Budget 2010 - I am not going to say “me too”

One usually annual problem for tax practitioners is that we are expected to have instant knowledge of every bit of information announced in the Budget almost straight away. There was in fact very little of substance in the March Budget of 2010, which is not surprising given that we are having a General Election probably on 6th May, and what Chancellor would announce anything unpleasant and painful in such a situation?

There is no point in publishing here a commentary on the Budget announcements. The newspapers have covered what there was in depth, and for a more insightful examination of the Budget scraps I recommend AccountingWeb.

The real Budget will be from the post-election administration in May. It is going to hurt, whoever delivers it, but we will have more certainty that measures already announced will actually come in, and will know about those new ones as yet unannounced. That is all!

Dodging the Excise Men – encouraging a tax evasion society

In my business we frown upon tax evasion. It is our duty to uphold the law through helping our clients in their self assessment of their income, profits and their company accounts. We have to tread a firmer line than Joe or Jo Public, though unrepresented taxpayers may make mistakes in the Revenue's favour as well as their own. It is my experience that they do.

This week we have seen further hikes in taxation, principally through National Insurance and more obviously the return to 17.5% VAT. Personal Allowances are frozen for next year, so there will be some increase in the tax take through fiscal drag if there is any inflation in the interim. We will have to see. The Government has to balance the books having borrowed and spent so much on the banks and on the reduction in VAT this past year, the latter with no perceivable effect on the economy as many of us predicted in November 2008. It has to be paid for, and the full horror of the eventual deficit has yet to be revealed, and will only be known after the election next May, when either the Tories will be biting the bullet amidst squeals, or New (Old) Labour will have to come clean.

In the past, the higher the level of taxation, the less actual tax take. The lower the rates, the higher the honesty level and the better the tax take. This was seen notably in the tax-cutting eighties in the UK and especially under Reaganomics in America when the IRS profited greatly from lower rates of taxation.

People are going to be much less willing to pay their legal dues and HM Revenue & Customs do not have the resources to enforce payment through more investigation. I am not sure they even have enough resources (people) good enough to deal with the Liechtenstein Disclosure Facility. If you want a steady flow of anything including tax, you need a reliable channel. If you hike up tax, especially with HMRC's technical staff pared to the bone it is like trying to collect rainwater in a cup. In a deluge your cup will overflow. Most of it will escape. You need a measured channel and that means a more prosperous economy with a population willing to pay tax rather than driving more people into dishonesty to feed their families.

I think we will inevitably see a return to more dodgy dealing, and it will become popular like the public support for smugglers against the Excise Men in the eighteenth and nineteenth centuries. You will get more questions in shops such as “Do you want a receipt because I will have to charge VAT? Can you give me cash?.” and we know into whose back pocket those notes will go. The trouble is the tax which should have been paid by the trader will be coming out of your and my back pockets instead. How can we have got back to the bad old days?

© Jon Stow 2009


References

Smugglers and Excise Men
Liechtenstein Disclosure Facility

New tax amnesty and old habits

We are starting to hear a little more about the new tax amnesty in the UK, called by HM Revenue & Customs the “New Disclosure Opportunity (NDO),” which follows on from the 2007 amnesty. Now we know that since the original amnesty, which followed on from HMRC’s victory in the Courts over the UK banks defending unsuccessfully their Channel Island branch customers, HMRC has come by a lot more information. Indeed I can infer from what I have heard on the grapevine that the acquisition of information concerning the Lichtenstein accounts has borne fruit, and will continue to do so. Therefore I think that the NDO is aimed at this particular tranche of (non) taxpayers and may be the reason for the bullish £2Bn tax take punted in the Daily Telegraph report.

I guess my advice to the miscreants would be to grab the 10% fixed penalty (plus interest on late-paid tax) while they can; of course my advice is always to come clean because at least in theory, the more tax the fraudulent evaders have to pay, the less the tax burden for the rest of us (I wish). To my mind, failure to pay thousands or millions in tax which is properly due to the Exchequer is little different from robbing a bank or stealing millions in gold bullion.

There are those who have been caught already between amnesties, which is bad luck or just desserts for not having come forward the first time. There really will be no excuse for lying low in the next amnesty, and to be honest (me, not them) they would be well advised to talk to their tax advisers, accountants or lawyers now in readiness to make complete disclosures. If they do not, or if the disclosures are incomplete then it may well mean jail time (being British and pedantic I would like to say “gaol time”). Still, it might be hard to persuade die-hard evaders to put their hands up.

