Ed Balls does an Alan Johnson....

Words fail me. Shadow chancellor Ed Balls has called for a temporary emergency cut in VAT to "boost consumer confidence and jump-start the economy".

Even though it's only Thursday I am sure this will qualify for my Tax Mistake of the Week award.

Let's ignore the fact that Mr Balls has made no suggestion as to how he would fund the £12billion a year cost of a 2.5% cut (being the amount due to be raised when the rate went up in January).

Let's ignore the fact that small businesses are hit worst because of the associated costs (time and money) of implementing price reductions caused by temporary reductions in the rate of VAT.

Let's ignore the fact that few retailers would pass on any rate cut in full as their margins are already so tight - such that they would take the opportunity to either keep prices constant or increase their margins.

Let's ignore the fact that the related complexities and cut-offs around the date on which VAT rate changes give rise to mistakes that allow HMRC to penalise hard working small businesses who have typically done their best despite the inherent complexities in the system.

Beyond all of those points Mr Balls has revealed that he simply doesn't understand how VAT works. Reports of his speech suggest he said, of a reduction in the rate of VAT:

"It has an immediate impact on people's purchasing powers or the bottom line of businesses."

But it doesn't. Businesses collect VAT for the Government and pay this over after deducting the VAT they pay on the costs of running their business. Reducing the rate of VAT will NOT have ANY impact on the bottom line of most businesses.

As Shadow Chancellor Mr Balls really should have known better. At this rate he may have to go the way of Alan Johnson who famously got the National Insurance rate wrong during an interview, and wrongly claimed VAT is charged on food.

Ed Balls therefore gets my award for "Tax Mistake of the Week".

Nominations for next week have opened early...

Tax Buzz Blog review - 2010 and plans for 2011

As we move into the 4th year of this Tax blog I've revisited the 118 posts added in 2010 to check on the range of topics I've covered.

As in previous years many of the posts were inspired by tax related stories in the media.

If there's one consistent theme it is one of debunking myths and misconceptions about our tax system. Many of these are spread by partly informed journalists and commentators (online, on radio or on tv).

The other key areas covered by blog posts were much the same as in 2009 - with a heavy emphasis on tax avoidance, the prospects of a General Anti Avoidance Rule, HMRC Spotlights and tax amnesties.

I also highlighted a number of key lessons about the tax system drawn from decisions of the Courts and Tribunals, offered predictions and shared my view on various topical issues including tax issues specific to MPs (again).

Here are what I consider to be my top ten posts of 2010:

9 Nov: Many people may have paid the wrong tax - why is that? - One of 3 posts that debunk elements of the confusing Panorama report on the PAYE story about 6 million wrong tax codes.

26 Oct: The IoD needs to be careful what it wishes for re IR35 - An objective look at the rationale for the rules known as 'IR35'

4 Oct: "The taxman is happy with my return' - Sure? - Debunking the idea that your tax return has been agreed.

20 Sept: No - ISAs are not a form of tax avoidance - Debunking this myth once and for all

20 Sept: Doesn't everyone try to avoid or evade taxes? - Well, a large majority anyway. Let's stop the double standards.

1 Sept: Tax planning schemes - The latest in a series of posts that debunk the idea that 'abusive' schemes are attractive or worthwhile in the majority of cases.

1 June: CGT: Since when does an automatic relief constitute tax avoidance? - Debunking misleading press stories

21 March: Why did the BBC's Sian Williams' appeal get to the Tax Tribunal? - Debunking reports of this tax case

31 Jan: Is it ever morally acceptable to fiddle your tax form? (Radio4) - Debunking the biased reporting in the radio programme concerned.

29 Jan: Retrospective tax avoidance legislation ruled LEGAL - Highlighting the implications of a key decision by the Tax Tribunal

What can readers expect in 2011? Well, subject to a multitude of requests to the contrary, I see this blog evolving in 3 key ways:

1. There will be fewer topics aimed directly at accountants. Most of these will instead appear on my blog for ambitious professionals (which I started in May 2006)
   
2. Blog posts here will be shorter and with briefer commentaries.
3. The main focus will be debunking tax stories in the mainstream media - online, on tv, on radio and in the press.

And if you're involved in social media at all, you'll notice that we've recently added the facility to share individual blog posts on twitter, linkedIn, facebook etc. This was in direct response to a request from a regular reader. I just hope he's not the only one to use them!

A similar, but more in depth, review last year also examined the original motivation and targets for this blog: Review of TaxBuzz blog 2009

Will benefits reform help entreprenuers and remove 'onerous regulations and taxes'?

Tangental to news stories about tax are those about reforming the benefits system (after all, tax credits are simply 'benefits' in disguise).

