Being skeptical about financial advisers and tax...

Financial journalist, Paul Lewis, presented what I'm sure was a fascinating talk to a group of skeptics in June 2011.

I have long harboured similar reservations to Paul about some financial advisers but I have never been able to articulate my concerns as well as Paul has done.

I strongly recommend that anyone interested in debunking tax and financial advice reads the transcript of Paul's talk. It's on his website here. In it Paul, who presents MoneyBox on Radio 4, argues that:

• Financial Advisers do not address most areas of financial advice with which the public have problems;
• Financial Advisers become seduced by the product providers and promote products that are not in the investors' best interest;
• It is commission – not solutions to financial problems – which has driven the growth in the financial services industry;
• Most people should clear their debts before starting to invest for the future;
• Many advisers and the public confuse savings with investments. If you save money it remains yours. If you BUY an investment you no longer have the money you have an investment - which can go up or down...
• Assessing what the industry calls customers’ ‘attitude to risk’ is not done well. Because most people haven’t got a clue.
• The impact of inflation is not specific to savings accounts. It simply means that any investment return needs to outstrip inflation (and charges) to have been worthwhile. And this always carries a risk that it may not happen.

Paul concludes:

• Do financial advisers really give the financial advice we need? Not often.
• Do we all need to see a financial adviser? Absolutely not.
• Will the Retail Distribution Review make things better? Yes. But there is still a long way to go.

From a tax perspective it was also interesting to note Paul's analysis of the top ten common financial topics he gets asked about. This included income tax, national insurance and inheritance tax (IHT). Of these, financial advisers will typically only advise in detail on the latter. I wonder how often the typical financial adviser involves a TAX adviser rather than simply looking at ways to fund the inheritance tax when it falls due? Maybe it's my background but I'd think that the starting point for people with concerns about IHT should be an inheritance TAX SPECIALIST rather than a financial adviser.

Finally I should state that I know a number of financial advisers who do not fit Paul's stereotype description. Equally I know a number of accountants and tax advisers who promote tax schemes with much the same mindset as that of which Paul complains. By which I mean they are seduced by promises of healthy commission and assurances given by the original promoters of the schemes that the scheme works and that the hoped for benefits outweigh the risks. But that's a whole separate subject - that I've addressed many times before on this blog.

What's your view?

Related posts:

Are Stamp Duty planning schemes worth the money?

NO. The Revenue do NOT approve Disclosed tax schemes

Tax planning to be wary of

Naive promoters of tax avoidance schemes

Tax avoidance is a card game - the metaphors multiply

Tax twist: BBC compares job losses re VAT vs National Insurance

I'm never sure whether politicians deliberately misquote figures or do so naively. Here's a good recent example related to the question of which was worse, an increase in the so-called 'jobs tax' (Employers' NICs) or the rise in VAT?

The Shadow Chancellor, Alan Johnson, has been saying:

“At the time the Conservatives called the National Insurance increase a tax on jobs. The Chartered Institute of Personnel and Development [CIPD] say that that would have taken 75,000 jobs, VAT would cost 250,000 jobs.”

An editorial in the Times on 5 January was dismissive of the CIPD figures suggesting that:

“[Alan Johnson's] claim that the VAT rise would cost 250,000 jobs appears to be a figure plucked from the ether without supporting evidence.”

This was harsh as shown on the fullfact.org website.

However, the full picture was revealed on 7 January by the BBC's More or Less programme, presented by Tim Harford. A good summary of the key points appears on the XpertHR blog. At the time of writing, the recording is available on BBC iplayer. Personally I enjoy listening to the weekly podcast as it complements the debunking nature of this TaxBuzz blog.

Bottom line

You cannot legitimately compare the forecast impact of job losses that might be caused by the two different tax rises. At least not without also comparing the quantum of tax being raised.

Labour's 'jobs tax' was forecast to start in April 2011 and expected to raise just over £3billion a year. The CIPD estimated this would cause 75,000 job losses by 2015/16.

The VAT rise to 20% started on 4 January and is expected to raise just over £12billion a year. That's 4 times as much as the 'jobs tax'. The CIPD has estimated the VAT rise: "will reduce UK employment by 250,000 over a five year period relative to the level of employment that would otherwise be achieved."

So, even if the CIPD predictions are correct, the impact on jobs will be significantly less than 4 times the impact of a rise in employers' national insurance contributions.

Was Alan Johnson naive or deliberately comparing apples and pears?

