25th January 2009

Happy New Year. 

Firstly, I'll take an opportunity to remind everybody that if you have not lodged your personal tax return and paid your tax by 31st January you are probably in trouble.  And don't forget you've already missed the deadline for using a paper return.  Internet filing is required to avoid being late (albeit if you pay your tax and use paper this year they are supposed to waive the penalty).  MPs are given exemption from this of course and can lodge in paper form up to 31st January - 3 months longer than you and me.  I have written twice to my MP about this unfair differential and he assured me the Treasury were to reply....seems they have more important matters to deal with.

Some good news in the gloom of 2009!  The HMRC's new "Business Support Service" seems to be very effective.  A quick phonecall to HMRC can see you spread pretty much any sort of tax liability for up to a year at around 4.5% interest - not particularly cheap but worth the phonecall if you can't get money from the bank.  PAYE, VAT, personal taxes and corporation taxes are all "fair game".

Secondly, unless you have just returned from a 3 month holiday in a remote island with no media the fact that the UK's economic health continues to wobble will not have escaped your attention.

I was interested to read that the Government are to put curbs on the pay and bonuses of the banks they are recapitalising.  It occured to me that it is normal for an investor to put conditions into the terms of their investment/debt - and that the "first" bail out should have had such strings attached (maybe it did!). 

For example, when the IMF bailed out Asian economies after their financial crisis a few years ago they put in requirements to restrict public spending (just as they did when the UK was bailed out in the 70s).  Bail outs are not to be wasted on inefficiency.

I comment about this because the taxpayer is being asked to commit to a massive further investment into the state via tax rises in future years. 

I would argue that this is the point the taxpayer should be commenting that such taxes must come with conditions to ensure our extra tax money is not wasted.  Many commentators think we've been wasting tax in recent years as it is. 

Whilst most readers won't agree with my view that we should cancel the Olympics, I do hope other people agree that it might be time to cut public expenditure as a part of any turnaround plan for the UK.

In any case, the point I should be making as tax partner is that we all know taxes are going to rise.  How can client prepare for these changes? 

As George Bush might say, "forecasting is difficult, especially about the future".  We do have some "probable" targets:

1. VAT will rise back - but probably to something like 19%.  Other EU countries are around this level.

2. A temporary (tax itself was temporary when introduced) tax on higher income - maybe the 45% level stated by Darling.

3. National Insurance again - maybe some fiscal drag (where the limits aren't increased) and a small increase.

4. More from Cars, Fuel and Road Use - this dovetails with the carbon dioxide theme and is an easy target.

5. A further increase in the powers of HMRC and pressure on them to go out and "get money" from investigation work.

6. Booze.  I think the anti-smoking change in society will creep towards alcohol.

How can we prepare for a higher tax country? 

For some people it is likely that emigration to avoid taxes will become more fashionable (or to at least go somewhere with a better climate for your money). 

If, as seems likely, we have a long slow climb out of our recession and a high level of taxation, the wonderful all year round "winter rainforest" climate in Renfrewshire may lose appeal. 

For those of us who don't see emigration as personally viable, care will need to be taken to structure our affairs for the lowest level of tax. 

At the moment capital gains tax is at just 18% (albeit there is no inflation adjustment in the computation).  If that rate stays in place,  investment for gain rather than income is vital for higher earners.

Further, those with businesses will have the additional challenge of managing corporation and business tax liabilities.  Companies generally pay less tax than partnerships until salaries and dividends are paid.  Being a Limited company seems likely to continue to be the most attractive structure for many (not all) business ventures.

It might be that the tax value of using pension fund reliefs, ISAs and other tax reliefs (EIS, VCT) becomes greater.  For businesses, ensuring the annual accounts and tax returns are accurate and robust enough to withstand an investigation would be common sense as HMRC will be more likely to knock on the door.  This is the time to make sure your procedures are sound, not least because HMRC now have more power to visit your premises than ever before.

