Much has been said about the optimistic nature of the Chancellor's growth forecasts in last week's Budget, but I detect a deeper malaise. Whatever one may have thought of Gordon Brown's tenure as Chancellor (increasingly looking like a Golden Age in retrospect, probably not least to him) there was a degree of intellectual rigour about his tax policy, which even a tendency to ill-advised tinkering could not entirely disguise.It was, at least to some extent, clear where tax policy was going.
This sense of a thought process underlying fiscal policy now appears to me to be entirely absent under Alistair Darling, the evidence including the following:
1. The backtrack on capital gains tax simplification under pressure from the small business lobby.
2. The farce surrounding the abolition of the 10% rate.
3. The backtrack on anti-income splitting legislation.
4. The 'buy your way out of tax for £30,000 per year' non-domicile regime.
5. The abolition of the favourable tax regime for furnished hokiday lettings.
6. The revenue-raising measures and the tax mitigation opportunities they create (see below).
I can only really see two threads running through the Darling era at #11 Downing Street, neither of which reflects entirely to his or the Treasury's credit. The first is a large element of political calculation, of which I think I can detect three distinct elements, shifting over time:
1. The earlier stages of the Darling Chancellorship were characterised by a tendency to seek at all costs to avoid upsetting large groups of taxpayers (also known as voters). Place numbers 1, 2 and 3 firmly in this category, as in each case the measure stood to increase the tax burden on those who are not necessarily the wealthiest among us (in particular #2) and on large numbers of people. After all, there is an election to try to win within just over a year at the latest.
2. The introduction of measures designed to make life awkward for HM Opposition, such as the 2010-11 higher rate income tax and personal allowance changes and the abolition of higher rate pension contribution relief. Whilst it is temporarily diverting to watch the Tories offend their core supporters, I am not enamoured of this as the basis of fiscal policy.
3. On my really cynical days I have characterised the 2009 Budget as a Budget to win the 2015 election. Here I envisage senior Labour figures giving up all hope of winning the 2010 election, and leaving the incoming government with a monumental economic mess to sort out, for which human nature says the electorate will blame them for failing to do come 2014 or 2015. This is perhaps an unkind way of saying that the Chancellor has no idea what to do, and is thus intent on appearing to do all sorts of things, without knowing if they will truly help.
The second thread is also rather cynical in its way, but perhaps rather more cunning. By leaving some of the following planning opportunities available, the Chancellor may calculate on encouraging people to accelerate income, and thus the payment of tax liabilities. That is the sort of thinking I can approve of, although whether it will work on a large enough scale is very doubtful.
You will by now have deduced that in my view there are significant opportunities to mitigate tax in respect of the Chancellor's main revenue-raising measures. In simple terms these are as follows:
1. Income splitting
It was all made rather easy here, although the government has only shelved this because of the recession, they tell us, and not because of the large numbers of voters who would be affected or the sheer difficulty of putting in place any effective legislation in this area. However, it has only been shelved, and it would be a brave person who assumed this will never rear its ugly head again. Thus maximising dividends within the basic rate band whilst the planning opportunities remain looks an attractive option, assuming the profits are available, of course.
2. Enhanced loss carry back
If one wishes for evidence of confused Treasury thinking, one can profitably look at this legislation. When it was originally introduced, the accompanying press notice said that this would be particularly helpful for start-up businesses caught up in the recession. It is in fact of no use at all for such businesses, because they have a better form of relief, unlimited in amount, applicable to losses in the first four years of trading. It might be advisable if Treasury press notices were actually written by someone who knew something about tax.
The other notable feature of the relief is that it appears to be predicated on the idea that the recession covers a different period depending on whether you are an incorporated or unincorporated business. Assuming annual accounting periods (see below), the recession for incorporated businesses will run from 25 November 2007 to 23 November 2010, and for unincorprated businesses from 7 April 2007 to 5 April 2010, those being the periods which could potentially make up an annual accounting period covered by the relief.
The latter is slightly extreme, but plenty of sole trades and partnerships have year end dates of 30 April (which maximises time lag between making profits and paying tax on them) and will thus be entitled to the relief for accounting periods beginning on 1 May 2007, when the word 'recession' was far from the lips of even the most pessimistic economist, as far as I can recall. This illustrates my point about intellectual rigour very graphically, I think.
In terms of planning for the relief, there appears to be nothing preventing a taxpayer from changing year end to ensure that a loss-making period falls within the above time limits. Thus a company with a December 2010 year end might see the attractions of making up 10 months accounts to 31 October 2010, or a partnership with a 30 April 2010 year end might decide to move to a fiscal year accounting period by making up accounts to 31 March or 5 April 2010.
Or of course it might incorporate to extend its 3 year loss carry back window by 7 months. If it did that it could extend its period for 3 year carry back from 1 May 2007 to (say) 31 October 2010, and also remove the £50,000 restriction on carry back of losses of the final period of partnership trading under the terminal loss provisions. So lots of planning to be done here, methinks.
3. Cars and capital allowances
Cars lose their value very fast, particularly if they are expensive. If you change your car regularly, you lose a lot of money on a regular basis. Under the old capital allowances regime you obtained relief for this, assuming the car cost more than £12,000, by way of a balancing allowance on the single asset expensive car pool in which the car was placed for capital allowances purposes. This was usually substantial, because the writing down allowances available on the car were limited to £3,000 per year.
