Wednesday, November 12, 2008

Talk of tax cuts hits the headlines but is unlikely to hit our pockets

I was interviewed on BC 3Counties radio on Monday about the stories that had appeared in the press suggesting that tax cuts were on the way. I said that many of politicians speaking on the subject were revealing how little they know about our tax system. Either they are woefully ill informed or simply ignorant on the subject.

I’ve amplified below some of the points I made during the interview:

There will be no income tax cut part way through the current tax year. Neither HMRC nor any commercial tax software would be able to cope with the necessary calculations. So any such change would either be deferred until the start of the next year (see below) or it would need to be back dated to the start of the current tax year (6 April 2008) as was the recent change in the personal allowances – to compensate for the abolition of the 10p tax rate. Even then a back dated rate change would be unprecedented and I’m doubtful the software would be able to cope as it’s never had to do so before. And no one with experience of HMRCs software would have an confidence that it could cope with a back dated change.

Even if the basic rate of income tax were to be cut from 6 April 2009, this would only flow through to employees’ pockets some time after May 2009 – due to the way that the PAYE system operates. So, no immediate impact or benefits other than headlines.

For the self employed the position is even worse – if the basic rate of income tax is cut from 6 April 2009 this will generally only affect the tax payable on, wait for it, 31 January 2011. That’s when the self employed settle their tax bills for 2009/10 so such a tax cut would not impact our pockets for almost two years. That’s hardly going to make a difference to how people feel about spending over the next few months.

What about a cut in VAT? Well, let’s leave aside the need for the Government to first obtain authority from Europe for such a cut and assume that follows. Would a cut help ‘now’? It might do IF all shops and suppliers pass on the cut to consumers. But there’s no guarantee they would do so. The basic rate of VAT has been unchanged for so long that most people are used to VAT inclusive prices.

Assume the rate drops from 17.5% to 10%. Will a shop that charges £58.75 (being £50 plus VAT) reduce their prices to £55 (£50 plus 10% VAT) straight away or will they find it easier to revise their price upwards from £50 to £53.40. VAT at 10% on this takes the full price figure upto £58.75. And then price tickets don’t need to be changed. INCREASES in VAT would be passed onto consumers straight away but I’m not sure that cuts would be. Having said that a cut in VAT is otherwise the fastest way to get a tax cut to the majority of the country. But it’s also VERY expensive for the Government.

Increases in tax credits would be targeted on those on lowest incomes and equate to an increase in ‘benefits’. Sadly. As I have said before, the tax credit system is not fit for purpose and claims can only be backdated by 3 months so many people lose out as they did not anticipate their income falling to a level that would qualify for tax credits.

Reducing Employers NICs would have an immediate impact on employers (big and small) but would do nothing to help the self employed or the small companies with no employees.

Talk of tax cuts hits the headlines but is unlikely to hit our pockets


  1. Informative post, thanks. I suspected that HM Government does not understand how to translate macro action into individual action economic stimulus and this backs up my suspicions.

  2. As I understand the current overarching European side of VAT Law, Directive 2001/41/EC has set a 15% minimum standard VAT rate for all Member States with no exceptions.

    It is dangerous to suggest a possible 10% rate as this just cannot happen. I am also aware that most retailers now use EPOS machines (not just the big ones any more) so any change to VAT rates needs quite a bit of introductory time as well.