I am not taking the Revenue’s side so much as the side of truth and honesty. That said, if anyone wants to speak to me with a view to their coming clean on their undeclared income and gains, I will be pleased to represent them in dealing with HMRC as long as I am satisfied they wish to make a full disclosure. Naturally I offer a very discreet and totally confidential service.

Property flipping and knee jerk reactions

I must admit that the publicity about some Members of Parliament with two or more residences changing their designated main residence to one they are about to sell has me a little concerned because of all the publicity around it, and because of the public's ire. The principal residence capital gains exemption is there for good reason, and whilst as with any rule it might be possible to exploit it to one's advantage, the main purpose of electing as to which is the main residence is actually to prevent hardship or difficulty. Often people acquire a second property through the necessity, perhaps related to a job or through inheritance, and electing as to which property is the main residence avoids unnecessary debate with HM Revenue & Customs at a later date. If a large family home were to be treated inadvertently as the second property, then upon moving, a large tax bill might prevent the purchase of a suitable replacement with similar and adequate accommodation. There has to be a rule determining which property attracts the exemption. Of course the system might be manipulated, but it is not a “loophole” as many commentators have described it.

If it is thought that MPs or ordinary taxpayers are taking serious liberties with what amounts to serial property dealing, then HMRC can look at the background and might believe that they are participating in an “adventure in the nature of a trade”, the profits of which would be liable to income tax, so it is not sensible or true to say that the tax man or tax woman does not have some powers to clamp down. With all the publicity MPs have received, those who have abused the system more seriously may certainly expect to receive letters from HMRC, who read the newspapers like anyone else. I should be concerned if there were some sort of knee-jerk clampdown emanating from Gordon Brown or Alistair Darling which might catch and be unfair to the innocent taxpayer.

Any system can be used or exploited. Readers of this piece might be interested to read about the late Frankie Howerd's ex-partner using the new Civil Partnership legislation to avoid Inheritance Tax and pass his estate tax free to their “son”. It is very ingenious, but just because rules can be exploited and manipulated by the clever or even the unscrupulous does not mean that they are wrong in principal or have to be scrapped in favour of some onerous and unfair regime which is detrimental to the greater “innocent” population.

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Exorcising ghosts

Whilst on the subject of Hamlet's father's ghost, in my post “As ye sow” on 13th of this month, I mentioned the spectre of income shifting legislation and was worried that it might be sneaked in whilst we were looking at the drastic measures being introduced to save the country from ruin. No, it's not funny.

In the PBR we were told:

"The Government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax, known as income shifting. The Government has consulted on this issue but, given the current economic challenges, the Government is deferring action and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review." 


I explained a year ago how fundamentally inequitable such measures would be – see here.
My sources tell me that the Treasury and HM Revenue & Customs think that implementation of any such legislation is impractical and too expensive to administer. Phew, what a relief! I hope it's true.

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A hard taxing week, Horatio!

Readers of this column know that I am not a great fan of the Government’s economic and taxation policies, so may well be expecting me to take another swing at the Chancellor and his organ-grinder boss. However it is true to say that my disappointment at the content of the Pre-budget Report given last Monday by Mr. Darling is not because I would oppose any of his policies on principle, but because I truly believe that the measures announced are not the right ones, and that they are again treatment of the symptoms of the economic malaise, and not of the underlying cause or disease.

There were announcements of increases in benefits such as Child Tax Credit from January instead of April, and additional earlier payments to State Pensioners, and this type of thing does put money into the economy, though it will very likely have to go towards higher fuel costs compared with this time last year, and help pay off any overspend at Christmas. However, the disappointing reality is that many people are very hard up and pretty much all the increase in benefits is likely to be mopped up.

Of course there is the very tight squeeze on credit following on from the banking crisis, and I am not going to rehearse the background to this other that to say it might have been a lot less serious if the Northern Rock crisis had been addressed properly in September 2007 when it came to a head, and not at the beginning of 2008. There is however a shortage of money to spend, which is why I am confused as to the thinking behind cutting the main VAT rate from 17.5% to 15%, albeit in time for Christmas, with a guaranteed rise in Employers’ and Employees’ National Insurance from 2011. Naturally the latter rise will raise billions towards the borrowing the Government has embarked on to spend its way out of this mess but to me it highlights muddled thinking.

