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

CGT is NOT double taxation. It's just misunderstood.

Let's just clear up a key misconception about CGT. Some people argue that it amounts to double taxation. "I've paid tax on my earnings, it's double tax if I have to pay CGT when I invest my savings."

Er, no. That's not how it works. You only pay Capital GAINS Tax on GAINS you make. That is, on increases in the value of your investments - and only when you realise those gains by disposing of your investments. There's no double taxation involved.

If you earn £1,000 and have £600 left after (top rate) tax you can either spend the £600, save it or invest it. If you save it in a bank account you will receive interest and pay tax on the interest. Your £600 is unaffected by this.

If you invest the £600 in shares, for example, these will increase or fall in value. If you have invested in a second property, this will, hopefully increase in value. Again it's only when you realise that increased value that CGT becomes payable and only by reference to the increase.

Let's go back to the example of the shares acquired for £600. If, when you sell the shares in the future, they are worth, say £800, you will have made a capital gain of £200 (£800-£600). CGT is only payable by reference to that gain of £200 (hence Capital GAINS Tax). Again, the £600 you earned, after tax, is unaffected.

So, tell me, how does this constitute double taxation?

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?

Ministers for Tax raising and Tax policy

The Treasury have published a list of headline ministerial responsibilities for key ministers in George Osborne's new team.

On the tax side, the breakdown of roles is a little different from that which applied under the previous regime. The majority of key responsibilities are to be shared by two ministers:

Exchequer Secretary to the Treasury: David Gauke MP

• Strategic oversight of the UK tax system including direct, indirect, business and personal taxation;
• Corporate and small business taxation, with input from the Commercial Secretary;
• Departmental Minister for HM Revenue and Customs and the Valuation Office Agency;
• Lead Minister on European and international tax issues;
• Overall responsibility for the Finance Bill.

Economic Secretary to the Treasury: Justine Greening MP

• Environmental issues including taxation of transport, international Climate Change issues and Energy Issues;
• North Sea oil taxation;
• Tax credits and child poverty and assisting the Chief Secretary on welfare reform;
• Charities and the voluntary sector;
• Excise duties and gambling, including excise fraud and law enforcement;
• Stamp duty land tax;
• EU Budget;
• Ministerial responsibility for the Royal Mint and Departmental Minister for HM Treasury Group;
• Working with the Exchequer Secretary on the Finance Bill.
  

The Financial Secretary to the Treasury, Mark Hoban, will instead focus on financial services, banking, the City and financial markets in the UK and abroad. He will be responsible for the FSA, personal savings and pensions policy, and the aftermath of Equitable Life.