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Where now for UK Taxation? October 2009 by Donald Parbrook CTA
Lots of people are asking me where my blogs have been? Sorry - but I have been building up a head of steam for this one......
As usual- there's a sensible tax update document on the right hand side under "quarterly newsletter" -
http://www.milnecraig.co.uk/view_documents.asp?fld_document_section_ID=7
Who will pay for the folly and greed of the bankers? Who will pay for the failure of Brown & Darling to run the UK with a fiscal surplus in the good years? If I start with the view that the tax “take” in the UK will rise, I thought I’d ask where that tax hike will come from. The 50% rate for the rich is an insignificant financial measure really – undoubtedly doing more symbolic (and, in due course, actual) harm to the City of London as a place to make money (and don’t forget we get PAYE on all the fat cat pay) than is justified by the appeasement of the public who want to make the rich pay.
So, where can tax come from? Companies? The biggest international businesses are more internationally mobile than ever – the result of which has seen corporation tax rates drop considerably in the EU zone in the last fifteen years. It is also hard to see how corporation tax rates (and tax from companies in general) can be moved upwards – especially since migration from the UK has been a running sore in recent years despite the main 28% rate of corporation tax. An increase in tax on international companies could be tax revenue negative for the UK coffers as more businesses would go.
Personal income tax rate is tricky too – an increase in the main “higher rate” from (say) 40% to 45% might help – as might a return to a 25% (20% now) main rate. However, these are politically difficult and with the various national insurance hikes over the years, general increases in these rate would be a hard sell to the public unless combined with some serious austerity in the public sector (and, at last, some equitable pension arrangements in line with the private sector).
There has been a massive “bust” in public revenues – some obvious reasons -
- The asset price inflation (bubble) created additional revenue in the form of capital gains tax, stamp duty and the “wealth effect” – PAYE on bankers bonuses and bumper profits for companies involved in that bubble (e.g. construction and development trades). The Government mistook this temporary windfall as a structural increase in the economic output and, therefore, tax revenues. So, as the bubble bursts the tax tap is switched off. But Mr Darling and Mr Brown had thought their income was stable and rising – so they spent it all – even in the good years they spent more than they took in tax – they banked on never ending growth.
- The UK is heavily reliant on financial services – and therefore feels the effect of the “crunch” more directly than other countries. America and Britain were most successful in the bubble and have the lion’s share of the pain – a result of what was now obviously a naïve belief that mortgages and “asset backed securities” were “safe as houses”. Oops.
- Oil prices have been low, reducing receipts from that other cash cow.
- Less people are working, less PAYE, less spending, less VAT.
- VAT reduction to 15%.
The Governor of the Bank of England has already made it clear that some of our current deficit is not due to the banking bail-out, or the recession – some of it was (his words) “structural” i.e. we were already well into a deficit position even in the good years and we were headed this way anyway. Not only that, as we come out of recession tax will have to remain high no matter how much public sector “efficiency” is gained- since we will have to service the interest on our enormous national debt. The legacy of this Government’s failure to run a surplus in the good years will haunt our children and grandchildren as the Government Gilts being issued today become due for payment in decades to come.
I digress. Where is the extra tax coming from? Direct taxes are hard to increase as people and companies are mobile. There is only “so much” we can get from direct taxes before rate increases cease to raise more tax overall. Dennis Healey has said as much of late – and he presided over the highest rates we’d ever had, back in the 1970s.
So, it is hard for the UK Government to increase the tax burden on the mobile (companies and individuals) and, as a result, they will tax the static. This means that indirect taxation will have to rise. We already know the 15% VAT rate (the lowest allowed in the EC under normal rules) is going back to 17.5% in January. However, it is easy to predict that a higher rate will follow (20% would not be out of line with many other EC countries) and that other taxes on properties, fuel etc. will increase (a nice wee “carbon tax”?). The problem is that VAT and other indirect taxes generally fall hardest on the poorest. So, it really does seem likely that the ordinary worker will end up paying for the mistakes made by investment bankers and the current Government.
For note – here’s some other VAT Rates –
Ireland – 21.5%
Netherlands – 19% (1% increase postponed at moment)
Latvia – 21%
Hungary - 25%
Germany – 19%
France – 19.6%
Still feeling confident that 17.5% will be the new rate, and that it will last?
Electronic Filing – VAT and Payroll returns
Clients should be aware that from April next year VAT returns for most registered businesses will have to be filed electronically not on paper. This is an important change that has received little attention to date – it’s worth a look at the HMRC’s website -
http://www.hmrc.gov.uk/carter/compulsory-deadlines.htm
We are happy to help where we can.