I already had a concern about Ian Duncan Smith's long awaited proposals to reform the benefits system. I'm a supporter in principle but wonder if it will address a much overlooked but important issue. The benefits system at present discriminates against honest entrepreneurs.

I was reminded of this when I heard that the PM has urged:

"more people to make a job rather than take a job."

And that Vince Cable has backed the PM's call during Global Entrepreneurship Week UK, pledging to tackle:

"onerous regulations and taxes"

Vince then made the all too common assumption that all entrepreneurs start new companies when they start new businesses. In fact this is rarely a good move from a tax planning perspective unless the entrepreneur is confident they will make substantial profits from the outset.

The point being that many people who start a businesss, whether they are contractors, service providers or web based, will do so as self employed people. They may or may not have entrepreneurial ambitions.

There are few 'onerous regulations or taxes' that can act as a disincentive here. But the benefits system can do so.

When someone goes to register for, what is currently called, job seekers' allowance they are asked how many hours a week they are available for work. That's not unreasonable as the benefit is evidently for 'job seekers'. By definition therefore it is not available to anyone who takes the opportunity to start a business. In most cases they will do so, at least initially, as a sole trader or in partnership with someone else. This means they're not available for a job so are denied the 'benefit'. Or they could lie and not tell the benefits agency that they are looking for business as a sole trader. The system should not incentivise lying.

I imagine this is all quite common and that the job seekers' allowance is paid to people who do some causal work and those who promote their services as a contractor, service provider or whatever. The problem is though that they are then disincentivised from declaring this income. To do so would deny them future benefits - although self employed/causal income is hardly comparable with employed earnings. Much the same is true for tax credits although at least there the system doesn't discriminate against those who start new businesses of their own.

I suggest that the new universal credit needs to recognise that not all unemployed people will be looking for a job. If the Government is serious about encouraging "more people to make a job rather than take a job" the benefits system must support this aim.

Thoughts?

The end of IHT avoidance schemes?

For some reason Inheritance Tax (IHT) avoidance seems to be considered even more of a sport than efforts to avoid other taxes. Actually there are probably 3 reasons for this:

1. Some people consider the tax to be unfair in principle (unlike for example income tax and capital gains tax);
2. There is an even longer lead time between IHT planning and the time when anyone can be certain as to how effective (or ineffective) was the effort to reduce the IHT bill; and linked to this point
3. The fact that IHT avoidance schemes have not, to date, been covered by the Disclosure regime (DOTAS).

This is about to change. HM Treasury and HMRC are aware that tax avoidance schemes are being used to avoid the IHT charge that arises when property is transferred into trust. FA 2010 included legislation to close down two such specific schemes. The concern, however, is that the full extent of such activity in this area is not known. And the time lag already mentioned means it can be many years before schemes become known to HMRC.

Including IHT in the DOTAS regime should help HMRC identify schemes and users at an early stage. I doubt this will reduce the number of adverts in the weekend money pages to 'reduce your IHT bill'. But it may mean that IHT planning has to become more bespoke and specialist. Nevertheless I am sure that the 'sport' will continue for many years to come. Don't you?

What a difference. Should mean less mistakes in new tax law.

I rather anticipated that the Budget day promise of a new approach to tax policy making was the start of a revolution.

Well, the proof of the pudding is here and we now have draft legislation and an informal consultation on 32 separate technical tax measures which the coalition Government inherited from the previous government. The tax measures are to be legislated for in Finance (No2) Bill 2010 which is expected to be introduced to Parliament in the autumn.

The Government is inviting comments by 3 September on whether the draft legislation now published will work as intended. They are not seeking comments on the policy behind the measures.

In effect what is being sought is free consultancy and input from the professional bodies, retired tax geeks and any other informed commentators who might otherwise complain about poorly drafted new tax law. And we've had plenty of that in recent years - largely I suspect because of the speed with which the then Government wanted to introduce changes. "Fast even if wrong" seemed to be the mantra. Now we have a more collegiate approach intended to get it right first time. It should make life easier for everyone and reduce the frustrations and time wasted when poorly drafted law comes into effect.

The draft legislation now published includes the following measures:

1. Capital gains tax private residence relief adult placement carers
2. Collection of income tax where sum deducted by payer
3. Company distributions
4. Consortium claims for group relief
5. Enterprise management incentives
6. Film tax credit - unused losses
7. Financing costs and income of group companies
8. First-year allowances for zero-emission goods vehicles
9. Landfill tax criteria for determining material to be subject to lower rate
10. Long cigarettes
11. Non-business use of business assets etc.
12. Payments to special guardians and those in receipt of residence orders
13. Penalties for failure to make returns etc.
14. Penalty for failure to make payments on time
15. R&D relief for SMEs - removal of intellectual property condition
16. Real estate investment trusts - stock dividends
17. Recovery of overpaid tax stamp duty land tax and petroleum revenue tax
18. Settlor to return excess repayment to trustees etc.
19. Venture capital schemes

Would a GAAR mean less work for accountants?

