The general election should (with any luck) sort out who will be taking up
the reigns of power for the next few years. But, for all the spectacle and
ceremony, one thing remains constant: the gaping hole in the UK’s finances and
widespread unhappiness with our tax system.
Whichever party takes on these responsibilities will have to tread carefully
in order to avoid nasty clashes with advisers and businesses while attempting to
plug this hole.
Looking at the obvious changes to the tax landscape that will be required and
the potential for further political uncertainty, it’s easy to see how such
arguments could flare up.
Francesca Lagerberg head of tax at Grant Thornton says: “Clients and advisers
want to know exactly how the land lies, and what the timeframe for changes are.
It’s all about consistency and knowing where you’re going. If you have a hung
parliament, who’s going to drive this change?”
On the ground, one of the most concerning issues is the fate of the taxman as
public spending cuts are pushed through.
“The big one for us is that whatever political party is in place there needs
to be sufficient quantity and quality of people in the government agencies for
us to co-ordinate with,” says Lagerberg. “One of the biggest changes going
through is what’s happening at HMRC. They are being asked to do a lot more with
fewer people, which will put a huge demand on its resources. That would be a
massive worry.” “
Leslie Strathie, HMRC’s chief executive, says the next financial year is set
to be a tough one for the department as it continues to respond to changing
demands impacting the way the taxman collects revenue, while also making the
payments people are entitled to. “I am confident we will rise to these
challenges as we continue to focus on closing the tax gap.
Although we still need to reduce the size of our workforce, I want our people
to feel that HMRC is an exciting place to work,” says Strathie.
The chief executive also says that while HMRC has a talented and hard-working
group of staff who meet these challenges head on, there is still a clear need to
up their game.
“As we become smaller, we need a more highly-skilled workforce if we are to
deliver what is expected of us by government and our customers,” she says HMRC
has been forced to provide an olive branch to businesses by letting them put off
the payment of tax bills currently – to the tune of £5bn – but businesses of all
sizes, from the sole traders to the multinational giants continue to suffer.
Lingering problems have still not been resolved. If anything, the financial
crisis just aggravated weeping sores already plaguing companies.
Recent research shows that during the second half of 2009, 28% of business
owners were forced to approach friends, relatives and company directors to
provide funding for their business. A further 8% meanwhile, found themselves
having to turn to their own personal credit cards to finance their business.
Martin Williams, managing director of credit referencing agency Graydon UK,
believes the recession has highlighted the vital need for additional sources of
funding to be made available for established small and medium-sized businesses.
“It beggars belief that, in a developed economy, over a third of business owners
have had to take on personal financial risk because of a shortage of
alternatives to bank funding. This is proof that the current system cannot be
relied upon to do its job during times of economic stress.”
At the global level, countries are still mulling plans to hit banks with a
tax while trying to keep the economy from falling apart.
The tax think-tank at the OECD says cross-country consistency is critical.
This is also recognised in the G20’s Mutual Assessment Process and in
international discussions of financial sector reform and taxation.
“We welcome the ongoing work within the G20 and the IMF on options to impro
ve the global financial safety net based on sound incentives,” states the OECD,
IMF and others jointly – a thinly –veiled threat that this issue is not going to
Banking taxes formed a key part of the election spin, but advisers have been
quick to pick holes in the fledgling plans.
The banking industry’s stance is clear. “All taxes have an impact and more
tax has more impact,” the British Bankers Association says.
“The [IMF] recommendations need to be carefully examined but we remain
concerned about moves which would place the UK industry at a competitive
disadvantage internationally. We also need to see all the detail of what is
proposed – and how any new levy and tax would apply – to determine the effect it
Deficit-busting proposals were also taken with a pinch of salt by the
Institute for Fiscal Studies, which unveiled the massive shortfall in the
The major political parties are at odds over how to deal with this shortfall,
the Conservatives insisting that tax rises could be prevented by slashing public
waste, with Labour countering that the rich must pay their share to drive
The parties were forced to reveal more detail following on from the rushed
Financial Bill “washout” process.
Labour, said it has taken “tough choices on tax” citing the bankers’ bonus
tax, reduced tax relief on pensions for the well off, a new 50p tax rate on
earnings over £150,000 and 1p on National Insurance Contributions as its main
planks on taxation.
But everyone shied away from a rise in VAT – one of the biggest money
spinners. Advisers flagged up the extra £12bn that would be generated by VAT
going up to 20% as an obvious revenue raiser.
Lest we forget, the money brought in from penalties and the various tax a
mnesties are also set to have an effect. However, the powers introduced to
underpin it is of concern to the profession.