Tax tease: Inaccurate Footie Tax story resurrected as 'news'

The headline in today's Sunday Times is "Top footballers dodge millions in income tax". And that "Rooney pays 2% on some earnings." Other footballers are then mentioned too.

The report seems to simply confirm the predictions of a very similar story the Times published in May 2009.

Football stars plan to dodge 50p tax rate
Scheme being considered by Manchester United, Arsenal and Liverpool means players can get salaries as interest-free loans

The Press Association are reporting the 'new' story as leading to a "Crackdown on top rate tax loophole". As the Sunday Times report though HMRC have been trying to do this for years.

The footballers are using two tax avoidance schemes. One involves their clubs paying large chunks of their earnings as 'image rights' rather than as employment income. The other scheme involves the footballers taking loans rather than salaries or dividends from companies they own. I need to debunk a key element of this part of the story to make clear that it's not as effective as the press reports suggest.

For the avoidance of doubt I'm no fan of this tax avoidance. Regular readers of the TaxBuzz blog may recall I mentioned this in the context of the 7th of my '8 fallacies that undermine the UKuncut tax protests' last month.

Debunking

When someone, a footballer or otherwise, takes a loan from their company they initially pay very little income tax. Instead of being taxed on the full amount they only pay tax on the interest they should have been charged.

In 2009 the Times suggested the tax would be as little as 2.5%. It now seems to be just 2%. The reports miss the key point though that this tax is paid every year for as long as the loan lasts. So the longer the loan lasts the more tax is paid. If the loan lasts for ten years and interest rates rise the total tax paid could end up being more than the tax they hoped to avoid.

Eventually the company will at some stage have to pay salaries or dividends to the footballer to clear the loans. This income will be taxed at the top rate - in addition to the tax already paid on the 'beneficial loans'.

I mention all this to help discourage anyone from thinking that it's always tax effective to take loans rather than salaries or dividends from their company. It seems to be attractive for footballers as long as they do NOT own the company and as long as they will leave the UK permanently before the loans need to be repaid.

When your own company lends you money the company is required to (effectively) also lend money to HMRC. This reduces the cash available in the company. And this loan to the taxman is only repaid when the loan to which it relates is repaid.

Most people trying to copy the footie players' tax avoidance scheme will also have to pay a fortune to close down their companies using complex (and expensive) schemes without paying back the loans. When that happens they will still face years of sustained challenges from HMRC who will argue that the loans were a sham and subject to tax as earnings.

Can't say I have any sympathy for the footballers though.

Tax tease: The number of non-doms left in the UK

The press are making much of a disclosure by HMRC about the number of people registered as non-doms in the UK. Some reports suggest that 16,000 wealthy non-doms have fled the UK.

The FT's headline, as you might expect is more accurate, suggesting that ‘Non-dom’ numbers fall in wake of levy'. However the article also reveals the figures for 3 years:

• 2006/07 -117,000
• 2007/08 - 139,000
• 2008/09 - 123,000

Notice that overall this isn't a fall in the numbers.

It's also worth noting that, contrary to some reports, the figures do not represent 'the number of wealthy foreigners' who live in the UK. HMRC's figures are simply of those people who have ticked a specific box on their tax return each year. And many of them will be second or third generation immigrants who can technically claim non-dom status despite having no great wealth or assets outside of the UK. They might just be hedging their bets.

Anyway, the guidance as regards ticking the 'non-dom' box changed in 2008/09 so many people who ticked it in 2007/08 no longer had to tick it in 2008/09.

I doubt that they all left the country. And, in any event, by my reckoning there were 6,000 more non-doms here in 2008/09 than there were two years previously. Another two years have since passed. I wonder how many are here now?

Tax troubles: Seems there really has been a PAYE mess up after all

Seems there has been a real glitch in the PAYE system after all - at least in so far as it relates to the taxation of pensioners who have secondary pensions in addition to the state pension.

When the PAYE debacle became apparent over the summer I wrote a piece: The PAYE tax system is now working as it should...

I stand by the explanation I gave and continue to deplore the ill-informed and sensationalist reports in the media.

However, NOW it seems that there has been a real and widespread error on the part of HMRC. The reports I have seen so far seem to simply see it as more of the same. In fact it's much more fundamental.

The latest PAYE failing is an announcement that during 2008-9 and 2009-10 state pension income was omitted from the tax codes issued to 250,000 pensioners with second pensions or other earned income. The state pension is taxable; the tax due is normally collected through the tax code used to calculate the net income from their second pension. Where insufficient tax has been paid in such cases, the Government has announced that pensioners will not be asked to pay up.