A General Anti-Avoidance Rule (GAAR) is identified as a possible way forward in the June Budget document: 'Tax Policy Making - A New Approach' - which I have referenced previously on the TaxBuzz blog. I also suggested here last October that "we are likely to see a draft General Anti-Avoidance Rule (GAAR) emerging in the not too distant future".

The Government say that they will be consulting with 'interested parties' over the summer to consider the case for developing a GAAR. The last time this was proposed (in 1999) HMRC and the profession concluded that it would be unworkable. Much has changed in the interim, In particular we now have a number of Targetted Anti-Avoidance Rules (TAARs). Adapting the wording used in TAARs could lead to a GAAR and would potentially lead to the removal of TAARs.

I was intrigued by the views of a Tax Director with whom I was discussing this issue recently. He is responsible for the tax affairs of a large property company that now operates as a Real Estate Investment Trust (REIT). This means the business is 'transparent' for tax purposes. It pays no corporation tax or capital gains tax. Instead the investors pay tax on their share of profits and gains.

The Tax Director pointed out that REITs are, effectively, subject to a GAAR which applies if HMRC considers that the REIT has taken any action in an effort to obtain a tax advantage as a REIT, either for itself, or another person. In such cases HMRC may, by notice to the company, counteract the advantage and assess the company to an additional amount of corporation tax, and impose a tax penalty.

The Tax Director with whom I was speaking suggested that the existence of this GAAR for REITs provides them with GREATER certainty as it leads to them having closer dialogue with HMRC. Such dialogue occurs directly between the Tax Director and the REIT's CRM in HMRC. The auditors rarely get a look in. The Tax Director was quite clear that a GAAR is not to be feared. In his view it simplifies things AS LONG AS HMRC IS ADEQUATELY RESOURCED to discuss those issues that require 'debates around the edges'.

The Tax Director suggested that maybe one reason the profession is anti-GAARs is that they fear it will lead to less advisory work. Personally I doubt this outcome - other than perhaps as regards the largest of companies. What do you think?

Freedom to abolish tax laws

Last week the Deputy PM, Nick Clegg, announced the launch of 'Your Freedom' a new Government website where British citizens can nominate laws they wish to be repealed or altered because they're unnecessary, restrict civil liberties or hinder development of business.

Already there are over 700 suggestions for changes to the tax system. I'm not convinced that any will ever make their way into a Finance Bill or that contributing to this site will prove more effective than making representations through the professional accountancy and tax bodies.

But, if you have strong views about any aspects of tax legislation that you think should be repealed, you may want to record your views on this website. You can do so anonymously although why anyone with a serious idea would choose not to be identified with it is beyond me.

As is suggested on the home page of the site, you should first do a quick search using key words to see if someone else has already identified your chosen law for prospective abolition. Sadly the majority of tax related ideas to date are rather ill informed, too generic or simply mad. Maybe the site will be enhanced to require the identification of the specific laws to which contributors are referring.

I managed to identify a couple of suggestions with which readers may wish to identify:

• End IR35 immediately - NB: I suspect this is in prospect anyway and that it will be replaced with something more workable.
• Zero Rate All Supplies Between VAT registered businesses - I can follow the logic here - although partly exempt businesses would complicate the position.

If you spot (or post) any others by all means add links to them in the comments against this blog post.

Huge change in approach means we'll get 3 Finance Acts in 2010

The first (truncated) 2010 Finance Act was rushed through just before the House rose for the General Election.

The Budget Red Book notes at para 2.118 that a new Finance Bill will be published very shortly "to ensure swift Royal Assent for its key priorities". This will result in the Finance (No 2) Act 2010.

We are also promised a further Finance Bill in the autumn. This will be published in draft for comment in July. This is in accordance with the proposed new convention whereby the majority of tax changes are initially published in draft for consultation three months before formal publication (para 2.11 of Tax policy making: a new approach).

This third bill will then become Finance (No 3) Act 2010.

I'm telling you - the proposals for a New approach to Tax Policy Making are ambitious and very welcome. It seems clear that the professional bodies have got their points across effectively to the both the Tories and the LibDems in recent years. The last Government's approach to Tax Policy making on the hoof and the evidently rushed and botched legislation that ensued was a disgrace. These new proposals, if carried through, will set a new standard and help improve our creaking tax system.

