Advisers warn of taxing times ahead with Lib-Con coalition

The Lib-Cons love-in could backfire as entrepreneurs, pension contributors
and the taxman all find themselves disadvantaged after two distinct sets of tax
policies were hurriedly cobbled together.
The coalition government is drawing up a new fiscal blueprint – but with the
finer details omitted and advisers warning of the dangers arising from such a
quick courtship.

To compound the situation, HM Revenue & Customs will also be struggling
under a heavier workload alongside its workforce being cut.

One of the most controversial changes mooted is to the rate of capital gains
tax, currently at 18%. The coalition has said CGT will be levied “at the same
rate as on earned income”, on “non-business assets”, which could mean a hike to
50% in the worst case scenario.

This raid on non-business assets, to clamp down on gains made through the
sale of second homes, could disadvantage the entrepreneurs central in
stimulating the UK economy, advisers warned.
The undefined nature and diversity of non-business assets will see the
entrepreneurs supposed to benefit most from CGT relief (it reduces the effective
CGT rate to 10%) drawn into the clampdown.

George Bull, national head of tax at Baker Tilly said on Accountancy Age TV:
“What about entrepreneurs’ non business assets, where the gain is regarded as a
social good?”

John Whiting, head of tax policy at the CIoT, also warned it would be hard to
ensure entrepreneurs still benefited from the reliefs they were entitled to as
non-business assets were targeted. “Where on earth this divide is between the
‘social good’ type CGT and the others – lets call it second homes at the other
end – I don’t know.”

The taxman will have to process the CGT of four times more taxpayers if the
most sweeping Lib Dems’ proposals go through. This includes lowering the £10,100
annual exemption threshold to £2,000 which would see the number of people caught
in the CGT net increase to a million.

And for good measure, HMRC is trying to reach its target of cutting 25,000
jobs and closing 200 offices by 2011 while the extra CGT workload looms on the
horizon.

Ian Smith, chairman of Midlands-based accountants Rabjohns LLP, said: “The
proposals cannot take place without both a massive shift in policy and increased
high-level staffing within HMRC.”

Bill Dodwell, head of tax policy at Deloitte, hoped that the government would
steer clear of changing the annual exemption, if only to spare HMRC from the
extra burden. “This benefits those on basic rate, as well as people who are
further up the scale,” said Dodwell. “Additionally, it substantially reduces
HMRC and taxpayer administration.”

Tellingly, there has been no mention of the withdrawal of pension tax reliefs
so favoured by the Lib Dems. Relief on contributions would be capped at 20% for
all taxpayers, bringing billions into the exchequer. Advisers have said this
would be an obvious way to offset the cost of increasing the tax-free personal
allowance towards £10,000 – also announced by the coalition.

As the new government tries to find its feet, John Cairns, convenor of the
ICAS Tax Committee, said stability and certainty were needed.

Cairns said each incoming government should commit at the outset to their
high level intentions and the main structural features of the tax regime for
their term of office, and should set these out clearly in their first Budget
statement, announced for 22 June.

Further reading:

Osborne warned over hasty tax
decisions

Break with the past? So start
making sense

Cable cabinet role fuels
audit debate