This error may well be a symptom of the staff cutbacks imposed on HMRC by the previous Government. To reduce the burden on the remaining staff, HMRC started to write to taxpayers on PAYE saying that they need no longer file tax returns. This was welcomed by those who saw it as a chore. Accountants anticipated that it would mean that some taxpayers would miss out on tax repayments as no one would be checking whether they had under or over paid tax. What also seems to have happened is that someone somewhere in HMRC didn't programme the computer to include the state pension in PAYE codes for pensioners who no longer filed tax returns. Whoops!

Tax tease: Fallacious demand to "Abolish the 50p tax rate"

The FT publishes today a letter containing a passionate demand that the Government 'Abolish the 50p tax rate'.

The writer seems not to understand how most entrepreneurs and growing businesses operate as he concludes his letter:

British job creators must be allowed to keep more of what they earn so they can hire more staff, purchase more equipment and reinvest in their businesses. The chancellor must take heed by removing the 50p income tax rate.

Most 'British job creators' run companies that pay corporation tax on their profits. The main rate of Corporation Tax is not 50%. It's just 28%. Only monies paid out of the companies to the owners and directors are subject to 50% INCOME tax (on amounts above £150k pa).

Together with National Insurance, the 50p tax rate means that the highest earners keep less than half what they earn. This cannot be ideal but there do seem to be political reasons to keep the 50% rate for the moment.

It could be worse of course. When I first qualified as a Chartered Accountant the top rate of income tax on earnings was 83% and there was a 15% investment income surcharge. This meant that the richest taxpayers kept just £2 out of every £100 they received in dividends and interest!

Don't talk to me about 'the good old days'!

Bank restraint on bonuses would mean LESS tax paid

I'm no fan of big bank bonuses but the argument is more complex than some think. We actually generate far MORE tax by allowing banks to pay bonuses than if we discourage or prevent them from doing so. To this extent I was disappointed by the PM's comments on the Andrew Marr show this morning. David Cameron said "I want to see the bonus pool smaller than last year."

This may be what the public thinks it wants but at a time when the Government wants to increase tax receipts it makes no sense.

Imagine a bank has a profit of £10m. How much tax gets paid if it pays no bonus?
Just Corporation tax on the profits. That's 28% of £10m which is £2.8m

If the bank ignores requests for restraint and pays out £8m as bonuses, how much tax is paid?

Well, in addition to the bonuses the bank will pay employers' NICs on the bonuses. So that's 12.8% of the £8m, being £1,024,000.
The bank will still pay corporation tax on the remaining profits: That's £10m-£8m-£1,024,000 = £976,000. And 28% of that is just £273,280.
The total tax paid by the bank then is:
Employers' NICs : £1,024,000
Corporation tax: £273,280
Total.................. £1,297,280 - compared to the £2.8m tax if it paid none of the bonus.

But that's not the end of the story as the bankers will be subject to tax on the bonuses they receive: Income tax @50%, so that's £4m, plus 1% national insurance = £80,000

So the total tax paid if the bank pays £8m of bonuses is:

• Tax paid by the bank: £1,297,280
• Tax paid by bankers: £4,080,000
• Total:..................£5,377,280

That's almost double the £2.8m tax paid if the bank 'exercises restraint' and pays out no bonus.

Of course if Labour's one-off banker bonus tax were reintroduced it would generate even more tax. But that's a different argument. The PM should be explaining why he doesn't want to do this, rather than arguing for smaller bonus payouts. That makes no sense as the bigger the bonuses the more tax is paid.

Did VAT absolutely HAVE to go up?

In this week when the standard rate of VAT was increased to 20% the question has been asked as to whether it was necessary.

If you agree that TAXES had to increase the answer is 'Absolutely, yes, it had to be VAT'. If you favour other ways to resolve the deficit then the answer may be different.

Almost a year ago in February 2010 I wrote a post on this blog explaining WHEN tax rises actually generate money for the Exchequer. I focused on those key taxes that contribute the most money each year. So I looked at income tax, corporation tax, National Insurance and VAT.

I noted that VAT is the ONLY tax where a change of rate has an almost immediate impact on the taxes that flow into the Exchequer. For that reason, back in February 2010 I predicted, as did many other commentators, that the rate of VAT would rise to 20% - regardless of who won the election.

It is simply not credible to suggest that other taxes could have been increased instead of VAT to fill the gap in the short term. Some of the comments made this week by Ed Milliband and by his, self confessed, trainee Shadow Chancellor Alan Johnson, suggest that they do not understand this pretty basic point.

