Budget prediction: No immediate merger of tax and national insurance

It was inevitable that, due to a short holiday last week, I would miss the opportunity to offer timely comment and debunking of some key tax stories. As I'm back just in time for the Budget there seems little point in writing about anything else today.

However there is one point about which I've been unable to resist tweeting this morning:

We can safely ignore the scare stories about a merger of income tax and national insurance. The coalition Government will NOT advocate simply adding NI to IT. There will be a consultation and many wrinkles to iron out first.

Last week The Office for Tax Simplification published their interim report on small business tax. The executive summary notes that:

"genuine and long lasting simplification can only be brought about through major structural changes to the UK tax system. Our key recommendations are that the Government starts to look at reforming the structure and we recommend that a timetable be set out by the end of the year. The two key areas that require attention are:

• The integration of income tax and national insurance contributions (“NICs”); and
• Introducing a radical new approach to taxation for the very smallest unincorporated businesses.

Studies on how best to achieve this could be carried out, for example, by setting up a working party and through consultation with advisers and professional bodies within a specified timeframe."

At chapter 3 the report sets out the proposed integration steps - being the issues that would need to be considered and addressed:

• Consistency in the definition of earnings;
• Consistency in the required calculations;
• Reliefs and exemptions on either income tax or NICs;
• Treatment of pensioners;
• Treatment of self-employment; and
• Treatment of savings and dividend income.

Many commentators seem to assume that this would all be done in isolation. For example, they suggest that a new combined rate of IT and NI would be charged on all dividends - whether received by small business owners from their own companies - or by pensioners with investment income. This is wooly thinking and most unlikely in my view.

Even though the objective would be to try to retain the same level of aggregate tax (incl NI) I firmly expect this will involve changes to relevant allowances and reliefs.

I'll resist commenting further now as I anticipate we will hear more about this in the Budget - or more precisely, we'll read more about it in the Budget paperwork later today!

Budget prediction: NO IHT changes and I'll tell you why...

In its report, published last week, the Office of Tax Simplification (OTS) said:

"On the basis of the low number of estates caught by IHT and the useful but relatively low revenues [after reliefs] that it raises, we consider that a more appropriate approach may be to review the whole of IHT rather than to consider individual IHT reliefs. Such a review may also encompass a review of capital gains tax and we envisage this as a longer term project."

I am surprised that anyone could use this statement as the basis for predicting that:

"Inheritance tax squeeze expected in budget"

That was however the Guardian's online headline on Sunday in a piece that heavily quotes Danny Cox, head of advice at the independent financial adviser Hargreaves Lansdown.

In fact, at para 2.33 of the OTS report, they state that the review they are suggesting:

"a proper review of inheritance tax, whether by HMRC, HM Treasury or the OTS....would clearly be a longer term project."

What do I think?

I doubt anyone in HMRC, let alone the Government, Treasury or OTS has the time to "review the whole of IHT" in the near future. The OTS were tasked with reviewing tax reliefs and this included those available when computing liabilities to IHT. This is the only reason why they make reference to it. There is no agenda to review IHT or to increase the tax generated by IHT.

IHT is expected to generate about £2.3 billion tax this year. A large sum in itself but this comes from only around 12,000 estates out of the 560,000 adult deaths (these are both 2009 figures). So just 1 in every 46 deaths gives rise to IHT. And the main reliefs from IHT do not have a significant impact on the amount of tax collected.

Back in 2007, when in opposition, George Osborne talked about raising the IHT threshold to £1m. The objective being that:

“only millionaires pay death duties”

It really is all but inconceivable that, now he is Chancellor, Mr Osborne would suddenly decide to change the rules and attempt to increase the take from IHT. It would take such an about-turn that he would get very dizzy!

Tax tease: OTS provides headline fodder re tax reliefs

The Office of Tax Simplification (OTS) has produced the first of two reports due in advance of the Budget later this month. Next week should see the much awaited interim report on possible simplification of small business taxation - including the IR35 rules and 'income splitting' between husbands and wives.

But first we have Recommendations to simplify UK’s “spaghetti bowl” of tax reliefs. And inevitably the media have sought out what they hope are issues that will cause most concern amongst their readers and viewers. For example:

• BBC business news notes that the 15p a day luncheon voucher relief may be removed.
• Money Marketing notes the calls for IHT and CGT reviews and the suggestion that merging income tax and national insurance would be a long term project that would deliver “major simplification”.
• The FT headline writer went for: Call to scrap blind person’s tax allowance

In each case however the report explains the thought process behind the recommendation and none are made lightly.