Stamp Duty Land Tax – Property between 125,000 and 175,000
The SDLT limit for residential property is currently £175,000 – at which point 1% is payable. This was a temporary increase and on 31st December the limit drops back to £125,000.
VAT – 17.5% again – think about it – plan for it – spend now?
Individuals considering when to acquire a major asset (e.g. car, TV, conservatory etc) might think about buying in December not January - since VAT will increase to 17.5% on 1/1/10 (from 15%). It is an “open question” as to whether the rate will increase further quite soon (post election maybe?!).
Most VAT registered businesses will remember that the 15% rate is temporary. On 1st January 2009 the current plan is that the rate returns to 17.5%. It is worth noting that whilst there are some anti-avoidance provisions to stop serious abuse of the rate change, businesses may reduce the VAT charge for customers by encouraging them to pay early/invoice early etc.
We recommend that you read the HMRC guidance if you think this may affect you –
http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf
This blog isn’t the place to write up any guidance on this – but suffice to say that the rate change is a real pest for business and it’s probably worth a little patient reading to make sure you minimise your tax cost as the rate changes.
Pension Contribution Relief for High Earners
We know that the current Government wants to remove higher rate tax relief for those paying 50% tax from 6/4/2011. However, there are some horrible additional rules to prevent those earning in excess of £150,000 putting extra in now. If you contribute more than £20,000 to your pension scheme each year we recommend you speak to our (or your) financial advisers quite soon to discuss how best to manage your pension contributions.
The terrible thing about pensions is that we can’t afford the promises made to people in the past. The private sector has mostly had the pain and accepted this – the public sector has to be next. When state pensions were started the state pension age was above the average life expectancy at birth and the number of people over 60 was a very small percentage of the population. The demographic change is compelling – we all have to work longer and expect less. I think it fair to say that the current generation of retirees may prove to have been the lucky ones- catching a moment in time where the working population was able to pay for their retirement (final salary schemes) as well as saving for their own (defined contribution).
Capital Gains at 18%
At the moment we don’t appear to have too many clients with capital gains. But, it might be hoped that those who piled into equities at a time when the stock market fell below 4,000 might be “lining up” the gains.
The capital gains tax rate is 18%, and it’s still 10% for a few lucky souls who sell their family company/business (and a very few others). Alistair Darling created this lovely rate to simplify things. In my view it’s totally unfair that there is no indexation (inflation proofing) meaning that by holding on to assets over time, inflation decreases your “real” gain and increases your “real” tax bill. To follow – you buy land and it rises in line with inflation only – after 20 years you sell it – there is no real gain – but if inflation means the actual sterling sale price is double the purchase price, you’ll pay 18% on that gain – the Revenue manuals used to say “we don’t tax inflation” – would it surprise you if that paragraph has been removed?
In any case, the point here is that everybody is planning for capital gains not income – the wealthy will buy investments with low income yields and maximum growth. It seems to me that the inequity of 18% vs 50% is too great to ignore. I’m not a gambling man – but I’ll bet on the capital gains rate being higher than 18% within a couple of years – just a guess of course and I’d not suggest you rush to sell all your shares the day before the first “post-election” Budget – but I do wonder what will happen. I’ll assume Mr Darling won’t back-track on his 18% rate so soon after introducing it. Mr Osborne might not be so sentimental (if elected).
Construction Industry Workers- self employed?
You’d think they’d leave this hard hit sector alone- but there’s more consultation on bringing self employed workers into the PAYE net – watch this space – but I can’t see why they don’t just make the CIS deduction much higher and make self employed taxes more equitable with employed taxes- thus removing the problem! Greed by the fisc methinks – but they really are doing this the hard way.
In Summary….
I’ve had a few months without a blog – there was less to say and I have always said I won’t clutter your inbox with rubbish too often!
There’s other things going on in tax of course…the new amnesty for offshore accounts disclosure, the continued bedding down of the new extended HMRC investigation powers….all good fun for me… but (hopefully) rather dull for you.
So, in short- I’m gambling on VAT going up to around 20%, capital gains tax rates being aligned with income tax rates again and an emergency Budget by George Osborne around May/June 2010. I wouldn’t bet against the basic rate of tax going up to 23% or even 25% on a temporary basis – with maybe an increased personal allowance to ensure the poorest aren’t worse off.
In tax terms, the UK’s financial black hole meams Emigration never looked more appealing – but for the fact recent guidance from the HMRC makes it pretty hard unless you really do “sell up, pack up, and head off”. Last October you could have got $2.6 Aussie dollars for a pound. Today you’d get $1.75 – what does that say about UK and Australian finances?
As ever – the views here are the views of Donald Parbrook – and probably don’t reflect the views of his fellow directors or staff ! Always take real face to face advice before making any tax decisions!
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