Tax Policy Making - Oxford University Tax Conference

I was already looking forward to attending the Oxford University's Centre for Business Taxation Summer Conference on 2 July 2010. The keynote speech will be presented by David Gauke, Exchequer Secretary to HM Treasury. This is quite a coup as it is his name that appears as the signatory on page 3 of the June Budget Consultation document "Tax Policy making: a new approach."

As indicated in my last blog post I consider this to be an ambitious and welcome set of proposals to move far away from the increasingly crazy process that the last Government permitted - if not encouraged.

There is no charge for attending the Oxford business tax conference which takes place on 2nd and 3rd July 2010. Programme and booking details here.

Draft tax legislation to be available for comments

First impressions of the June Budget document on "Tax Policy Making - a new approach" are very positive. If all of the proposals therein are brought into effect this would represent a bigger change even than the move of tax policy making from the (old) Inland Revenue to HM Treasury in 2005. And these proposals are far more welcome, progressive and taxpayer friendly too.

Without attempting to summarise the entire 16 page document let me just highlight one of the most welcome ambitions expressed therein:

3.4 Subject to views from interested parties, the Government proposes a minimum of eight weeks for comments on the draft Finance Bill legislation. This will ensure that there is sufficient time for the Office of Parliamentary Counsel to consider comments and amend the draft legislation, where necessary, ahead of publication of the Finance Bill.

3.5 However, a significant volume of changes to the tax code are dealt with outside the Finance Bill, through secondary legislation. Where secondary legislation makes a substantive change to the tax code, the Government will apply the same principles and disciplines as are applied to Finance Bill legislation, including publishing the legislation in draft for scrutiny. For secondary legislation, the Government proposes a minimum of four weeks for consultation on the legislation itself.

3.6 The Government welcomes views from interested parties on the practicalities for consulting on draft legislation, including the format and channel for providing comments, to ensure that it is efficient and effective for all involved.

Properly planned changes to the tax system? That'll be the day.

I was pleased to read in the Evening Standard that David Cameron has promised that:

“We are going to do a novel thing in this Government. We are going to plan properly, proper meetings, proper processes, proper Budgets.”

I'm recording this here for posterity. In context the statement is a reaction to the furore about prospective changes to the CGT regime (about which I have commented previously on this blog).

If the coalition Government is serious about doing things properly it would mark a sea-change in approach as compared with the previous regime under Brown and then Darling.

So often tax changes announced in the Budgets in each of the last 13 years were ill thought through, ill-advised or simply headline grabbers that would add needless complications to the tax system. I have referenced some of the more recent and obvious examples on this blog over the last 3 years - see below.

Will the coalition government be able to avoid replicating this approach? I really hope so. I especially look forward to the Tories' promise being fulfilled to establish an Office of Tax Simplification.

Will it happen or is it simply words? Time will tell.

Previous relevant posts:

• Making Taxes Simpler
• Bank Payroll Tax - designed to create a pre-election distraction?
• Budget tax changes can't help self employed until 2012
• Why are capital gains taxed at less than half the main rate of income tax?
• VAT changes will HURT small businesses
• The tax simplification project is abandoned - not that it got very far
• "Policy by panic"
• Tax credits time bomb threatens to explode

Secret way to give immediate effect to CGT rate rise

When will the much trailled CGT changes take effect?

Until recently I was of the view that a rate change couldn't be introduced part way through the tax year (eg: on 22 June when the new Chancellor presents his 'emergency' budget). I don't imagine HMRC's software, or that of the commercial suppliers, could be reprogrammed to address such a change of tax rate part way through the year.

I remain doubtful that changes will be backdated to the start of this tax year on 6 April. And yet, if the changes only come into effect next year what's the point in making so much fuss now?

There is a relatively simple way however that an effective change in the rate of CGT could take effect from 22 June. It need be no more complicated than the introduction of entrepreneurs' relief which gives an effective rate of 10%.

This relief was introduced in a hurry in response to the outrage that followed Mr Darling's surprise move of reducing the headline rate of CGT from 40% to 18% just two years ago. One consequence of this change was the abolition of taper relief. As a result the effective rate on qualifying gains was to be increased from 10% to 18%. To calm the objections Mr Darling agreed that the first £1m of entrepreneurial gains would only be subject to an effective rate of 10%. (Now £2m since 6 April 2010).

The point is that there is no 10% rate of CGT.

Gains which are subject to an effective rate of 10% are computed by charging 18% tax on 5/9ths of the gain itself.

Assume a gain of £30,000. 18% tax thereon would be £5,400. Instead the tax is charged on £30,000 x 5/9ths. That's 18% of £16,666. This gives a CGT charge of £3,000 which is an effective rate of 10% on the £30,000 gain.

In the same way the Chancellor could announce that, with effect from 22 June, CGT will be charged at 18% on a multiple of everyone's gains.