We all agree that there is not enough money being spent to keep the economy going and keep people in work. However, surely the cut in VAT on what will be largely imported consumer goods relates to voluntary expenditure which people anyway are reluctant to make. It might save a few retail jobs in Currys (though DSG are not doing so well) but what people really need to spend money on is food and fuel. Food is zero-rated for VAT purposes and domestic fuel and electricity keeps the 5% rate. I suppose the thinking is that people will spend money on those things because they have no choice, but the logic behind increasing the duty on vehicle fuel to compensate for the VAT cut makes not much sense even in a twisted green world. What it will do is increase the price of food because it will be an extra expense on the food retailers who could recover the input VAT but not the fuel duty.

The decrease in VAT on the imported items will be offset by the higher import costs because of the decline of the pound as a result of the economic downturn, so in cutting the VAT rate, Mr. Darling bears more than a passing resemblance to Don Quixote. Not a pretty sight!.

What scares me is the terrible price we are going to pay. The VAT cut will be very expensive for the Exchequer, and will be one reason why the NIC rate is going to go up in a couple of years if Mr. Darling has his way. The fact is that tax does have to go up, but as NIC is such an easy tax to manipulate I am at a loss to understand why it has not been used as a tool now.

If instead of cutting VAT, Mr. Darling had cut NIC at least for next April that would have given most employees and immediate boost and if Employers NIC had been cut that would have been a help to the cash flow of small businesses who are still the backbone of the economy, even if the Chancellor does not understand them. Oh, yes, losses can be relieved back three years now for tax purposes, but many small businesses cannot sustain losses for long in this climate and any sole trader with significant losses would most likely be stacking shelves in Tesco (not that isn’t an honourable job) rather than soldier on with negative money for any length of time.

The trouble is that for small business it is on the whole jam tomorrow. Small companies have to make the losses and wait for repayments down the line; it does not help them now. Never mind, the corporation tax rate for any small company making a profit next year is staying at 21% in April rather than rising to 22% as had been intended; a year’s reprieve. Now, only a couple of years ago the rate was 19% and I have never read any justification, official or otherwise, for the increase in the small companies’ corporation tax rate. Increases in allowances for plant etc. are generous this year and the ongoing rates are also reduced, but they assume that companies have money to spend. If they do, they had best spend the money on marketing, because there are opportunities still if business owners remain positive.

I just wish that the Chancellor and his cohorts had thought about the real world, not cutting taxes on imported goods that may be out of our price range now anyway. You cannot pull money out of people’s pockets to spend it on what they don’t need if the money isn’t there. We need early concerted action to cut the cost of all our mortgages (surely the banks want to retain control over their destiny rather than succumb to what John Prescott called Old Labour policy c 1947) because that is what is needed to help revive the economy. Otherwise the whole “cash injection” looks misdirected. An NIC cut would have been so useful, and more immediate than the VAT effect (if any) even if it could not happen until April.

I guess the lesson is that it is more important to be doing something positive than to jump about appearing to be doing something. I say this more in sorrow than in anger, because I would love the Government’s strategy to work for all our sakes. I just fear that we will pay the price without ever seeing the goods.

© Jon Stow 2008
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As ye sow...

It is always difficult to write in advance of the Pre-Budget Report, though we understand that it will be happening shortly. In some past years the PBR has been in October, but the Government would say it has had other things on its mind; in other words the “credit crunch” and the apparent impending recession. Of course, it depends on what business you are in as to whether you think there is a recession now, and the effects will bite on different people and businesses at different times. However, clearly the collective spending power of the nation will be affected.

The delay in the PBR is we assume because the Government is thinking about what measures it can take to address an immediate problem. Normally the twice yearly Budgets we have got used to take a longer term view. In the meantime we have been left with the spectacle of the Bank of England desperately cutting lending rates in an attempt to kick start the economy or at least relieve beleaguered mortgage holders (most of us) and ironically stimulate the housing market. Of course this points to a good part of the problem. Anyway, the Bank says it is cutting rates as it has most recently with a 1.5% reduction because it has calculated that inflation will fall below 2% anyway, whilst we understand that the economy may shrink by half a per cent a least in the next year; maybe more depending who you believe.

It is nice that the Bank has remembered that it was supposed to be using the interest rate tool as a way of controlling general inflation. In recent years it has wound the rate up in order, it said, to control house price inflation specifically, whereas before about four or five years ago it seemed to look at the general inflation rate, which is what we understood was important. Indeed it was important, and therein lies part of the damage that has been done. The general lending rates for business are what has caused a good deal of damage to the economy underneath whilst the Bank has been looking at house prices, and now, surprise, surprise, businesses are struggling. Apart from the construction industry and retail sales fueled by easy credit, those of us out in the real world know that the business environment has been slow for about three years because of the lack of genuine spending money in the economy..

