,000 before he was finally caught.

Another fraudster was brought to book because he could not resist recording his exploits in a hip-hop video. The rapper from London incorporated rhyming lyrics in his songs about his involvement in stealing scores of high performance cars and selling them under false identities. The scam was worth over GBP600,000.

Not just a London problem
While London and the South East was once again the dominant centre for fraud, with some 65 percent by value (GBP655m) and over 35 percent of the cases (77), other parts of the country also saw significant levels of activity. There was some GBP200m of fraud in the North West (30 cases) and GBP117m was recorded in the Midlands (31 cases).

Hitesh Patel concluded: “Given the developing economic conditions, companies and individuals need to be more alert than ever to the fraud threat. At a company level, they should bolster their routine monitoring and oversight processes with the use of data analytical tools to identify any unusual or suspicious trends. As individuals meanwhile, we all need to be vigilant and protect our personal data. The bottom line is that the cost of fraud goes beyond the financial. The emotional and social impacts are often forgotten.”