For example, after computing the gain on disposal of an asset, assume you had a gain of £50,000. CGT at 18% thereon is currently £9,000. If however that 18% tax was charged on 2 x £50,000, that would give a tax charge of £18,000. This would be an effective rate of 36% which is "similar or close to [the 40% rate] applied to income" as promised in the coalition agreement.

I had been wondering about the wording of that pledge anyway. Why "similar or close to"? Why not "the same as" (as was the case for short term gains until 2008)? Maybe the secret is now out.
What do you think?

Previous posts that address the rate of CGT:

• Coalition CGT plans could cause problems for all
• Prediction: CGT rate will increase to 50% this year
• Why are capital gains taxed at less than half the main rate of income tax?
• PBR - CGT reforms. It's not all bad news

A lower rate for Corporation tax in Northern Ireland?

The new Northern Ireland secretary, Owen Paterson, says he would back an inquiry into whether the province should have lower rate of corporation tax than applies in the rest of the UK. How odd.

Ever since corporation tax was introduced to the UK in 1965, the rate has been consistent across all the regions. I don't recall every hearing previously of any suggestion that this should change.

I am aware that Politicians and business leaders in Northern Ireland have been lobbying for a dramatic cut in corporation tax. They point across the border to the Irish Republic, whose corporation tax is only 12% — among the lowest in the western industrial world.

Companies and political parties in the north claim that Northern Ireland operates at a severe disadvantage when trying to attract multinational capital in competition with the republic. Of course this is no different to the rest of the UK. Is the enquiry intended to be a genuine intent to consider all of the issues? Or is the outcome already clear - as may seem obvious to anyone who understands our corporation tax system? Or am I being too limited in my thinking?

Let's assume it were possible to determine a simple way to determine the extent to which corporate tax profits earned in NI were subject to a lower rate than in the rest of the UK. Three simple challenges occur to me immediately:

• What would stop existing companies from seeking to relocating there or simply establishing subsidiary companies or branches there to benefit from the lower rate?
• How about the additional administrative burden of requiring 'transfer pricing' adjustments as between the different parts of a group based on the mainland and in NI?
• And, despite the best efforts of HMRC, companies will shift profit out of the rest of the UK and into Northern Ireland and pay less tax overall as a result.Who will pick up the increased burden?
  

And then, what next? A lower rate for companies based in Scotland? And then for those in Wales? The Cornish Nationalists would have something to say about such a policy too.

Maybe the North of England would be next, then the Midlands? Indeed, everywhere other than London and the South-East?

I tend to think that the outcome of the inquiry, were it to be undertaken, is already quite obvious and inevitable. There can be no differential corporation tax rate as between different parts of the UK. I would imagine the Treasury knows this too.

What about you?

Coalition CGT plans could cause problems for all

Back in March I predicted that the CGT rate will increase to 50% this year. I may be wrong. It may not be until next year.

The Coalition agreement declares the two parties:

"agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities".

Annual CGT exemption
The Liberal Democrat manifesto envisaged cutting the personal capital gains tax allowance to £2,000pa. There is no mention of this in the joint statement but reports suggest a reduction in the figure from £10,000 to just £5,000 or maybe £2,500 pa. If it's too low it will cause compliance headaches for anyone selling relatively low value assets who does not currently file an annual self assessment tax return.

Entrepreneurial business activities
Everyone is speculating as to what this phrase might mean:

• Will it cover much the same as the (max £2m) gains that currently qualify for the entrepreneurial CGT rate of 10%?
• Might this relief be extended to cover employee share option and share ownership schemes? This would strike a difference from the previous regime which only favoured entrepreneurs. I think it's optimistic but I agree that there is logic in providing a similar relief to the workers in entrepreneurial businesses.

Non-business capital gains
This would affect second homes, stock market investments and other short-term or speculative gains. What short memories some commentators seem to have. These were taxed at the marginal income tax rate (generally 40%) until 6 April 2008. The rate dropped to 18% only two years ago.

From 6 April 1998 inflationary gains were excluded through a taper relief which also gave a measure of relief for anything other than the most short-term gains. So longer term gains on non-business assets were often only taxed at an effective rate of 24%. It's reasonable to expect the re-introduction of a similar distinction between longer and shorter term gains.

Start date of new regime
Will it take place mid way through the current tax year or only be introduced with effect from 6 April 2011? If I were a betting man I would say the latter. Incidentally if the increase is deferred until 6 April 2011 there would be no additional CGT paid until 31 January 2013.

What are your views on the prospects of changes to the CGT regime?

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.

Inheritance tax - Who's right? Who is really at risk?

The two main parties are arguing as to the impact of inheritance tax and who would benefit if the rules were changed.