It is also worth noting, from the executive summary, reference to a number of key themes that emerged during the OTS review of tax reliefs:

• Merging income tax and NIC – this is a long term project of structural reform that would deliver major simplification;
• Employee benefits and expenses – The longer term aim would be to align the treatment of employee benefits, with shorter term aims of simplifying many minor benefits with a de minimis limit of £100/£500, or amending the current £8,500 threshold;
• Inheritance tax and trusts – the reliefs for inheritance tax are integral to the policy and we consider that a more appropriate approach would be to review the tax as a whole;
• Capital gains tax, particularly as applicable to companies – the capital gains systems for individuals and companies have drifted apart, with gains by individuals taxed at a lower rate than income to reflect inflation, whereas companies are still required to calculate indexation. Our aim would be to realign the treatments and simplify the tax, but as there are changes in relation to corporate capital gains expected in Finance Bill 2011, this is clearly a longer term project; and
• Environmental taxes – Both landfill tax and aggregates levy should be reviewed, as both regimes contain basic charging provisions with numerous exemptions and it may be more appropriate to define what is caught rather than what is excluded.

"Our review has suggested that these areas are particularly complex areas, for example due to the number and complexity of the reliefs involved. Whilst each area is deserving of a full review, we recognise that these are complex and time consuming areas involving important matters of government policy that go beyond the current remit of the OTS"

My observation is that commentators should ensure that they read the detail behind these headlines. The OTS team are neither stupid or naive. Each of the above themes is explored in the report and recommendations made that the related issues be the subject of consultations before any changes are made. This is as it should be. None of these suggestions is going to happen overnight and certainly not in the Budget on 23 March.

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?

CGT rules unlikely to change again in this Parliament

I was fortunate to have the opportunity to clarify a point about CGT policy with Edward Troup during the Oxford University Centre for Business Taxation annual conference on Friday.

Ed is Managing Director of the Budget Tax and Welfare directorate at HM Treasury.

During his talk he had reiterated the Chancellor's observation that 28% was the highest rate it was worth having if you want to maximise the CGT tax take. Ed had also suggested that there was no serious prospect of the Government making any further material changes to the CGT system during the lifetime of this Parliament. To be fair he made clear this was a personal view and that he could not speak for ministers. But it was reasonable to draw this conclusion from what ministers had said both on and off the record.

So I asked Ed why this approach made sense given that there remains an incentive to convert income to capital to save tax. And also why no reintroduction of taper to reward those who invest for the longer term (eg: more than 2 years)?

Ed explained that taper reliefs complicate the tax system both by virtue of the legislation but also because of the need to 'date-stamp' every acquisition. This Government wants to simplify rather than complicate the tax system. Whilst there remains an incentive to convert income to capital this would only disappear, Ed believes, if you had the same headline rate and had to wait 5 years before a taper came into effect. That approach had been considered and dismissed as:
a) the overall tax take from CGT would reduce (as income tax rates are higher than 28% - see above);
b) a 5 year taper would lead to distortions caused by people holding onto assets for a minimum of 5 years to qualify for the taper.

Whilst I remain skeptical about both points I do accept that the system is simpler without a taper relief. I also accept that many alternatives were considered and dismissed. I still think it likely that one reason for the new system is that it required little in the way of new legislation and could thus be introduced in the next Finance Bill without any need for consultation etc. The rate has gone from 18% to 28% and the limit for entrepreneurs relief has gone from £2m to £5m. Simples!

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.

"Minister wants supertax on Britain’s top earners"

Writing in the Sunday Times, the Health Minister Ivan Lewis, calls on the government to introduce a new economic package to bail out the hard-pressed middle classes – possibly paid for by new taxes on the rich.

There are two especially odd elements to this appeal.

The first is his definition of the “mainstream majority” of comfortably off voters who swept Labour to power in 1997. They are the families who take two holidays a year, belong to private gyms and eat in restaurants, but struggle to pay soaring bills. Note these are not the rich but those to be helped. Hmm. Sounds like a political ploy to me. Yes, the tax burden has increased for such people but they are all far better off than those who cannot afford even one holiday a year.

The other thing that struck me as odd was the suggestion that new taxes on the 'rich' (or super rich perhaps, depending on your definition) would simply be an increase in INCOME tax. The example given being an extra 10p in the pound tax for earnings above £250,000. According to the report in the paper, the Treasury estimates this would yield £3.5 billion a year, about the same amount as it collects from inheritance tax. I'm rather dubious of this estimate.

What seems to still escape everyone's attention is that in last year's Pre Budget Report the Chancellor CUT Capital Gains tax from 40% to 18%. I have yet to hear any logical or policy reason for allowing anyone who makes short-term speculative gains to pay only 18% tax thereon.

Prior to 6 April 2008 the rate of CGT was determined as if your taxable gains were an additional slice of income. Unless you qualified for any reliefs most gains were taxed at 40%. If you had owned the assets (that you sold at a profit) for more than ten years the rate of tax was reduced to 24%. Now it's 18% for everyone, on all gains, no matter how short a period the assets were owned.

