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Summer 2010 – Tax Blog
As you can all imagine, I did some serious thinking whilst I was sitting by the pool on holiday…..but leaving aside the question of whether the enjoyment of cold lager is worth the extra calories over gin & slimline, I did also read books and magazines. I was also happy to be in Portugal - one of the few European countries whose financial problems might eclipse our own. Didn't help the exchange rate though!
I’m afraid this blog is almost tax free – if you want a tax update I would urge you to click “quarterly tax update” on the right of the page and to download our nice new summer 2010 tax update – it’s a nice little pdf booklet. I’ve also got a few comments on capital allowances at the bottom of this “rant”.
One of the joys of holidays is that you have time to read the newspaper properly – and I don’t mean scanning the back page of the Herald to see which of your clients has done something exciting. The Times was the only paper I could get and I did enjoy the early snippets from Mandy’s new book. It appears to me that despite being Chancellor during the most disastrous period of economic downturn the UK has faced for many years, Mr Darling may come out of this exercise in “immediate history” book writing rather well.
Mandy’s (modestly titled) book “The Third Man” (what happened to Prescott?) confirms my own suspicions – that Darling probably had a good handle on the economic crisis by late 2008 but was pushed into the “borrow now in a big way” solution to it all, against his instincts, by the meddling Gordon Brown, who was “mad, bad and dangerous” (Tony Blair said it, not me).
I find it really interesting that it was Brown who wanted the 45% (now 50%) tax rates and it was Brown who insisted Darling give up on increasing VAT and go for NIC hikes instead (result – we have both now). It seems that whilst Darling managed to retain his position as Chancellor (despite Brown trying to bounce Ed Balls into that slot), he was being micro-managed by Brown – with all of Darling’s possible “tough but necessary” tax decisions being dumped in favour of the largest possible economic stimulus funded wholly by massive increases in our national debt. Net result, my children will be paying for Gordon Brown’s last gasp attempts to retain power.
Mandy’s revelations don’t surprise me one bit. Darling always sounded like he understood the implications of the huge deficit and sounded rather unconvincing and insincere when he delivered the 2008 to 2010 Budgets and PBRs - it was always wrapped up with new forecasts and optimistic statements that the UK would be back on track thanks to fabulous but entirely naïve growth forecasts. In short, Darling delivered Brown’s politically motivated tax and spend spend spend policy (tax the rich, give to everybody, borrow the rest) in favour of his own more cautious preferences. In reading Mandy’s summary of “No 10 vs No 11” (The Times, 13th July) I was struck by the fact that Darling and Osborne’s views may have been rather similar – the only difference therefore being Cameron vs Brown…..(or should that be Cleggeron – the rare mythical hybrid leader).
And, after all, the new Government has shown it is not so different after all, having just prepared legislation to ensure that MPs can get free travel for their spouses paid tax free along with late night meals and commuting costs. The spouse travel and commuting costs are NOT tax free if provided by an employer to anybody else – so, as usual…one rule for them… one rule for us – apparently HMRC had an “informal concession” until now. I can see no reason why taxpayers should not be treated equally.
Talking of equality of one taxpayer with another….when will the politicians move towards a “normal” pension arrangement themselves....(defined contribution, pension starting at 65+)….?
Gordon Brown was too scared to deal with the MP's pension scheme....let alone the wider public sector time bomb (I can almost hear it ticking).
It is my view that if our overall tax base is to come back down over a long period, it is absoluately inevitable the fight with the unions to get rid of “final salary pensions” will have to happen soon. The public sector pension arrangements will surely require to be brought (more or less) into line with the private sector as it is entirely implausible to have such inequality in society - never mind the fact the “black hole” of public sector pensions could cripple us – this isn’t scaremongering – Japan is suffering over a long period due to an ageing population who are retired with generous pension. It's a drag on the economy. For tax, this is an essential fight - it's a fight for the economic future of Britain - we simply can't afford to have millions of workers being paid large pensions from their late 50s, at the public expense - the public pension / state pension / NI arrangements have been compared unfavourably to a "Ponzi Scheme" by commentators in the Times and Telegraph. The comparison is drawn because in a Ponzi scheme an investors money is not invested but is instead used to give seemingly fabulous returns to past investors - but when new investment stops the emperor's clothes are revealed as there is no capital retained. The difference with the public sector pensions seems to be that contribution to it is compulsory for all - so it will run until the amount of investment (tax!) needed to provided existing participants with their guaranteed returns is so burdensome the country is crippled. Perhaps that's unfair - but I'm not alone in my view.
Turning to tax, one of the unfortunate consequences of the 2010 Emergency Budget (not to be confused with “the 2010 Budget” (Darling’s) or the “Pre Budget Report” (if we have one) later this years) is the changes to the Capital Allowances regime.
At the moment businesses get £100,000 per annum of Capital Exependiture written off immediately for tax purposes. This will drop to £25,000 from April 2012. This is unfortunate for smaller, capital intensive, businesses. In particular the long suffering licensed trade will find this hit to cash flow unpleasant, as will the care home sector. The rates of allowances are currently 20% and 10% (“integral features” e.g. lifts, electrical and water systems) at the moment. These will be 18%/8%. So for a business with regular expenditure on goods incorporated into the building (e.g. pubs, hotels, care homes) there’s a big cash flow thump. The best advice will be to ensure you use your £100,000 before the allowance is lost forever.
I continue to remind people we are now in a 60% tax regime (that’s the effective tax rate on income from 100k to 112k approx – due to the removal of your personal allowance at a rate of £1 for every £2 of income above £100k). Sobering tax rates.
The Emergency Budget’s capital gains changes and the announcement of the VAT hike appear to be getting no negative reaction overall – I think people are just not surprised. It was entirely predictable that the new Government would play the “bad news” card as hard as possible, giving maximum pain up front in the hope that they can give some good news in the last Budget before any election in a few years time…. If the coalition lasts that long.
In any case, I suppose we can be happy that we have some fresh thinking in No 11 Downing Street – I’m a great believer in having a change of power in Downing Street fairly often regardless of your personal preferences.
I just wonder how the tax changes will play out – and can’t help but think that a commitment to a return to a top rate of tax of 40% within 4 years might not have been good for Britain – simply to reassure the world we are a country where it is good to make money and create wealth. We seem to be living in an era where people envy success and expect wealth and reward without work and perseverence. It seems right to blame the rich for all our woes - and this creates a sentiment that it is in some way justifiable to take wealth away once created. For me, I see a society where wealth creation is encouraged and rewarded as a better model. I think it would be rather fairer to blame our Politicians for failing to put the UK in a stronger position after a decade of benign growth – but to avoid gazing at ones naval and ask why Hong Kong has a significantly higher GDP output per capita (Economist Magazine 2 weeks ago) than we do – could it be their low tax, light regulation society?......
*The above is a commentary by Donald Parbrook, Tax Director - his views are his own, and not those of the firm, or his colleagues.**
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