The Pre-Budget Report that we missed....and what it means

Many people were surprised by the publication last week of a wealth of Treasury and HMRC documentation which included draft clauses for the Finance Bill 2011.

We should remember though that this is all in line with the promised 'new approach to tax policy making'. Much of the Bill was published in draft, back in July when the Government launched an informal consultation on 32 separate technical tax measures. These had all been inherited from the previous government.

We have now been given the promised eight weeks for comments on the draft Finance Bill legislation.

This is all to be applauded and, as I have said before, if the Government continues to keep its promises re the 'new approach' there will be fewer shock surprises and less poorly drafted tax legislation.

Some people are concerned that we have a new Finance Bill but that this was not preceded by a 'Pre-Budget Report'. This also explains the absence of the traditional 'Budget' summaries produced by accountants and the supplements normally published by financial journalists. This is no great loss as such summaries and supplements have decreased in value in recent years.

For those who want to continue the tradition, Budget summaries and supplements will no doubt return after the Budget next March. In the meantime we have more notice than ever before of all key income tax and NIC figures for 2011/12. These were announced on 2 December.

The question though is whether the 'new approach' means that accountants are as uptospeed as ever with all the new tax laws and when they come into effect. I'm wondering if this might increase the demand to defer to tax specialists who, by definition, have to keep on top of such things.

What do you think?

Related posts on this blog:

• 22/6/10 - Draft tax legislation to be available for comments
• 22/6/10 - Huge change in approach means we'll get 3 Finance Acts in 2010
• 13/7/10 - It's not the PBR that should be dropped. It's the Budget
• 23/7/10 - What a difference. Should mean less mistakes in new tax law.
• 21/4/09 - Budget night summaries - worth the effort?

"The taxman is happy with my return' - Sure?

As we move towards the first filing deadline for 2009/10 personal tax returns you may find it helpful to reflect on a key aspect of our tax system. Many people seem to misunderstand how things work. They mistakenly assume their affairs are in order long before they have any real evidence that this is actually the case.

The concept of "Process now - check later" - is a key element of our self assessment tax system. It means that tax returns are processed by computer long before a real person checks them. In most cases the computer then generates statements showing the tax payable or repayable based on the entries on the tax returns as submitted.

At this point no one has reviewed any exception reports generated by the computer and no real person has checked any of the entries or disclosures on the tax returns. So little comfort can really be drawn from the statements issued confirming that a tax return has been 'processed'.

And it is especially important to keep this in mind when you hear stories about how people have supposedly got one over on the taxman. This includes those who have claimed what might be spurious deductions on their tax returns, omitted to report potentially taxable income or secured the hoped for tax treatment of a tax avoidance scheme.

So when you hear anyone boasting about their own success or that of their clients just remember that the real timescales are much longer than they might imply. This is especially true for anyone who is referring to transactions they have undertaken since 6 April 2009. Transactions undertaken from that date through to 5 April 2010 will be reported on tax returns that need to be filed (online) by 31 January 2011. HMRC then have 12 months from the date the return was filed (so potentially until 31 January 2012) to start asking questions.

So it's a little premature to determine your own attitude and approach by reference to the way that someone else has supposedly beaten the taxman on a tax return that has yet to be checked or challenged.

No - ISAs are not a form of tax avoidance

Kirsty Wark on BBC's Newsnight has just put it to Vince Cable that:

"at one level, using ISAs is tax avoidance."

She was suggesting that Nick Clegg and Danny Alexander had made a mistake by referring to plans to challenge both tax avoidance and tax evasion. Except that they were deliberate in their choice of words. There was no mistake.

Throughout my 25 year career as a tax adviser I stuck to the old adage that tax avoidance is legal and tax evasion is illegal. When I started to be troubled by the morality of tax avoidance I gave up giving tax advice.

As former British Chancellor of the Exchequer Denis Healey memorably explained:

“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.

This distinction remains true today. But something has changed. As Nick Clegg stressed, the Coalition Government wishes to stamp out (as did the previous administration) tax avoidance that is:

"perfectly legal but morally questionable"

For Kirsty's benefit - and that of anyone else who is confused, let's be clear. It is self evident that investing in in an ISA (Individual Savings Account) is not 'morally questionable' and thus not under attack. As long as all the published conditions for saving through an ISA are met it is simply good tax planning to make use of the facility to save money in a tax-free structure (ISA) specifically intended for this purpose. So perhaps we do need to be able to distinguish acceptable and unacceptable tax avoidance.

