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!

Late, late tax planning

The 2009 Pre-Budget Report in December signalled a significant number of tax increases in the UK designed to make up the significant Budget deficit following the banking crisis. For many or our clients there will be a significant impact on their finances.
-Income tax rates to rise and personal allowances to reduce for wealthier clients.
-Future changes to rates applicable for dividends, trusts and NICs.
-New 50% income tax band.

There are further complicated rules for pension relief restriction and the end of well-established tax breaks for furnished holiday lettings (currently enjoying business tax advantages). There is speculation about an increase in capital gains tax and I have heard different forecasts from various commentators.

We have about three weeks to do some quick planning which may mitigate in some part the higher tax payable on income receivable after 5th April 2010. It might be slightly less if restrictions are brought in with the 2010 Budget, for which we still await a date.

From 6 April 2010 there are higher rates of tax and fewer reliefs. Those earning in excess of £150,000 will be subject to a ‘super-tax’ of 50% on income over that threshold.

Furthermore, personal allowances will be restricted for those earning more than £100,000, at the rate of £1 for every £2 of income above that figure. As the current personal allowance is being frozen at £6,475 this means the full allowance will be extinguished at an income level of £112,950.

The gradual tapering of the allowance – within the narrow banding of £100,000 to £112,950 – means that where income falls within these limits, the effective rate of income tax is 60%.

In the current fiscal year ending in April it may be possible to convert income chargeable at 50% to gains chargeable at 18% or even an effective 10%. It would really depend on the circumstances of course, so no idle promises.

From 6 April 2010 there will be three rates of tax on dividend income. Where income falls within the basic rate band, the 10% tax credit will extinguish any liability, as before. The equivalent rate for 40% taxpayers remains at 32.5%, but a new rate of 42.5% will be introduced where income will be taxed at the new rate of 50%.

National Insurance contributions (NICs) are due to rise from April 2011 (a further year on), but if these go ahead as planned they will add another 1% to the rate, which is a significant uplift and may be a very sobering thought as people look ahead. Businesses could consider paying themselves in advance through salary or dividends, or paying their employees early bonuses but these are tough times from the point of view of cash flow. Still, any available option should be considered.

Our clients' finances and tax positions need to be looked at in the round; taxation of small businesses is inextricably linked to the reward and taxation of their owners and their families. Whilst high earners will bear the brunt of the initial increases, every taxpayer will feel the effect. These are tough times and tough decisions need to be made, although not to the long-term detriment of the businesses themselves. In addition, with a General Election in the offing we can only plan in the short term based on what we know now.

If you know anyone who may be affected make sure that their accountants and tax advisers are reviewing their tax positions in these next few weeks. Of course you may wish to talk to me about how I can help. Not everyone will have the flexibility to adjust their financial strategy, but it is worth checking.

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

Out with the old…

Like most other people in my business, nearly all things in my office are done online. The tax returns have to be submitted by FBI (file by internet); we can read the Revenue manuals online, download their booklets, read the professional magazines and have website communities of fellow professionals. In other words, we have access to every possible resource of information without resorting to the printed word. Then, if we need something printed, then we print it ourselves,

Many readers of this piece will recognise this; some will be fellow tax professionals and others will have found their business lives completely changed or based from the start on information technology.

This leaves me with a problem though. I have sets of the bibles of UK direct tax, Simon’s Taxes, and of the more recent indirect tax regime, De Voil. They constitute a very large number of loose leaf volumes of many pages in plastic covers and they have not been updated for six or seven years. Actually I had them as hand-me-downs when I started out on my own. They were surplus to requirements from an office that was closing. I could not have afforded to pay for the updates, and although some case law commentaries might still be relevant, the legislation has changed so much especially with the on-the-hoof goal-post moving of recent times. I hope that is not a surfeit of metaphors.



The books have to go. I need the space and have to think what to do. Are they of any interest to anyone? Shall I take them down the tip, take the pages out of the covers and recycle the component parts. Can I sell them on EBay – six years out of date? I guess the tip is odds-on favourite. Any offers – free to a good home?