However, under the new regime cars are placed into capital allowances pools, and thus no balancing allowances are available. If the company car needed a final nail in its coffin following the advent of the CO2 benefits regime and the hikes in car fuel scale charges, here it is folks.
Because, you see, company cars cannot have private use, and must therefore be pooled. Privately owned vehicles, however, almost certainly have an element of private use. Indeed, if your car exceptionally does not, I suggest you develop some. If a car has an element of private use, it still goes into a single asset pool, and you still get a balancing allowance on sale. Even better, you also do not suffer the £3,000 per year allowance restriction.
Unfortunately employees cannot claim capital allowances on cars used to drive business mileage in the course of their employment, but what they can do is claim tax free mileage payments of 40p per mile for the first 10,000 business miles and 25p per mile thereafter. So think again about company cars, and whether it would be better for employees to provide their own vehicles.
4. VAT time of supply forestalling rules
Attempts to anticipate the increase in the standard rate of VAT from 15% to 17.5%, due on 1 January 2010, will run the risk of attracting a 2.5% additional VAT charge. This forestalling charge will apply in 3 circumstances, each involving the issue of a VAT invoice or the payment for goods and services prior to 1 January 2010, where the supply will not take place until after that date:
1. Where the supply is between connected parties.
2. Where the supplier bears the cost of the delay (i.e. a VAT invoice is issued but payment is deferred until the supply takes place).;
3. Where the supply does not take place until 6 months or more after the issue of the invoice or the payment date.
Apart from making the slightly facile comment that anything up to 6 months is OK under 3, I will merely point out that those (such as accountants) making continuous supplies of services determine their own tax point by issuing periodic invoices. So when we bill all our work in progess on 31 December 2009, remember it's for your own good!
5. 50% higher income tax rate
There has been much whingeing and wrigning of hands about this, but note above all the voices saying that this will not raise much if any tax. This is not so much because there will be a massive exodus of rich taxpayers heading for the UK emergency exit but because those with income over £150,000 will often be in a position to determine, at least to some extent, what their level of taxable income is. This is particularly true of director / shareholders of unlisted or family companies, who can determine their own salary and dividend levels. And of course, as mentioned above, income splitting is alive and well, and likely to be of great interest to those facing a 50% income tax liability.
Highly profitable partnerships will presumably look with renewed interest at the benefits of incorporation, particularly where there are professional barriers to entry as a partner preventing income splitting, which would be unlikely to apply to shareholdings.
Taxpayers may also look to invest for growth (18% capital gains tax) rather than income (50% income tax), particularly with stocks and shares at low values.
6. Furnished holiday lettings
I am particularly angry about this change for two reasons. Firstly, with sterling at historically low levels, tourism is likely to be one of the relatively few industries likely to do well in the recession, both from UK residents priced out of foreign holidays and overseas residents attracted by the favourable exchange rate. So what does the government do but deter people from providing accommodation for the increased number of holidaymakers by removing the beneficial tax regime applicable to FHLs. This makes no sense whatsoever, but still on that basis makes more sense than the sensationally spurious reasons given for the abolition of the reliefs.
Usually the government has to be dragged kicking and screaming by the EU to amend our tax legislation to remove discrimination against other EU states and their citizens. However, in this case they volunteer to do so, which should immediately make us suspicious, on the grounds that the restriction of the FHL regime to UK properties only is a breach of the EU treaty. The implication is that the extension of the regime to non-UK properties will be a bonanza for landlords with foreign property, and that the favourable regime will therefore sadly have to be withdrawn.
Back I come to intellectual rigour, because this reasoning either suggests that the Treasury is collectively stupid, or even worse, that they think that the electorate is. This does not stand up to analysis for a second. Under every Tax Convention between the UK and other EU countries, the country in which real property (i.e. land and buildings) is situated retains the right to tax income and capital gains arising from that property. Thus the UK, where the landlord is UK resident, collects tax only to the extent that the UK tax bill is higher that the tax bill in the country where the property is situated. To characterise this as a major risk to the UK Exchequer is transparently dishonest, and is a veil for a penny-pinching measure which, as described above, puts at risk one of our few potential growth industries. In the face of some stiff competition, I think this is the most contemptible tax measure that this government has been responsible for.
7. Pension contributions
Finally in chronological order of implementation, I come to the restriction of tax relief on pension contributions for taxpayers earning over £150,000. Coming from a government which spends much of its time urging us to provide for our future retirement this might appear to be a bit rich, but then I suppose they need only mutter the words "Sir Fred Goodwin" (to speak of someone who is more than a bit rich) to get public opinion onside on this one.
This restriction, which takes the form of an effective restriction of tax relief to the 20% tax rate, applies to employee and employer contributions in excess of the higher of regular contributions level for 2008-09 and £20,000. In the case of employer contributions this will involve a 30% tax charge, on the basis that the top income tax rate will be 50% and the basic rate 20%.
In any case, if Alistair Darling is still Chancellor on 6 April 2011 something very strange will have happened politically in the interim, so I suspect it will be George Osborne's decision as to whether to proceed with this change (not a prospect that fills me with glee either - see previous posts).
Summary
I have finally run out of patience with this government's fiscal policy, which has become haphazard, opportunist and illogical. I fear that the current financial crisis is beyond their capacity to deal with, but then I have no confidence that the current Opposition could do much better a job, particularly with the current shadow Chancellor at the helm. Vince Cable for Chancellor in a government of national unity anyone?
Mark Simpson
28 April 2009
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