In this connection I again refer back to a post on this blog from over two years ago: Distinguishing Tax Evasion, Tax Avoidance and Tax Planning.*

* The distinction was first made by Richard Murphy and I note that he has more recently published a new tax briefing on the subject. Whilst I may not agree with his politics or all of his views, I think on this he may be right.

Evan loves tax

The BBC's Evan Davis has a series of programmes at 9am each morning on Radio 4 this week in which he explores our vexed relationship with tax.

I caught part of yesterday's episode during which Evan interviewed:

John Whiting twice - once in his capacity as Technical Director at CIOT (and an ex PwC partner giving tax advice) and later as "interim head" of the new Office for Tax Simplification.

Dave Hartnett (before last week's media frenzy) - who explained his distinction between tax avoidance and aggressive (and implicitly unacceptable) tax avoidance - which results in HMRC petitioning Government to change the rules.

Lord Howe and Lord Lamont - two ex-Chancellors

Each episode is available on BBC iplayer for a few more days if you care to listen.

British Legion gift does NOT provide tax benefit to Blair

Look, I'm no fan of Tony Blair, but let's be fair. Some of the media are implying that his gift to the Royal British Legion is a tax wheeze. The misleading headlines include "Tony Blair could save £2.3m tax on British Legion donation".

All the tax relief does is to reduce the cost of the gift. And this is very different to the implication of the press reports.

The following numbers prove the point:

• Let's assume Blair's taxable income without the book is £10m. With the book advance/royalties it would be £14.6m. The bulk of this would be subject to 50% tax. Let's say £7m in total
• By giving away the £4.6m Blair's tax bill does indeed fall by £2.3m due to the 50% relief potentially available. But this isn't the whole story.
• If Blair was keeping the advance etc he would have a net £7.6m left after tax (being the £14.6m less the tax thereon of £7m)
• By making the donation he only has £5.3m (being what's left after paying tax on the £10m (£14.6m less the donation of £4.6m).

The key point is that he is still WORSE OFF to the tune of £2.3m. He's not benefitting through making the donation.

And let's remember too that if the gift qualifies for tax relief then the Royal British Legion will be due to receive a consequential tax payout from HMRC. This increases the value of the gift to the charity. It's why they generally encourage donors to confirm that monies are paid under the Gift Aid tax scheme.

Definition of SME: Bet you didn't know what it means

Maybe it's just me. I get a little frustrated by constant references to SMEs as if this were somehow shorthand for small businesses. Indeed, SME is commonly used to reference the smallest of businesses. (And don't get me started on those people who say they specialise in helping SMEs).

Few people, other than some accountants, seem to be aware that 99.9%* of ALL UK businesses fit the official definition of a Small or Medium sized Entity (SME). This is clear from the statistics for SMEs published by the Department for Business Innovation and Skills* (previously the DTI and BERR). These reference a total of almost 4.8 million UK businesses.

The EU definitions for distinguishing businesses of different sizes, and which are used for many official purposes in the UK are effectively:

Small = upto 50 employees and upto £6.5m turnover.
Medium sized = upto 250 employees and upto £25.9m turnover.

I'm sure very few people realise that businesses with multi-million pound turnovers fall within the official definition of SMEs.

The term 'micro' business also derives from EU definitions but is less common in UK official statistics etc. The EU definition of micro entities covers those with fewer than ten employees and both turnover and balance sheet totals of less than 2m euros.

I suspect that when most people reference SMEs they are really thinking about micro businesses. Some people may also assume that the smaller 'small' companies are also included.

The previous Government often made reference to tax reliefs and exemptions intended to help SMEs. Perhaps the coalition Government will do the same thing. When the smallest (micro) businesses really can benefit that's fine. In the past however frequently the real beneficiaries were only the 27,000 'medium' sized companies rather than the 4.6 million micro entities. These figures come from the most recently published statistics* which also suggest that there are only around 170,000 'small' (rather than micro) and 6,000 'big' companies in the UK.

Perhaps we need a new term, phrase or abbreviation that better describes such businesses. My contribution would be to talk about MiBiz - and we could then refer to the MiBiz community.

* The latest stats from the BIS relate to 2008 and were published on 14 October 2009. They can be accessed through this link.

"Have a look at this scheme and tell me what you think"

Years ago, when I ran the 'tax support for professionals' team at WJB Chiltern, we were frequently asked to provide a view on the potential success of tax schemes.