Back in October I posted an item here: IHT receipts FALL under Labour - what's going on? This followed a report in the Guardian that Inheritance tax drops to all-time low under Labour. Exploring the issue further I concluded that the number of estates paying IHT would fall in the immediate future. My conclusions were drawn from HMRC's data and the impact of recent changes to the IHT rules.

I suggested that the number of estates paying IHT would fall, probably to something around 4% which accords with the Chancellor's later assertion in his PBR that "fewer than three per cent of estates will pay inheritance tax." Leaving aside arguments as to whether the tax is wholly "avoidable" if one is very wealthy and employs top tax experts, this is not going to affect 'Middle-England'.

The Tories have now extrapolated data from the Office of National Statistics that seems to show that over 4 million adults have non-pension wealth above the current inheritance tax threshold of £325,000. And this leads to the conclusion that one in five families and one in 10 people above the age of 18 are potentially liable to IHT.

It's simply not true however to suggest that "More than 4million face inheritance tax bombshell under Labour." Over and above the £325k per head exemption the rules also provide further exemptions (in effect) for qualifying business and agricultural assets.

These exemptions also mean that some very wealthy people are not currently subject to IHT as there is no cap on the value of qualifying assets that can escape IHT.

In any event, it seems fair to review the Government's data to which I referred above. If it is wrong the Tories' plans will benefit Middle-England as they assert. On the other hand, if the data is reliable, the Tories' plans will simply improve the well being and perceptions of Middle-England as they are not really at risk of a substantial liability to IHT.

The real issue is the soaring value of houses (homes) owned by people when they die and the disparity in such values across the UK. The average price of a home is now £162k so to many people only the very wealthy own homes worth £800k (which together with other assets could take an estate upto £1m). However in parts of London and the South East this is not uncommon. And I assume this is why the Tories want to raise the headline threshold so high. It might be less contentious to do something I think John Major suggested in the 1990s and John Redwood proposed, to a degree, in 2007. To exempt the main home from IHT?

The key issue for both parties is to shift the fear of inheritance tax from the consciousness of average families - wherever they live. If this requires changes to the tax rules, and I think it does, then such changes should be welcomed.

And this would also lead to a consequential and welcome development. The end of inheritance tax avoidance seminars run by promoters of standard trust-based 'solutions' - many of which are dubious in the extreme - especially in so far as they purport to reduce the IHT payable by reference to the value of your main residence.

I've heard stories of how slick presentations result in long queues of audience members who sign up and pay for a supposedly legal document there and then. They are encouraged to do this without any real regard for their personal situations and without the benefit of any qualified tax or legal advice. That's NEVER a good idea. If you have any IHT concerns do speak to a suitably qualified and independent tax adviser.

Two dozen tax changes this year announced BEFORE today's Budget

Let's see now. What's more relevant to hard pressed taxpayers struggling with the impact of the recession? The announcements that the Chancellor makes later about FUTURE tax changes? Or the tax changes that are impacting the tax payable THIS year?

I have explained in a separate blog that there is invariably a long time lag between Budget announcements and the time that they actually impact the tax bills payable by the self employed.

With due credit to the ICAEW Tax Faculty, (who first collated a list) here's a list of 24 tax changes that will have more of an immediate impact than almost anything the Chancellor might mention during the Budget later today. (NB: Tax rates and allowances for 2009/10 appear at items 1 and 2 of the second list 'From 6 April 2009'):

From 1 April 2009:

1. New powers and safeguards covering PAYE, VAT, Income Tax, Capital Gains Tax and Corporation Tax. I've blogged about these here and here.
   
2. New time limits for tax claims and assessments. Many are now 4 years rather then the 6 years they were previously.
   
3. New two-tier system of tax tribunals - a 'first-tier tribunal' and an 'upper tribunal'. General Commissioners, Special Commissioners and the VAT & Duties Tribunal no longer exist.
   
4. Corporation tax rates were to change but will now remain 28% (main) and 21% (small) for Financial Year 2009.
   
5. The Corporation Tax Act 2009 (CTA 2009), produced by the Tax Law Rewrite project, received Royal Assent on 26 March 2009. It came into force on 1 April 2009 and has effect for corporation tax purposes for accounting periods ending on or after 1 April 2009 and for income tax and capital gains tax purposes for the tax year 2009/10 and subsequent tax years. Although, the CTA 2009 does not change the effect of the law it does correct some minor anomalies. It also incorporates two extra-statutory concessions and one statement of practice. Particular features include the removal of references to 'schedules' and 'cases 'and the amalgamation of profits arising from UK and non-UK sources.
6. New rules for tax relief for business expenditure on cars (Corporate) – capital allowances will be dependent on emission levels. Hire charges for cars will only be restricted for cars emitting over 160g/km using flat rate of 15%. The new rules for cars are that those with:

• Emissions below 160g/km go into 20% pool
• Emissions over 160g/km go into 10% pool
• 100% FYA still available for cars not more than 110g/km

7. Headline rate of Industrial/Agricultural Buildings Allowances falls to 2% (was 3%).
   
8. Amended loan relationship rules for accounting periods beginning on/after 1 April 2009. Where one company releases a trade debt owed by another, the debtor will not be charged on the amount released. As before, the creditor company does not get relief for the amount written off.
   
