Written by Martin Muirhead, senior partner at Kingston Smith
THE Accountancy Age Top 50+50 shows that the larger firms have been able to grow their tax income at a faster rate than their fees from audit and accounting, with seven of the top ten firms reporting more growth in tax than audit. This trend does not appear to be replicated across the rest of the 50+50, with less than a third of firms across the top 100 being able to report the same.
The demand for tax advisory services remains high and this looks to continue; but fee pressure is expected in relation to compliance services as the “Making Tax Digital” initiative is rolled out, so those firms reliant on compliance fees may see a fall in tax fees in the future. Firms will be considering adapting their services to become more advisory focused in order to succeed.
The 2016 Top 50+50 Survey has been published in a year when the subject of tax has made more headlines than it has in the last ten years, with increased public scrutiny on whether businesses and individuals are paying enough. Looking forward over the next few years, HMRC will be consolidating 170 tax offices into 13 hubs at the same time as the Making Tax Digital project seeks to simplify and automate the tax compliance cycle.
In recent Budgets, the chancellor added to the bewildering array of minor tax reliefs for individuals. We now have the personal savings allowance, the dividend allowance, the property income allowance, the trading income allowance and the transferable personal allowance for married couples and civil partners, to name but a few. Add to these the ISA, the NISA, the Help to Buy ISA and the Lifetime ISA; the complexity of the tax system is becoming so mind boggling for individuals on comparatively low levels of income that, in practice, very few of these reliefs are likely to be used.
Looming on the horizon we have the “Making Tax Digital” initiative, the goal of which is to ensure “the end of the tax return for millions of taxpayers.” The government has set itself a tight timetable for implementation but only published the long awaited consultation documents in mid-August with a deadline for response of 7 November; this leaves a little over two weeks before the Autumn Statement for the chancellor to digest the responses. Although a concession has been granted for businesses with turnover of less than £10,000, a great deal more thought is needed on how individuals and businesses large and small will deal with this monumental change to the tax system; so delaying implementation would be the most sensible approach. It is worth remembering that although this change will be ground breaking for HMRC, other countries such as Australia are on the same journey.
Although “Making Tax Digital” was heralded as the end of tax returns, at least whilst the system becomes established, the opportunities arising from the need for advice to comply seems to outweigh the threat of the profession becoming redundant; even though the nature of the compliance services advisers offer will need to evolve. The pain of the increased rates of tax on dividends is now being felt, with the top rate of tax having increased from 30.6% to 38.1% from April 2016. This increase is softened a little by the Corporation Tax rate reducing over the next few years, but it is still causing many to rethink how they take profits out of their businesses. The increased tax rate on profit extraction may cause pensions to gain popularity given the new pension freedoms announced in recent years. However, higher earners will find that they are limited to contributions of just £10,000 a year, so the ability to make pension contributions in place of dividends for some is severely limited.
Finally, large corporates should be happy that they will be paying one of the lowest rates of corporation tax in the G20 when the rate reduces to 17% in April 2020; although early hopes that this may reduce further post-Brexit have faded. They are, though, having to deal with an unprecedented amount of anti-avoidance legislation as corporate tax avoidance and the OECD Base Erosion and Profit Shifting (BEPS) project are flavour of the month. Large employers will need to pay the Apprenticeship Levy from April 2017, broadly equal to 0.5% of the cost of the salaries they pay; it has a very similar affect to increasing the rate of employer’s National Insurance by 0.5%. Some of the larger international businesses with operations in the UK will also need to give some thought to their “tax strategy”, which they will need to publish for accounting periods starting since Royal Assent of the Finance Bill was given in September 2016.