Despite being a specialist tax consultancy with dozens of in house tax advisers we chose not to offer such a service. The rationale was simple: Such schemes always carry risks. The promoters invariably underplay these and tap into the taxpayer's natural greed.

A worthwhile independent review can take many hours - obviously, given the inevitable complexity of such schemes and the need to review and consider all related paperwork including both the instructions to Counsel as well as the formal Opinion itself.

I was talking recently with the head of tax at another reputable tax consultancy. He shares many of my views about tax schemes. I was amused when he said he thought he could make a lot more money if he closed his eyes to the risks that pre-packaged tax schemes run. As it is, like any reputable tax adviser, he dutifully considers schemes that his clients purport to have an interest in. He goes through the paperwork carefully to ensure he understands the scheme sufficiently. He then explains the process, the hoped for benefits and the risks to the client, in words of one syllable. This, he tells me, invariably results in the client saying:

"Now I understand it properly, why would I want to go into a scheme like that?"

And, just as I concluded a few years back, there is a limit as to how much you can charge a client in such circumstances for the time and effort involved in reviewing, checking and advising on the scheme - especially if the client decides not to proceed. This is one of the reasons that promoters pay high commissions. It is partly to compensate for all of the conversations and meetings that do NOT result in a client signing up for the scheme.

Within the Tax Advice Network the tax advisers are generally just as reluctant to review third party schemes brought to them by prospective clients. And yet they are all tax experts and well aware of many schemes relevant to their specific areas of expertise. Why would anyone less experienced feel able to provide an informed objective view of a pre-packaged scheme?

What do you do when a client wants your opinion of such schemes?

Previous relevant posts:

• "Raise the white flag" - Are tax schemes worth the effort any more?
• Give me pure tax evasion any day
• Discovery assessments issued re film schemes in 2003-04
  
• HMRC challenge sideways loss relief tax avoidance
• HMRC confuse tax avoidance and tax evasion again
• Beware of HMRC spotlights - EBTs now included
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules

Finance Bill 2010 proves Parliament doesn't decide our tax laws

Publishing the Finance Bill 2010 on 1 April was always going to look like a bad joke. Even more so if Parliament is about to be dissolved for a General Election.

Commentators, eg: the ICAEW Tax Faculty and CIOT, are rightly critical of how little time will be available to debate the Bill before it becomes law. The common consensus being that there will be just 3 days to 'consider' the 167 pages containing 73 sections and 22 schedules. These include detailed and complex legislation related to 3 brand new taxes: the bank payroll tax, a duty on landlines and the 'high income excess relief charge' on pension contributions. The latter is so needlessly complicated it could easily have been designed by the March Hare from Alice in Wonderland. There are also many other contentious tax changes that go way beyond those necessary by reference to the Provisional Collection of Taxes Act.

This pre-election Finance Bill simply provides the purest evidence of something many of us have long suspected when it comes to tax law. It rarely receives adequate Parliamentary scrutiny.

When trying to interpret complex tax law we are often referred back to the alleged 'intention of Parliament'. In my view this is commonly used as a cloak to hide the 'objective of HMRC' when the rules in question were drafted. The small (if any) amount of Parliamentary time, in the House or in Committee, focused on the issues in question is rarely considered. We are instead presented with the circular argument that if we have a law then that law accords with 'the intention of Parliament'. NO IT DOESN'T!

I've never been convinced that in most such cases the MPs (or even the Treasury Ministers) always understand all the related issues. How could they in fact? Our tax system is overly complex and few MPs understand the process sufficiently to debate the key issues from a position of knowledge.

And if the current Finance Bill 2010 passes into law within the next week we will have prima facie evidence of the lack of Parliamentary scrutiny that tax law invariably receives. In future let no one attempt to argue that Parliament decides our tax laws.

Back in 2008 I attended a 'Making taxes simpler' presentation at the ICAEW. This was when George Osborne and Lord Howe first announced a new Conservative policy to establish an Office of Tax Simplification (OTS) and also a Joint Parliamentary Select Committee on Taxation (JPSCT). I am well aware that each could end up as diverted from their task as was the recently axed Tax law rewrite project. But I'm hopeful that such developments, if they come to fruition, could lead to much needed improvements to our tax law making process and to some simplification of the system too.

What do you think?

Which Budget proposals will make it into the Finance Bill?

After the Budget announcements, everyone poured over the related Budget Notes which give a better indication of what will appear in the Finance Bill. And all Budget commentaries faithfully reported such additional details.