HMRC now has powers which cut across all taxes, allowing the department to
carry out checks on current records of all businesses, and, controversially,
visit business premises without giving advance notice in some cases.
Baker Tilly’ tax cjief George Bull issues a stark warning about the
uncertainty in the penalty regime and the powers behind them. “The penalty rules
in taxation are in danger of becoming like those in rugby union: highly numerous
but not properly understood by players (the taxpayers) or consistently applied
by officials (HMRC). Or perhaps like football; often awarded, or not,
arbitrarily and without full, if any, explanation.”
Bull says piecemeal implementation of the penalty regime that has already
been embodied in statute, with some penalties still to be brought into effect
and more still to be legislated for, would cause serious problems. “Time for the
refrain ‘you don’t know what you’re doing’,” Bull adds.
With a new administration about to take its place at the seat of power, the
profession’s representatives also made a final plea to whichever party (or
parties) takes control to use the election as a chance to iron out the kinks in
the UK’s tax system.
“In the next parliament, the UK needs to develop a much more straightforward
and stable tax system,” says the ICAEW.
The institute called for an overhaul of the way tax law is formulated in
order to encourage “clarity, fairness, effectiveness and certainty”.
It has also warned that the structural problems with the UK tax system – such
as the length of the tax code – have to be met head on if the UK is to improve
the environment in which businesses can grow, create wealth and generate tax
revenues as a result.
“It’s not just the deficit, both business and private taxpayers would benefit
hugely from the certainty that long-term tax policy can bring,” says Richard
Mannion, national head of tax at Smith & Williamson.
“Such certainty helps provide businesses with the framework and confidence to
plan for the future.”
Advisers, their clients and taxpayers will hope that now the election is done
and dusted , the fact that the UK is still a long way from recovery will not be
forgotten when the celebrations die down.
The main parties’ policies
Labour – A commitment not to raise any of the rates of income tax. Tax relief
on pension contributions will be restricted to the basic rate of tax for
individuals whose incomes and pension contributions combined are above £150,000
a year from 6 April 2011.
Conservative – Introduce a £750 transferable income tax personal allowance
for married couples (or in a civil partnership) as long as the higher-income
member of the couple is a basic-rate taxpayer.
Lib Dem – Increase the income tax personal allowance to £10,000 for
individuals of all ages. Reduce the basic rate band from £37,400 to £33,875 (so
that the 40% band remains the same after the personal allowance increase).
Income tax relief on pension contributions will only be at the basic rate.
National Insurance contributions (NIC)
Lab – 1% increase to NIC from 6 April 2011. Raise the primary threshold by
around £25 per week from 2011/12 so that individuals earning under £20,000 will
not be affected by the 1% increase.
Con – 1% increase to NIC from 6 April 2011, with a raise in the primary
threshold by £24 a week and raise in the upper earnings limit by £29 a week on
top of Labour’s announcements. Individuals who earn under £35,000
not affected. Increase the threshold at which employers pay NICs by £21 a week.
Cut employers NIC for the first ten employees of new businesses
Lib – Will introduce the changes as announced by Labour.
Stamp Duty Land Tax (SDLT)
Lab – No SDLT for first-time buyers on all residential property below
£250,000 for two years. New 5% SDLT rate band on residential property over £1
Con – Permanently raise the SDLT threshold to £250,000 for residential
property purchased by first-time buyers.
Lib – Tackle SDLT tax avoidance and evasion for properties in an offshore
Lab – A commitment not to extend VAT to food, children’s clothes, books,
newspapers and public transport fares.
Con – No announcements regarding VAT.
Lib – Equalise VAT on new build and repair on a revenue neutral basis.
Lab – No announcements regarding corporation tax, although the 2010 Budget
defers an increase for the small companies rate from 21% to 22% to April 2011.
Con – Cut the main rate of corporation tax to 25% and the small companies’
rate to 20% funded by reducing reliefs and allowances. Encourage foreign direct
investment into the UK, including consulting on moving towards a territorial
corporate tax system that only taxes profits generated in the UK.
Lib – Work to create a simpler corporation tax system and cut the corporation
tax rate by removing a wide range of reliefs.
Work to allow small businesses to pay corporation tax based on their net
operating cash flow as opposed to their accounting profits.
Inheritance tax (IHT)
Lab – Freeze the IHT nil rate band at £325,000 for 5 years.
Con – Raise the IHT threshold to £1 million over the term of the parliament.
Lib – No announcements regarding IHT.
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