9. Changes to simplify the entry and leaving rules for small businesses using the VAT flat rate scheme, see PBRN25, 2008 Pre Budget Report Notes. The entry test requiring total business income to be less than £187,500 is removed completely. Eligibility to join the flat rate scheme will be determined solely by the turnover of the business.
   
10. VAT staff hire concession ends (announced in Budget 2008). This had allowed employment businesses supplying temporary staff to charge VAT only on their own fees and not on wages paid by the client to workers.
    
11. Turnover ceiling for using a published VAT retail scheme is raised to £130m, , see PBRN24, 2008 Pre Budget Report Notes.
    
12. Newly rated premises qualify immediately for small business rate relief.
    
13. For 2009/10 only empty premises with rateable value below £15,000 are exempt from business rates.
    
14. Expenditure incurred on or after 1 April on restoring long term derelict land may qualify for land remediation relief.

From 6 April 2009:

1. New rates of tax free allowances for 2009/10: eg: personal allowance up from £6.035 to £6,475
   
2. Income tax rates and bands for 2009/10 eg: basic rate of 20% (unchanged) will now apply to incomes upto £37,400 (previously £34,800)
   
3. Employers with 50 or more employees have to file their employee starter and leaver notifications and similar pensions notifications online.
   
4. Mandatory e-filing of PAYE end of year returns by small employers (<50>
5. A new A4 version of the P45 form replaces the old style A5 form.
   
6. Changes to form P46 (Car), used for reporting the private use of cars supplied by employers.
   
7. Benchmark rates for day subsistence introduced - HMRC have introduced a set of benchmark scale rates that employers can use to make certain day subsistence payments free of tax and NI to employees who incur allowable business travel expenses. Employers do not have to use the benchmark rates. They can reimburse their employees' actual expenditure or apply to HMRC to agree a scale rate appropriate for their business needs in a dispensation.
   
8. Only earnings up to ‘upper accruals point’ of £770 per week will accrue entitlement to the income related S2P. Earnings between UAP and upper earnings limit incur additional NIC but for no extra pension. Upper earnings limit rises from £40,040 to £43,875, giving an increase in annual NIC payable by many higher rate taxpayers, of £383.
   
9. Leaflet IR20 replaced - Booklet IR20: Residents and non-residents – liability to tax in the United Kingdom has been replaced by booklet HMRC6: Residence, domicile and the remittance basis. Any practices associated with IR20 – whether overtly expressed or not – will not apply from 6 April 2009, unless provided for outside of IR20 (in statute law, in case law, in a published extra statutory concession, or in a guidance note).
   
10. New rules for tax relief for business expenditure on cars (unincorporated businesses) as for companies, see above.

Budget night summaries - worth the effort?

My summary is better than your summary. Actually they're all pretty similar. So similar in fact that I see little point in devoting time and effort to producing an overnight Budget summary.

Over the years I was in practice I often worked as part of a team (and latterly even led the team) that worked late into the night attempting to produce a unique Budget night summary. I never felt it was worth the effort - even when we moved to web based copy rather than printed summaries. In almost every case such summaries did little more than regurgitate what was in the Budget day press releases. There is rarely time or space for informed comment.

Some firms defend their attempts on the grounds that clients like them. Really? Or are they just being kind. Are they really of any value? The papers will invariably contain more detailed summaries, analysis and comment than any one firm's overnight Budget commentary. And within 48 hours it's often out of date as more related documents are published by HMRC and Treasury revealing more details of the announcements contained in the Budget. And in time some of the least well thought out ideas will be modified (if we're lucky) before new rules come into force. I'm quite sure this will happen, for example, as regards the taper provisions related to the 45% top rate of tax announced last year - which causes an unintended rate of 60% on some income bands between £100k and £150k.

If you really feel it's necessary then, in my view, it's much more cost effective to buy in a Budget summary from a commercial source - and to share this with clients and contacts in a branded cover. This approach allows you to satisfy the (supposed) client demand whilst allowing you to focus on key elements of the Budget that might be of immediate relevance to key clients. In recent years there haven't been many such issues as most tax changes are now announced so far in advance. The reduction in VAT from 17.5% to 15% last year is the exception that proves the rule! ;-)

This year of course even more attention than usual is being focused on the Budget. But how clear will the commentaries be as regards the impact of the tax changes that Mr Darling announces? ie: When will the tax changes actually hit taxpayers' pockets? I'll post a separate blog about this.