This year however there is barely any time for parliament to debate and consider the Finance Bill because of the forthcoming General Election. So we know that the Bill will only contain some of the proposed changes. What few commentators seem to have noted is that the Government has already determined certain changes which will be held back for a second post-Election Finance Bill. Twenty of the 71 Budget Notes contain the phrase:

"The Government intends to legislate these changes in a Finance Bill to be introduced as soon as possible in the next Parliament".

I am indebted to my colleague Ian Young at the ICAEW Tax Faculty who has noted that this phrase appears in the following Budget Notes:

6,8,12,13,19,20,22,30,35-37,46-48,50,57,65-67 and 69.

This leaves 51 of the 71 provisions that could appear in the first Finance Bill. This is far more than is likely to be acceptable to other main parties so some of the 51 will also be held over.

You might think that the list represents those clauses that are party political or last minute additions to the Budget. A quick review reveals this is not the case and that there is no obvious distinguishing factor.

I can only assume that this list represents the items in respect of which Parliamentary Counsel had not yet started to draft the related legislation. And that would support the argument that Counsel is given insufficient time and resources to draft tax legislation generally. Is it any wonder that so much of it is unduly complex? Or have I missed something?

It was a Giveaway Budget for Getaway MPs

Little attention has so far been focused on the main beneficiaries of the pre-election Budget. I've identified 8 measures that will evidently help MPs who lose their seats, as many are bound to do following the expenses scandal.

Many ex MPs will struggle to get 'proper' jobs and will instead tout themselves as consultants or 'cabs for hire'. The rest will have to try start new small businesses.
---------

1. Remember the Chancellor talked about doing "more to combat financial exclusion, through a guarantee that everyone can have a basic bank account"? [Even MPs who have become pariahs]
2. And we were told that "Budget 2010 also announces a package of measures to help people make the transition back to work" [Departing MPs will need as much help as anyone]. One of these measures will ensure "the eligibility of the Working Tax Credit to people aged 60+ if they work at least 16 hours a week, rather than 30 as currently." [Of particular value to ex MPs who can't get that much work]
3. What about "ensuring that the supply of lending to the economy supports the recovery [of MPs after they stand down/lose their seats]"? Of the new money that Lloyds and RBS must lend, "£41 billion of this total being lent to small businesses [many to be run by ex MPs].
4. There's to be a 'small business credit adjudicator' to help "ensure that small businesses [run by MPs] are treated fairly when applying to their bank for finance. [Who'd want to lend to them otherwise?]
5. The Budget announced "an increase in the threshold of the Annual Investment Allowance to £100,000 for qualifying expenditure incurred from April 2010." [Should be very useful for ex MP's kitting out their new offices as the old limit of £50k would not have been enough given their past experience of and preference for expensive taxpayer funded items].
6. Another measure that will help ex MPs is the the small business rate relief whereby "eligible small businesses occupying properties with rateable values up to £6,000 will pay no business rates for one year from October 2010."
7. Older MPs will be pleased to note that they may be allowed to continue working outside the House beyond the "default retirement age" of 65 as "the Government intends shortly to launch a formal consultation on reforms to the Default Retirement Age."
8. The Chancellor said he was "relocating civil servants from expensive London offices to elsewhere in the country." What he didn't say but may have been thinking was that this should be another way to help MPs who lose their seats. It will be much easier for them to do their lobbying locally.

I could go on.
The one Budget announcement that is so evidently NOT intended to benefit departing MPs is the "two-year stamp duty land tax relief for first-time buyers for residential property purchases up to £250,000". Everyone knows most ex MPs would be at least third-time buyers given they already have two homes!

What did I miss? Which other measures may have been selected, designed or intended to benefit the MPs who lose their seats or who are not standing in the General Election?

Tory tax plans discriminate against sole traders and partnerships

Last Sunday George Osborne explained in a TV interview how the Tories plan to fund the reductions in corporation tax they have promised.

During the Andrew Marr show Mr Osborne initially stated that the reductions in the rate of corporation tax would be paid for by the “abolition of some complex reliefs”. When pressed however, he went a little further and stated that "an investment relief predominantly available to small businesses would be abolished" to “simplify tax".

The only obvious candidate for such abolition would be the 100% Annual Investment Allowance (AIA). However this relief currently simplifies the tax position for small businesses as it enables them to write off the cost of capital assets acquired each year (upto £50k pa). Crucially the relief is also available to sole traders and to partnerships who would not benefit from the reduction in corporation tax. So abolishing the AIA completely would mean more tax and complexity for them and no compensatory reduction in the rate of tax payable on their profits.

