The Tax Partner’s Blog

By Donald Parbrook

June 2009

The summer is traditionally a relatively quiet time in tax, with no Budget or PBRs around to talk about.  This could be my shortest ever blog!  It might also be my most political – there being more to talk about on politics than tax at the moment!

However, the good news is that there’s a sensible quarterly tax newsletter on the right hand side of our website – or click here and select the bottom item.

http://www.milnecraig.co.uk/view_documents.asp?fld_document_section_ID=7

Despite the relative “calm” in the economy etc in recent weeks (with eyes on the expenses of MPs rather than the financial calamity), the current economic circumstances should still have most taxpayers very worried.

It doesn’t seem likely that there’s any good news on tax likely for a long while.  Indeed, this firm sees signs that the “real recession” is now well under-way as clients continue to fight against the weak economic circumstances and the impact of a weakened and “risk adverse” banking sector.

Of course, high earners (£150,000+) will have noticed the Government has hatched a plan to tax people at 50% (51% with National Insurance).  The personal allowance is also being removed at around £100,000 and pension contributions won’t get higher rate relief in many cases for the wealthiest.

Leaving the technical conundrums to one side, the interesting issue is that Her Majesty’s opposition have not said they will reverse these tax changes - despite the fact many economists say the changes raise less in tax than the cost of lost tax in terms of discouraging inward investment of people and businesses.  The “City” seems to have most to lose – and, therefore, the Treasury as an enormous proportion of tax was taken from that source.

Well, perhaps, the Tories are politically “scared” to talk about any tax cut at all.  If the worst of the forecasts about our public finances are in any way true maybe that is appropriate.  However, tax is half the picture, what about spending?

It seems that the OECD, The Bank of England, the IMF and the IFS are all saying “stop spending so much” to Mr Darling.  Whilst I actually think the Government spending levels will fall (as is suggested in the small print of the Labour plans!), it is surely a cynical bit of “spin-mongering” for Mr Darling and Mr Brown to pretend spending will rise in real terms within their plans.  (They may call it “investment” but it looks like the cost of interest on national debt and social security hand-outs to me.)

Their claim that spending will rise amazed me as it just seems so comprehensively foolish to all external experts.  However,it was said in the Sunday papers that there is a belief in the Labour party that their northern voters will vote for the party that is committed to spending not “Tory cuts”.  In essence it is a ruse to try to get people to hate the Tories rather than an honest statement.  Perhaps that article was biased but it is a signal that Labour will have to raise taxes further if the books are to come back into balance – and the Tories might do likewise (+ cut spending) 

In any case, the point I wanted to make was that the “balancing of the books” will be tricky for any Government and I don’t think for a minute the opposition has a magic wand.  So, everybody has to assume we are likely to be saddled with high tax rates for some years.  Just keeping pace with servicing the interest on our national debt will be awkward – this cost is what Gordon Brown used to call the “price of failure” back in 1997 - It is ironic that we now face a much higher “price of failure” than he inherited in 1997.  Blaming the “global circumstances” is a good excuse but the point is that the over-spending was in place without that – a point Mr King at the Bank  was poignant enough to highlight last week – the deficit is not ALL the result of the global financial crisis.

Turning back to the world of tax it is worth remembering some of the “tax news” stories that are bubbling away –

1.      VAT will go back up at the end of the year – 17.5% again or 19%/20%?  (my money is on the latter).

2.      Capital Gains Tax remains at 18% - but for how long?  I’m a doom-monger, but that rate seems too generous to last – and it’s 10% in some cases for business assets.  For residential property it remains possible to “flip” your main residence to save capital gains tax and this is useful for people with multiple homes.

3.      Inheritance Tax – the Tories committed to increasing the nil bands – but will they, if they come to power?  Always a tricky planning area this one – as rules change over time, but it’s never too early for a courtesy chat with Sheena McDonald (our IHT planning senior manager).

4.      Tax avoidance strategies.  As the personal tax rate looks likely to reach 50% for the highest income bracket, we have noticed more clients interested in strategies to avoid the top rate that go beyond the usual planning and mitigation.  In short, higher tax rates make people more aggressive in their determination to avoid unfair levels of tax.