On past performance most commentators will only have time to replicate the headlines and spin that are contained in the main Budget press releases. I'm happy to let others do that. I'll explore and explain the TaxBuzz over the coming weeks and month as further details and implications become apparent.

Tax predictions from 2001

I've just found a list of predictions I made during a tax seminar at which I spoke in December 2001. If only I'd started the TaxBuzz blog back then I could have posted them here for posterity. OK - I'll post them now. How did I do?
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While everyone else is focused on short term predictions I'm going to have a go at predicting what will happen in 5-10 years time (ie: between 2006 and 2011) assuming there's no change of Government:

• The top rate of income tax will be increased to 45% on incomes over £100,000;
• The rate of CGT will remain linked to the income tax rate so as to avoid incentivising the conversion of income into capital;
• The small rate of corporation tax will be abolished after moving closer to the standard rate;
• The tax credits system will suffer constant tweaks in a continued effort to disguise the fact that it's not fit for purpose;
• Tax relief for pension contributions, favoured investments and personal allowances will only be given at basic rate;
• A statutory rule will be introduced to determine whether or not anyone is UK tax resident in each tax year;
• The merged Inland Revenue and HM Customs & Excise will become known colloquially as iTax;
• A tax scheme disclosure rule will require the promoters and users of all tax avoidance schemes to make themselves known to iTax - and this will move more tax avoidance underground;
  
• Non Doms will have to pay an annual fee if they want to avoid paying UK tax on worldwide income and gains;
• National Insurance charges will be increased by 0.5% and it still won't be called a 'tax';
• Electronic filing of all tax returns will become compulsory;
• Employers will receive an incentive payment to operate the PAYE system and pay witheld taxes over on time each month;
  
• The IHT nil rate threshold will become transferable between husband and wife;
  
• The tax rules will be changed so as to encourage one man businesses to incorporate and then, after a short time, there will be a crackdown on the tax efficiency of one-man companies;
  
• VAT will be reduced to 15% for a 13 month period to 'stimulate the economy';

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I didn't do badly now did I?!

OK - I admit it. I didn't predict all this 6 years ago. I doubt anyone could have done so - especially that last one!

This post was inspired by one written in a similar vein on a more general topic by Seth Godin. In it he notes how impossible it is for us to predict what life is going to be like just a few years into the future. He suggests that "being ready for anything is the only rational strategy."

Accountants and tax advisers have always known this. The constancy of change is one of the best known characteristics of tax work. It was one that attracted me into the profession over 25 years ago. And it was also one of the reasons I stopped being a tax adviser and set up the Tax Advice Network.

As we move into 2009 with the economy in recession I hope that the tax changes that are to come this year and over the next few years don't cause you to want to give up giving tax advice too.

If you're on Twitter you can tell your followers about this blog post by clicking here to: Tweet a link to this blogpost. You can send the tweet, which contains a shortened link, as is or edit it.
And you can follow me @bookmarklee and @TaxAdviceNet depending on your interest.

VAT changes will HURT small businesses

Despite my comment in a previous post that I'm not a fan of instant Budget analyses I did find myself in a bizarre situation yesterday. I was providing instant comment and analysis as regards the likely impact of the VAT cut announced in the PBR. Or, as at least one radio station insisted upon describing the move, "VAT slashed". Somewhat of an over exaggeration I thought especially as many traders won't change their prices to reflect the change.

We had of course had time to consider some of the related issues as the reduction from 17.5% to 15% in the standard rate of VAT had been widely leaked beforehand.

I wasn't alone in noting the practical issues for small businesses. These are two fold:

No compulsion to lower prices but retailers especially may be expected to explain that they've included the VAT rate cut in any wider discounts they are offering; and

Significant time, effort and hassle arising from the need to recognise the rate change in their accounting records and systems.

Beyond this I haven't however seen any other references (yet) to the VAT nightmare before Christmas that will ensue when everyone gears up for the change back to 17.5% over the festive holiday period next year.

The Government it seems takes a contrary view. Their impact assessment anticipates that the average cost per small business will be less than £100. This comprises £7 for familiarisation, £25 for repricing, £13 for extra bookkeeping, £25 for extra accountancy costs and £13 for system changes and upgrades. They've also allowed a further £10 for purchasing patches or upgrades to accounts packages whilst recognising that these may be provided free by software suppliers.

Would readers of this blog care to share their views by way of comments as regards these cost figures?