At this stage we can but hope that, if the Tories are elected, that the AIA remains available to the smallest businesses (regardless of their legal structure). The tax system has long been distorted due to the damage caused by constant tweaks to the tax status of small businesses. Reductions in the rate of tax paid by small companies on their profits will perpetuate the destablising impact of constant tax changes for smaller businesses.

The VAT rate will increase within months. The only question is 'by how much?'

There has already been plenty of media speculation about a prospective rise in VAT whichever party is returned to power after the election. No one wants to confirm this move - because they fear the backlash and being blamed for not winning the election.

The Chancellor has no excuse. The Treasury will have advised him of his options re spending cuts and tax rises. He will have to lay out his plans in next month's Budget. George Osborne's team will also have had conversations with the Treasury as part of the plans for a possible transition. It seems likely that there is a clear need to increase taxes. I will leave the economists to dispute the timing and depth of spending cuts that may also be required.

I will also leave aside the precise numbers and how much can be raised through tax rises.

What I want to do here is to simply highlight WHEN tax rises generate money for the Exchequer. And I'll just focus on those key taxes that contribute the most money each year.

Income tax
Assume a second Budget in June or July - part way through the current tax year that starts on 6 April 2010. It is customary to determine tax rates before the start of the tax year. But let's assume instead that income and corporation tax rates were to be raised in respect of earnings and profits of the tax year 2010-2011.

Remember that the PAYE system, which only affects employees and pensioners, is 'cumulative' in the way that allowances, reliefs and taxes are allocated. A tax change half way through the year results in 6 months worth of the annual tax effect hitting taxpayers in one go. Not good news and, I would have thought, all but inconceivable. At least, not without the introduction of complex adjustments that could throw out many computerised payroll systems.

Still, even if income tax rates were increased for 2010 and a solution was found for the PAYE issues summarised above, what about the self employed and the higher rate tax payable by those with investment or rental income? When would they pay the additional tax? Well, it's not due for payment until 31 January after the end of the tax year - so that would be 31 January 2012. And that's if income tax rates are increased with immediate effect. Such a change would clearly not contribute a major reduction in the deficit this year.

And the impact of a rise in income tax rates is further delayed if any increase is deferred until 2011-2012.

Corporation tax (CT)
CT rates for the 2010-2011 financial year could, in theory, be revised mid year and the resultant complaints could be ignored. But again this tax is paid after the end of a company's accounting period. Assume a year end of 31 December 2010. Any increased CT would only be payable late in 2011. And all those companies with 31 March accounting dates would only pay such increased CT at the start of 2012. So, as with income tax rises, this will not do much for the current year deficit. And the impact is further delayed if any increase is deferred until 2011-2012.

National Insurance (NI)
Most classes of NI are payable along with income tax for the year in question. Thus pretty much the same issues arise as for income tax (see above). The only class of NI that could have material sort term impact is the 'tax on jobs' - employers' NI. An increase of 1% has already been announced to take effect from 6 April 2011. And part of that rise was announced in 2008.

Capital Gains Tax (CGT)
I'll write separately about the rate of CGT. For now let's just note that, like income tax, it is payable on 31 January after the end of the tax year. Thus, even if the rate for 2010-2011 was increased from 18%, this would only have an impact on the tax payable on 31 January 2012.

VAT
We have already seen two changes to the VAT rate in the last 18 months. Firstly a reduction to 15% and then an increase back to 17.5%. Both such changes had an almost immediate impact on the Government's tax receipts. There is no other way to do this.

So VAT will have to rise later this year. The only question in my mind is by how much? I suspect 20% as it's a convenient figure but better minds than mine are welcome to suggest alternatives.

The average rate of VAT in the EU is almost 21%. Only Luxembourg and Cyprus have a standard VAT rate lower than the UK. Each 1% rise in the rate of VAT should generate £4-5 billion of additional income for the Treasury. A rise to 20% would still leave the UK slightly below the average rate across the EU, and could generate almost £12 billion for the economy, the equivalent of around 3p on income tax. And let's remember that we all dismissed the 2.5% reduction from 17.5% down to 15% as being unlikely to have a meaningful impact on spending. And when we reversed the cut and put up VAT by 2.5% to 17.5% did everyone cope? Might this always have been the plan, to use such a rise as a test-run for the impact of a rise to 20%?

What do you think?