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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What's cooking with HMRC, MPs and networking?

It was interesting to meet HMRC representatives at the Essex Branch CIOT/ATT meeting last week, and they seemed a pleasant and friendly bunch. However, of the contingent of six (v attendance of only about 25 members) a couple had come all the way from Yorkshire to Chelmsford. I could not quite see how this was cost-effective.

I took the trouble to make notes, but cannot see on re-reading them that I really learned very much. One lady was able to assure us that they were working hard to improve the website, including the deplorable search function (generally it is better to tell Google to search the HMRC site) and to tell us that we practitioners had been re-labeled as “tax agents and advisers”, an unexpected re-branding from outside. Maybe they will stop calling their hapless taxpayers “customers” but the customer word was repeated during the meeting a number of times so any move from upstairs has not reached the grass roots.

I did get some reassurance that HMRC is still interested in the small fry compliance failures such as letting income, casual earnings and bank interest (historical interest at present in more ways than one) and that they were still keen on rounding up reluctant customers. This sort of work is welcomed by me for one, and I do not see why anyone should get away with not paying tax which should be due. I am all for tax planning and saving clients tax, but am definitely not in favour of tax evasion planning!

I sent out my tax newsletter out this week. The Budget was not very nice; in fact rather depressing, though I did avoid it by being away. Still, there was no escape from the email and I am thoroughly up to speed. I have little hope that the Finance Bill will be scrutinised any more than others in recent years. Frankly, there was little help for small business and and it seems unlikely that MPs even understand anything about trusts and the proposed 50% tax rate from next April. Still, they have the exposure of their expenses to worry about. Frankly, even many of their “justifiable” expenses paid by the Exchequer would be taxable in an ordinary mortal's hands. They are like anyone else entitled to indulge in property dealing, but please, not with my money. No names, no pack drill, but some of the shenanigans I have heard of these past few days might be treated as trading liable to income tax rather than capital gains exempt due to flipping properties within the private residence rules. Some of this might be beyond HMRC now in terms of enquiry windows depending on how it was all reported to HMRC at the time.

In May we are definitely into the new season of tax returns etc.. I do like to meet face-to-face as many clients as possible at least once a year. The two I met with last week are really both some of the nicest people I know and they cheered me up. I learned a while back not to work with clients with whom I felt the relationship was difficult because there is much less pressure if we like our clients and they like us.

I am always on the look out for more nice clients and am trying a couple of new marketing strategies including some positive networking with as much giving as possible. I will let you know how I get on. Maybe barbecue networking will catch on in the long hot summer the Met Office is forecasting?

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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.

www.jonstow.com

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

Post-holiday blues

I have been a bit quiet of late. You could understand that a number of developments in the UK tax world have pretty much left me speechless. We have had the Budget, largely flagged in advance with the capital gains changes etc. but the income-shifting fiasco has been put on hold. Unfortunately it is not a dead duck and will reappear not much changed, I suspect; a serious canard if ever there were one.

We tax advisers have a job squeezing our holidays in these days but we managed a couple of weeks in May in the steam room that is Florida at this time of year. Whilst I had my back turned, Darling had another Budget to compensate those who lost out from his organ-grinder's announcement of the abolition of the 10% band – well, one of them – in the 2007 Budget. Everyone knew about what had happened last year, except apparently the Government's own MPs. The give-away will apparently cost the Exchequer £2.7 Bn. This will be why the Government probably secretly welcomes the high oil price, at least in the short term, because of all that lovely extra tax it is collecting. After all it cannot really borrow any more, can it? Oh, well, I expect you are right.

Anyway, time is money for businesses, so I am especially upset at the problem we are having preparing and filing Self Assessment Tax Returns on-line for 2007-08. I said at the end of last year that the HMRC on-line system was much improved. So what happens? Wholesale change at the behest of Lord Carter and all the work and progress over the past few years has gone out of the window. I have lost time with the software not working, my supplier is over-stretched and work is not getting out of the door as I would like (any of my clients reading this need not worry; they will still get the same good service but it is just costing me more at the moment). If it ain't broke.....