5.      Business Support Service – a large number of taxpayers have taken advantage of the HMRC initiative to allow negotiated spreading of tax payments.  It appears to work well (mostly) and it is almost amusing that on the one hand there is a team that works with taxpayers but that if you are not using this service and fall behind you face a merciless and relentless pursuit by HMRC officers.

Turning to the expenses scandal -

Mr Darling is our Chancellor.  He and Mr Brown have continuously driven the tax system forward with the stated intention of removing both evasion (illegal) and avoidance (legal). 

Brown and Darling have referred to tax avoidance as unacceptable and unfair.  Budget after Budget referred to the “right amount of tax” and the distortion and unfairness caused by people who seek to avoid paying the right (maximum?) amount of tax.

These statements would, to an ordinary person, suggest that if a taxpayer only complies with the letter of the law that is not enough.  If they comply but use the rules to avoid tax this is unacceptable.  In recent years there has been a shift both in case law and within the tax legislation to try to make it clear that taxpayers should work within the “intent of law” as well as the “letter of the law”.

As a result of this shift and the consistency of the “tax avoidance is wrong” theme, I was really very angry that so many politicians (including Mr Darling) have been using the small print of the capital gains rules along with the expenses systems to create tax free (and taxpayer funded) capital gains on property.  It seems that the defence offered is

“What I did complied with the rules.  I have nothing further to add.”

I find it almost unbelievable that there is no shame.  I would encourage clients to “flip” their capital gains main residence to save tax so I may appear to be a hypocrite but bear in mind it is not me that writes the Budget and who has been banging on about unacceptable avoidance for 12 years.

I read a view saying the problem we have is that we have had 12 years of endless new laws for everything.  It seems there isn’t a problem that can’t be fixed by a new law.  In tax, in particular, this is true.  The Budget and PBR are a twice yearly feast of legislation.  Old laws are rarely repealed.

Why are so many new laws needed?  It seems that the Government organises itself around the creation of a “culture of compliance” (with the state) rather than a “culture of conscience”.  It seems people are not to be trusted in any way, that every minute aspect of what is done must be monitored, legislated for and then policed in some way.  If that sounds like 1984 I apologise but now that HMRC can come to your house night or day without a warrant (if you use it as an office) I think it fair to challenge the assertion “it’s a free society”.

In any case, few doubt there were always some MPs who were “playing the game” on expenses.  However what seems to have evolved in the recent years is a widespread belief amongst MPs that you really ought to use the expenses rules to maximise your personal wealth whether “conscionable” or not.  It was seen as a top up part of the pay deal really.

So, the Government should not be surprised that people organise their affairs to minimise their tax bills within the “letter of the law”.

“Look into the mirror” I would say to the MPs.  Ask yourself if your own approach to public money is beyond reproach in “all conscience” rather than just compliant – and do this before you talk about unacceptable tax avoidance. 

To conclude, I do not blame anybody for trying to avoid taxes.  In my view taxes are a levy on society.  Taxes are needed to fund the areas in society which can only be organised properly through being managed centrally. 

The problem is that it now seems the machinery of state is so big it has become the “society”.  There is a feeling that politicians see money within society as all being available to them and that there is a decision as to how much a taxpayer (“a worker”) is to be permitted to keep.  This is the feeling that arises in a heavily taxed, heavily regulated society where a very high proportion of the populace is in one way or another in receipt of money from the state – whether via employment, benefits or via the “tax credits” system which sucked millions of people into a culture of state dependency in the name of social engineering.  It seems that the legacy Mr Brown may leave is a country where there are too few people in the “productive” side of the economy making money to support the “unproductive” public sector (and pensions).  Until the balance is tipped backwards it really is hard to see how the UK can make a strong and fast recovery.  The 50% tax rate is hardly a “selling point” to encourage people to come to the UK and help make a difference, particularly in the City of London where the banks strategic HR  decisions for their top players really are played out globally rather than locally.

The comments above are the personal comments of Donald Parbrook, our tax partner.  They are not the views of the firm or any other partner.  Readers should always seek individual tax advice.