Surprisingly it was Mr Brown who, dare I say it, wisely determined that CGT should be charged at income tax rates in his 1998 Budget. At the same time reliefs were introduced to help investment through encouraging longer-term holding of assets by reducing the effective rate of CGT on longer-held assets. This, we were told was to "stimulate entrepreneurial activity by rewarding longer-term investment in businesses. " As a result, the effective rate of tax on many business assets could be as low as 10% until 6 April 2008. For non business assets the lowest rate of CGT payable by 'the rich' was 24% on assets owned for more than ten years.

No more does the incentive to invest for the longer term exist. Instead we have a system that encourages short-term speculative gains. It also encourages the rich to find ways to convert income (that would be taxed at 40%) into capital gain that are only taxed at 18%.

I wonder how much tax would be generated to help the 'mainstream majority' or those further down the income scale if the basic rate of CGT was still aligned with income tax rates?

Is it safe for general practitioner accountants to give tax advice?

Last week a regular contributor on AccountingWeb questioned whether or not it is safe for general practitioners to continue to give tax advice. This is in the light of my recent article in which I explained why, two years back, I gave up giving tax advice.

To paraphrase my response on that thread:
Of course it is safe for general practitioners to continue giving tax advice - as long as they recognise their limitations. I didn't want to struggle to keep upto date with day to day issues as was required for me to continue to give tax advice myself. That was my choice.

Over the last few years I've been presenting a talk to accountants around the UK on Avoiding tax related negligence claims. To paraphrase one of the topics I address: If you're accused of negligence the claimant has to prove that you owed them a duty of care and that they have suffered a loss and that the loss arises from your negligence (ie: that you have breached the duty of care). Your defence will often be that you did the same as any 'reasonably competent' accountant would have done in the same situation

'Reasonably competent' accountants comply with the Guide to Professional Conduct for those working in tax (which has been adopted by all of the main accounting and tax bodies). It includes a paragraph:
"Members will from time to time find themselves having to advise on matters which require specialist knowledge. In such circumstances they should be careful not to go beyond their own level of competence and, if necessary, should seek help from a specialist in the field”.

This should surprise no one. And of course, it's one of the reasons why I established the Tax Advice Network as a resource for accountants in general practice. It enables them to access their own choice of cost-effective, vetted, independent tax specialists as and when faced by tricky tax issues or problems that would take them outside their comfort zone.

"Policy by panic"

It was only when I was gifted a subscription to 'Private Eye' for my 50th birthday that I became an avid reader and fan. What have I been missing all these years?!

This week's first page had an item that caught my eye:

"The last-minute shambles surrounding publication of the long-awaited [xxxx] last week was another example of Gordon Brown's unique style of policy-by-panic."

"Despite the complexity of the [xxxx] and despite the [xxxx] being many months in the preparation, a final draft of the 81-page document was still doing the rounds only 24 hours before it was due to be launched."

"Insiders suggest that changes relating to the plans to [xxxx] were inserted at the 11th hour, with experts being given all of 90 minutes to respond."

"As one might expect from policy made by rabbots in headlights, the plan was a hotchpotch."

This being a blog about tax issues you would be forgiven for assuming that the above relates to the publication last year of the residence and domicile review, the income shifting proposals or perhaps related to the 10% tax band debacle.

The point is that it all resonated with me as if it were about one of the above. It could so easily have been. In fact the article refers to the Government's Youth Crime Action Plan.

I'm prepared to accept that one bad experience isn't necessarily evidence of something going wrong unless it is corroborated by a repeat experience or evdience from a secondary source.

So what does my reaction to the above story tell us about the tax system?

Making Taxes Simpler

Last week I attended the launch, at the ICAEW, of Geoffrey Howe's report and witnessed George Osborne's commitment to accept and adopt the principles set out therein.

He stated that 'the next Conservative Government will create an Office of Tax Simplification' (as proposed in the report). It will include HMRC and Treasury officials as well as members of the professions. Their remit will be to systematically examine the existing tax code and to make proposals for simplification.

Of course, in an ideal world, such a body would not be necessary but our tax code is now amongst the longest in the world. Each year far more is added than is removed. The Tax Law Rewrite project has simplified the language of the law but was forbidden from proposing changes to simplify the law itself.

I have noted elsewhere that this is all too late for me. Two years ago I gave up giving tax advice myself. I have explained my decision (which led to the creation of the Tax Advice Network) in an article that is in our T.A.N.K.

Maybe things would have been different had the OTS already existed. Somehow I doubt it. Whilst I welcome the commitment I anticipate that, even if it comes to fruition, it will take some years to have much impact.