A WINTER OF DISCONTENT?  (August / September 2008)

TAX LOSSES ? – GETTING TAX BACK…

A few of my older colleagues have been muttering about 2008 bringing another “winter of discontent”.  For a youngster like me (hmm) I have only vague memories of the late 70s and unless the winter of discontent involves sledging and being crammed into the back of an old mini to go swimming, I’m not truly sure what they’re talking about.  However, it seems that this was the last really bad economic time before the early 90s. 

I had to ask "What is a winter of discontent”? – things were actually really quite bad in the country in the late 70s....and we had a Chancellor with prominent eyebrows....suddenly I understood the comparison. 

So, we have a re-run of 1978 - and this seemed to make sense until Alistair Darling dramatically claimed that we actually had to go back over 60 years (to the 1930s - isn't that 70 years?)  to find the correct historic parallels.  Either he didn’t like the eyebrow comparison (to Denis Healey), or was keen to blame “the world economy” for the fact we’re in a bit of bother. 

Of course, all this talk of the 1930s downturn got me thinking  got me worried that the reference was political not economic….and that it was a reference to an emerging global power annexing an eastern european country….I was half expecting to see Sarkozy getting off a plane, after a trip to see the relevant dictator, smiling to the camera and claiming he had secured an agreement for peace in our time in the form of a dubious agreement which would probably never be honoured....

However it seems the sixty year comment is related to economic matters after all.  Alistair Darling is keen to draw parallels with the 1930s in order to claim the whole economic mess is global and is not caused by mistakes here in the UK over the last decade. 

In doing this he obviously implies that the late 1970s economic problems were caused by the Government of the day and were not global.  I immediately thought of the Chancellor Denis Healey.  He presided over some incredible tax increases and we can, I suppose, be glad that there is no talk of good old fashioned tax rate hikes….just a few raids on selected profitable sectors.

With hindsight, perhaps, I prefer Chancellor Denis Healey as he was quite straightforward – he wanted to tax the rich and give more to those in society who needed help and didn't pretent his Government could achieve what they wanted without taxing the rich until their pips squeeked.

He increased almost every tax rate possible – there were few stealth taxes or clever tricks – just higher rates of tax on profits and income.  The problem for Darling is that it is accepted that to increase tax in a direct and honest way is political suicide.  Alistair Darling appears to be caught in the same sort of trap as Denis Healey may have been in 1978 - an honest man with no new options to solve the crisis - so I rather fancy the 30 year comparison over the 60 year one.  Sorry, Darling, the OECD said the UK was "uniquely badly placed for a recession" out of developed western countries for a reason - and we can't blame the outside world for that.

So, what can Darling do to balance the books a little?  A quick hike in VAT rates could be a good tip as this could be part of "harmonisation with other EU rates to remove distortion"....VAT seems to be a forgotten tax recently and several other EC Countries have higher rates.  Hopefully this years "tip" won't come true.  I am still living in hope that he'll climb down on the retrospective tax disc hike for older high CO2 cars - but that's just personal as my local dealer tells me my 3 year old 4x4 has been depreciating by £900 per month in recent months....

Recently, my tax planning conversations with clients have evolved greatly from “how can I save tax on my profits” to “how can I get relief for my losses”.  This area of planning has been a little under-rated in recent years!  Maybe that confirms we really did get “stability and bust” (we were promised an end to “boom and bust” so I suppose they have at least kept half the promise there – I didn’t see a boom – did you?)

On the matter of losses, or lower profits, the good news is trading businesses can carry back losses against previous profits to some extent.  So, if you have losses, it is very useful to accelerate the timing of preparation of accounts so that we can claim your losses and maximise the early repayment of your old taxes. 

The bad news is that you can’t offset company losses against your personal income (logical, but worth pointing out).  Other areas for review are the claiming of capital allowances in a low profit year – sometimes it can be worth avoiding a claim for tax write down on assets if it will create a loss that you can’t use or if claiming later is likely to give relief at a higher tax rate.

The Chancellor has announced that the Stamp Duty limit is going to be £175,000.  But, as is ALWAYS the case with these political types it has a catch in the small print-  it’s only for a year.  A cynic (like me) would comment that the housing market is being held back by a lack of first time buyers and investor-buyers not because of SDLT but simply because the banks won’t lend a high “loan to value” any more having had to take the hit for the injudicious loans made in their sector.  The SDLT relief might be welcome but appears unlikely to offer more than a crumb of comfort to the sector.

So, how do you organise your tax affairs for a downturn?  Firstly, don’t let the tax horse lead your cart.  As ever, concentrate on core business and making profit if you can.  However, if that profit isn’t there, tax relief can help.  Secondly, ensure you realise any obvious losses before a year end (business) or end of tax year (individual) to get relief as soon as possible.  Thirdly, talk to us about planning for lower profits (or losses) to try to ensure you don’t pay high taxes at a high rate in one year then fail to use the lower bands the next (if possible).  Finally, it can sometimes be worth changing a company year end.  Each client differs but for some it may be that a shortened or lengthened year end can accelerate and improve the relief for losses or help ensure profits are taxed at the optimum rate.

As ever, this is a “non-technical” rant, and on the right hand side of the web page there’s a link to our sensible newsletter. 

Again, I reassure you that when the day comes when we have a different Chancellor of whatever political persuasion I will be just as unsympathetic to the strange decisions being made.  I have no personal issue with any political party - or perhaps I am equally cynical about them all!

This blog is written by Donald Parbrook, tax partner at Milne Craig.  His views are personal and may not be those of the other partners or the firm.