Taxation – Year end review

A Taxpayer: So, Labour’s been in office for a year – has it raisedr in office. the tax burden? After all, we keep reading about how well the tax receipts are going.

JW: Labour probably is raising it a bit more – the effect of its tax changes over the first year is to get in about #5bn or so extra a year, even without the windfall tax. And there may be more to come with the capital gains tax changes.

AT: So the rich are feeling the squeeze?

JW: Not really; barely a cuddle. There are some changes that might be seen as affecting the ‘rich’ – for example, reducing MIRAS tax relief to 10%, reducing the married couple allowance (MCA) to 10% from next year and hikes in stamp duty, but a feature so far of Labour Budgets is that we have not seen some of the attacks that were feared, like cutting tax relief on pension contributions, abolishing MIRAS, targeting company cars more and increasing inheritance tax. There is still time I suppose.

AT: So there aren’t any changes of any significance to affect the individual, then?

JW: There is one change that affects many people, raises about #4bn a year and was missed by most people when it came in. It was to block the tax credit repayment to pension funds when dividends are paid.

That happened from July 1997, but as it attacked seemingly faceless pension funds and was concerned with the little-understood advanced corporation tax, most people missed it.

It’s a hit to all our pension funds. The self-employed in particular are having to look at increasing their contributions in many cases.

AT: I never did understand ACT, so I was pleased to hear that Gordon Brown was abolishing it. That’s a tax giveaway, isn’t it?

JW: Another clever move. Abolish a tax and raise more money, which is what will happen. Large companies will have to pay their tax bills faster to make up more than the government’s loss.

The point for individuals is that, from next April, they will not have a tax credit to reclaim if they are non-taxpayers – so quite a few married women pensioners whose husbands get the pension will lose the entitlement to some extra money back on their bits of dividend income. The only way you will get any extras on your dividend income is to invest via an individual savings account.

AT: Surely ISAs have to be a good move, trying to attract more savings by offering a bit of tax relief?

JW: Maybe. It’s a reasonable try, but you have to ask whether any scheme will attract those who have little money to start saving. I still feel that an unstated reason for the switch to ISAs from PEPs and TESSAs was to restrict the tax relief awarded.

Dividends received by an ISA only benefit from a one-ninth tax credit – and only for five years – compared with the one-quarter the PEP gets now, which will mean lower returns than PEPs and TESSAs. Couple that with possibly increased administration costs and you wonder what returns there will be on ISAs.

AT: We seem to have a few more things to come. You’ve already mentioned the reduction in MCA, for instance.

JW: Yes. It does seem as if we have a chancellor who is prepared to think ahead and commit himself, which has to be good for planning. But the devil will be in the detail.

The working family tax credit and childcare relief sound good, but until we see how they are going to work, we can’t be sure about them – and I have concerns about whether they will place a huge additional burden on employers.

AT: But employers can look forward to reductions in their National Insurance bills, which could help them to take on more lower paid workers?

JW: This is another ‘yes, but’ answer, I’m afraid. Next April will see some sorting out of the lower end of the NIC bands where there are some absurdities in how the system runs – an extra few pence pay rise could cost the employer pounds at the moment.

But the rate of NIC goes up from 10% to 12.2%, and that means those who employ higher earners – not much above average earnings – will find their NIC bills going up.

AT: You make it sound rather gloomy. But surely the reform of CGT has to be good news – promoting long-term investment and entrepreneurship?

JW: There are a few problems with the CGT reforms – additional complexity, for a start – after all, is it a business asset? Non-business? Indexation to April this year only? Sorting out the taper?

The acid test will be whether the changes promote what the chancellor wants. Certainly, the CGT headline rate will come down, but getting to the 10% rate will be rare and, for most, keeping indexation relief might have been better than the limited taper that they will get.

It seems unreasonable to cut into our retirement relief so quickly, leaving some middle-aged small businessmen with the prospect of paying some CGT when they sell up instead of escaping altogether.

And if they seek to reinvest their gain and claim reinvestment relief, that relief has been drastically scaled back and restricted too far, in my view. I fear we will see CGT raising more money than it does now.

As that money would essentially otherwise go into investment, I have to hope the government will keep the system under review.

AT: The major tax issue over the last year has been self-assessment. That wasn’t a Labour thing of course?

JW: No, you can’t blame Labour for SA. In any case, it’s non-political and a necessary reform. But it needs monitoring, and I hope the government will take an interest in the feedback on SA’s first year that the Inland Revenue has asked for.

AT: I think after all that, I need a drink – pint for you?

JW: Thanks – and of course this is an area that the chancellor hasn’t added much extra tax to, though we have a small rise to come at the start of next year.

He is rather boxed in by the lower duties in our EU neighbours. Who knows – we might even see lower duties in years to come. That would be something to drink to, but the hangover would be the need to raise the missing tax from other areas. So we’ll end up paying one way or another. John Whiting is a tax partner at PricewaterhouseCoopers.

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