Knee + jerk = government's tax strategy

by Andy White, Carter Backer Winter

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12 Jun 2012

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...OR, 'IF ANYONE'S SEEN the government's tax strategy, could they please return it?'

An unusual title, no doubt, but recent events really do make me wonder whether the Government has a coherent tax strategy. Or is it simply reacting to events with a series of knee-jerk provisions?

I have heard comments to the effect that the March Budget was so poorly thought-through that it must have been written on the morning of the speech. Subsequent events make it clear that even that analysis is overly generous; some parts are apparently still being written.

There is no doubt that taxpayers dislike two things about tax. Firstly, and most obviously, they don't like paying it. However, evidence shows that, where the rates are perceived to be fair, most citizens will stump up their share without too much complaint.

Secondly, they hate uncertainty. If the tax consequences of a particular action cannot be quantified with any degree of confidence, entrepreneurs in particular will find life very difficult.

In that regard, the government has failed lamentably in its one discernible (and laudable) policy, which is to make the UK an attractive place to do business. It's all very well operating in a reasonably low-tax environment, but if the fiscal consequences cannot be judged with any degree of certainty, business leaders will take their companies elsewhere.

So where is the evidence for this somewhat cynical view?

Well, let's examine recent government u-turns and, in particular, the decision not to cap tax relief on charitable donations.

As it happens, I support the cap. Why should part of my tax money go to a charity of my neighbour's choosing? If he wishes to support a particular charity, he is entitled to do so. But government funds should not be given to charities at the whim of one individual. We live in a democracy and therefore it is for the government, not individual citizens, to decide where the money goes.

Of course the decision to present the proposal to cap relief as part of a campaign against "abusive tax avoidance" was at best naïve and at worst deluded. The outcry from those philanthropists whose only objective was and is to benefit their chosen charities was predictable. But there is another aspect to this.

Only last year, this same government introduced a new inheritance tax relief designed to encourage people to leave more money to charities in their wills. The legislation itself is ridiculously complex and I cannot believe that anyone will be incentivised to exploit a tax relief that is so impenetrable that they cannot understand it (so much for the Office of Tax Simplification). Even if they are, the accountant's fees in carrying out the calculations are likely to wipe out any benefit.

But it is also designed to have the completely opposite effect to that envisaged in the Budget proposals. On the one hand, legislation has been passed to encourage taxpayers to give more to charity, but then, on the other hand, new legislation is proposed to penalise those that do.

This is not strategy – this is knee-jerk legislation that is sending out conflicting signals and making our tax system a laughing stock around the world. More seriously, it is making the UK a particularly unattractive place to set up business and that will be damaging to our prospects of economic growth.

Andy White is a tax partner at Carter Backer Winter

Image credit: Shutterstock

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