The Bank of England, in increasing interest rates over the last couple of years has of course been treating the symptoms of the disease, house price inflation and consumer spending, rather than curing the disease, which has been the ridiculously easy credit available. Of course mortgage lending regulation had been hived off to the Financial Services Authority, an impotent and useless quango as we know form their failure to regulate properly the pensions industry, but even so one would have thought there might have been some dialogue. Of course it would not have saved the US sub-prime market from coming to grief, but we might have been much less badly off in the UK if people had not been defaulting on mortgages they could not afford and never should have been given in the first place.

So where does this take us on the tax front? Business does not react well to jam tomorrow, so any new stimulus to spend money such as a hoist in capital allowances will not help in the short term, any more than a cut in corporation tax for small businesses (or delaying the current locked-in increase to 22 %) would help us now. The Government has already painted itself into a corner even with the current level of borrowing. Remember also the fiasco requiring the Chancellor to increase the individual personal allowance for 2008-09 to compensate basic rate taxpayers for the loss of the 10% rate band? Will this have to be locked in for future years at further cost to the Treasury and us when the chickens come home to roost and the borrowings have to be repaid?

A quick stimulus to the economy has to put money in people's pockets now. Anything of this ilk will be very costly indeed. What would be most effective would be a cut in Employer's National Insurance because this would help business now. Schemes such as the Conservatives' idea of cash to business to employ the longer-term unemployed might to a degree be self-funding but even this will have a delayed effect.

Anyway, the Government and Gordon Brown are now reaping what they and the Bank of England have sown. In the end, we shall all have to pay. What really worries me is that MPs and the financial press will take their eyes off the ball when it comes to the Pre-Budget Report and the Chancellor will sneak in something nasty, such as a revised attack on family businesses with the income-shifting proposals we saw this time last year as a reaction to the Revenue defeat in the Arctic Systems case. Such a thing would hardly lift the mood and sentiment in small businesses, but the Treasury hitherto has not understood the reality on the ground, and is unlikely to now in the light of a “painting over the cracks” Mini-Budget.

© Jon Stow 2008

Domicile puzzles

Then again, what are we to make of the so-called reforms relating to the taxation of non-domiciled residents in the UK? This was one of the policies the Government has pinched from the Tories following the policy announcements at the Conservative Party conference. The Tory proposal proved that the Government does not have the monopoly on misguided (did I hear you say daft?) policies. So why borrow this one except to trump the Opposition?

During its ten years in office the Government has discussed several times changing the rules concerning non-domiciled persons, which in simple terms are those whose background or family history might suggest their natural homeland is not one of the countries comprising the United Kingdom. For a more detailed explanation see here. A study was made in 2005 and there was a consultation, but we had started to suppose that the Treasury saw the whole issue as a political hot potato.

Briefly, unlike domiciled resident individuals who are liable to UK tax on their worldwide income and capital gains, non-dom residents have up to now been taxable on their UK income of course but not their overseas income and gains except to the extent of the amounts actually remitted to the UK. It had been the view of many that if taxation of worldwide income and gains were extended to non-doms many of our richer guests including oil billionaires would take themselves and their spending power elsewhere; hence there had been no amendment to the rules since the first review was announced way back in 1949.

The new rules effectively bring most non-domiciled residents into a regime of being taxed on worldwide income unless they pay annually to HM Revenue & Customs £30,000 plus whatever tax is due on remittances as before. Of course the super-rich will go for this unless they see this as an unprincipled betrayal and leave the country. Those who will be hit are the non-doms of moderate income who have brought their labour and investment to the UK, perhaps employing people in their factory, workshop or restaurant; those who hope to retire in their homeland or elsewhere. Of course there are long-term resident (seventeen years plus) non-doms who already knew that if they died within the UK their worldwide estates would be liable to inheritance tax.

The Government talks a lot about fairness. One might say that it is not fair that some taxpayers of a particular class pay less tax than others with similar income. Is it fair that the very wealthy can buy off HMRC with a £30K bribe or paying annual protection money? Is the Treasury reduced to acting like the Mafia or an East End gang? Worse, is this not another example of the total lack of coherent fiscal policy? What on earth is going on?

© Jon Stow 2007