I found some interesting thoughts on the economy in an interview with Dennis Healey in the weekend papers.  Of course most readers (over 35) will recall well that Lord Healey was the Labour Chancellor in the mid to late '70s.  It was "on his watch" that we ended up at the IMF with a begging bowl.  We also had an official 83% tax rate (98% on unearned income).  Lord Healey is now a very relaxed looking 92 year old.  Despite his age and his Labour background he suggested that higher taxes are ineffective (!) because the rich find ways to avoid them and the amount raised is small.  He also says that the public payroll has become bloated due to Government's complacency and that we should look to cut public expenditure and taxes (not raise them!).  We have to hope that Brown-Darling got a chance to read the article and think about it - Lord Healey rode through the storm and says the lesson he learned as Chancellor is that high taxes encourage people to invest outside the UK and promotes emigration.  A slightly depressing interview for him, perhaps, as it seems to suggest the economic strategy of that era was a failure in the eyes of the Chancellor of the time. 

Just because we might escape the humiliation of returning to the IMF again perhaps, to avoid more tax increases we could "take the medicine" they would administer in any case?  Like a business, you cannot go on forever with more outgoings than income.  We need a strategy to return to a budget surplus and part of that must surely be to help balance the books through less spending.  Perhaps we can push more of the working population into the productive side of the economy and away from the public sector?  The difficulty is working out just how to do that whilst facing an election and keeping the trade unions who support your party happy! 

In terms of people looking for tax tips at this time in the tax year, my main comment is that this is definitely the right time to catch up with our financial advisers!  You should ensure you've used your capital gains exemption, ISA limits, pension limits etc for the tax year.  You'll find a glossy 2009 tax year review on the right hand side of our web page under the documents section - I'd encourage you to have a look at this.

Whilst I think many people are very nervous about investment at this time, history tends to show a cycle and the biggest gains are made by buying at the bottom and selling at the top.  I've heard a few clients say they are stopping putting into pensions or equity based investments and whilst I share the "fear of the unknown" it's hard to resist the argument that only saving whilst stock markets are on cyclical high points is unlikely to yield you a good return over the long term.

The problem is we don't know where the bottom is (or the top) until after the event.  That said, we can be sure some shares are much cheaper than they were.  I once read that it is vital that you invest in pensions and other equity based savings monthly in order to ensure you catch the market at its low points.  This might give only average growth and no doubt buying "big" at the bottom would be better but unless you have a wonderful way of predicting highs and lows the safe bet is to put monthly savings away to ensure you at least get the average pattern over the long term.  Hopefully the fund managers can then improve on the average - I believe that's the measure of a succesful manager - beating the overall market movement (despite rumours that the manager's Ferrari and house in Antibes was the real measure!).

I'm not a financial adviser but my partner, Kate Brown, and her team would be delighted to have a chat with you about how they see the position with regard to investment in these volatile times. 

I imagine that we might all look back in a couple of years time and think "I wish I'd bought shares when the FTSE was under 4,000 back in 2008"....  On the other hand, you might wish you'd changed it all into gold or dollars in 2007.....we just don't know!  Hard decisions for those with savings at the moment given the strange times we live in.  Definitely the time to take advice before leaping in.

I want to finish by saying that I think the doom and gloom is all the worse for the media coverage and our Prime Minister's dour and serious appearance.  I'm going to be very careful in this blog not to suggest the action being taken to rescue our banks is wrong etc. as I can't say I'm well qualified to comment.  And I'll not say there is anything wrong with being dour.

However, I do think that it is time we had some leadership with a big (but serious) smile saying "come on guys, this is GREAT Britain  - let's get to work - "yes we can"...".  Come back (the late) Ally Macleod (1978 World Cup), all is forgiven - we need somebody to make us believe again.  Mind you, I don't think the English are ready for another Scot in charge.

Kind Regards

Donald Parbrook

Tax Partner

 ** The views above are personal to Donald Parbrook and may not be those of the firm or his partners.  Always take personal tax advice before making decisions.  **