Saturday 15 December 2007

Dickering Darling delays amending capital gains reforms

What are we to make of Alistair Darling's delay in the announcement of any amendments to his proposals on capital gains tax “reform”? He told the Commons on Thursday that he was postponing any decision on change until the New Year.


In my view, commentators tend to hang too much on what might be motive. There was, I am sure, genuine concern from the Chancellor and the Government that they had put their foot in it and made a serious misjudgement, and I am sure that that Treasury Civil Servants will have felt the wrath of their political masters over this matter. There was of course quite a “Clever Dick” or maybe “Clever Alistair” element in the Pre-Budget Report last October, which was a real “rabbits out of the hat” performance of the type we usually associate with the Budget itself. Of course, many Budget tricks have little impact and are designed for show. Unfortunately in many ways, the particular announcements made in October do have genuine impact and we all know a couple were designed to trump the policies announced by the Conservatives at their conference.


The reform of the position concerning treatment of non-domiciled taxpayers (or non-taxpayers) is not very intelligent any more than was the Tory proposal, but I will return to that another time. The Inheritance Tax change also borrowed from the Tories is hardly a give-away except in the sense that it will save some legal fees related to will making.


But back to capital gains tax. The Government proposals sweep away a raft of complications in calculation of gains, some of which have been in place since 1965, and yes, they will be simpler to administer or for taxpayers and their advisers to calculate gains. However, it is hard to see why the taper relief for business assets is being replaced by a flat rate, therefore increasing the effective rate of tax for most sellers of such assets from 10% to the 18% flat rate, an increase in tax of 80%, while at the same time reducing tax on investment gains from between 30% and 40% to the 18% flat rate. It is fine for investors, of course, but seems to involve little insight in an understanding of the realities of the change on the part of the Treasury. Why 18% anyway, which is a strange rate? Maybe someone was fond of the construction industry income tax flat rate for subcontractors which was in force until April this year, and wanted to keep the number on the tax tables somewhere.


Of course, many buy to let and other property investors will be delighted with an 18% rate. Investment in property has been booming under the current Government since the late nineties. My own theory as to the reason (partly because it was my wife's and my reason) is that this is the result of:


  1. the disastrous consequences for the pension industry and people's pension funds of the removal of the dividend tax credit refunds (Gordon Brown's first Budget in 1997)

  2. the other pension disasters brought on by subsequent funding problems for many pension schemes,

  3. the regulatory failures such as Equitable Life (where many lost some tens of thousands) which whilst it was not entirely the Treasury's fault, it played its part.

So I believe that the popularity of property investment amongst the less wealthy is as a result of Government policy. Now, with interest rates so high, many are subsidising their mortgages to a degree, and few are making any income profit on lettings where they borrowed anything like the maximum. Income losses are the norm, though many will hang on (those who can afford it) for their hoped for capital gain down the line. The trouble might be those who cannot afford to pay the mortgages and will try to cut and run. That could cause the whole market to lose confidence, which has the potential for disaster.


So, back to the capital gains issue as it affects small business owners who may wish to sell, and the prospect of paying 18% tax after 5th April 2008 rather than 10% on their gains. Why the delay in announcing changes? Well, I am sure it is nothing more sinister than the Treasury not knowing what it is doing. People say”why is Government policy so against small businesses?”. Well, I don't think the Government is against small businesses. It simply has no policy, or at least no long-term thought-through policy with regard to small business in general.


I also think that ideas tend to come from different places.. The 18% capital gains tax trick comes from the Treasury Civil Servants (I speculate) who do not understand the old system and were anxious to have something they could understand, though they did not appreciate the consequences of their changes. The income-shifting document on which I commented last week is much more driven by HM Revenue and Customs, anxious to make up for the Arctic Systems defeat and to prove that their leadership knows what it is doing. This is coupled with HMRC's deep suspicion of small businesses, which it feels are mostly on the fiddle. Having had brief exchanges earlier this year with a certain someone who has had a recent promotion in the upper echelons of HMRC following the tax credit data loss debacle, I have the distinct impression that this suspicion is extended to the small businesses' tax advisers too. We were told we should be more helpful. In the good old days we tax practitioners worked in partnership with the Revenue to get things right (all right, there were some naughty schemes for the very rich, but most small businesses were a long way from being able to take advantage). Oh, the days when we could talk to someone in the Revenue who had a file, someone who would telephone to clear up a query, when it was all so much less confrontational!


We tax advisers should not all be tarred with the same brush, and neither should business owners in general.


What to do about business asset capital gains tax? I would have had a new acquisition base point of 5th April 1998 and abolished taper relief except for business assets, and I would be surprised if the cost to the Treasury would have been all that much, though I accept that part of the motive for the change announced was a tax raising exercise. Probably we will get some sort of retirement relief, maybe £100,000 exempt and then 18% flat rate. If we just have a £100K lower rate band that will be a stupid fudge which will not win the Government any friends (and it needs friends).


I just hope that whether under this Government or a future administration HMRC and the Treasury policy makers and planners do put together a coherent strategy for managing business taxation, and that Ministers take responsibility for their actions and for their failures. Here is an irony: Paul Gray as Chairman of HM Revenue & Customs did fall on his sword over the lost CDs crisis, even though this was not his personal responsibility. He deserves great credit for that, and I would love to see honour, principle, competence and vision, rather than suspicion, drive fiscal policy.


© Jon Stow 2007

No comments: