Osborne warned over hasty tax decisions

Walk, don’t run. Perennial advice for children and those carrying dangerous
or delicate loads, but now the advice of choice for the country’s new chancellor
George Osborne.

The warning comes from a tax profession war-weary from watching the previous
regime introduce tax measures that may have sounded good in a meeting room at
the Treasury, but turned out to be blunders once subjected to the scrutiny of
professional tax advisers.

The alert is all the more poignant because of Osborne’s stated aim of
tackling the UK’s budget deficit of £163bn this year – a policy diametrically
opposed to Labour and Lib Dem policies of putting off significant tax rises or
spending cuts until 2011.

George Bull, Baker Tilly’s national head of tax, in an interview for
Accountancy Age TV, said that the chancellor should try to “resist the
temptation to make dramatic quick easy political statements”.

“The issues are complex. We’ve seen years of unintended tax consequences from
poor tax legislation. Take time, use these 50 days to formulate clear policy
decisions… Don’t be afraid to take advice from people like Vince Cable and Ken
Clarke, they’re both in the cabinet. And come to the Budget with good figures
and a clear plan that restores confidence to business and the country at large,”
he said.

For advisers, the recently published manifesto agreement published by the
Tories and Lib Dems have given good reason to worry about what may come out of
it.

Though there are apparently bold statements on capital gains tax (CGT),
national
insurance contributions (NICs) and tax avoidance, the effect has been to leave
most observers wishing for considerably more clarity.

The CGT policy speaks of a rise, but clearly the new rate is unresolved. The
statement
also offers no information on the definition of the assets that will be
affected. There are also some questions about what might happen to the
entrepreneurs’ relief that currently exists.

On NICs, the picture seems equally opaque. The manifesto appears to suggest
that the rise in thresholds for employee contributions, proposed by the Tories
as a means of softening the blow from the forthcoming 1% point rise in the rate,
could be killed off in order to help pay for an increase in personal allowances.
The rise in thresholds for employers will go ahead “to stop Labour’s job tax”,
according to the manifesto. But it seems the 1% rise for everyone will go ahead.

The lack of detail leaves tax advisers concerned about the drafting of tax
law in time for the emergency Budget.

Labour’s time in office is littered with policy that proved ill thought-out
and caused unintended consequences that prompt embarrassing policy rethinks.

The Budget in 2000 saw a classic example. Gordon Brown, the then chancellor,
announced changes to double taxation relief and controlled foreign companies.
The Treasury estimate was that, together, the reform would cost business around
£300m in the first year. The tax world and business disagreed.

Vehemently. They insisted that the government calculations were wrong and the
true cost would run into billions. After weeks of arguments and briefing in the
newspapers the government eventually backed down.

Perhaps a more notorious example is the debacle over the nil rate band of
corporation tax introduced in 2002. There was plenty of warning from Companies
House, HMRC, the department of trade and the ICAEW. The government pushed on and
an avalanche of incorporations at Companies House followed in an effort to take
advantage of the new rate. It was soon cancelled, but with the government
attempting to turn those who had incorporated into tax avoiders.

Further trouble came over the introduction of the 10% income tax rate. It was
eventually done away with in 2008.

In recent times, the issues that have caused most controversy in the City
have been the treatment and taxation of non-domiciled workers. Labour’s policy
came in a rush and in an attempt to wrong foot the Tories. There has been an
ongoing row about it ever since in the press.

John Whiting, tax policy director at the Chartered Institute of Taxation,
said: “There is this risk that we’ll get some complex tax changes – capital
gains tax is much bandied about… and everybody watching can remember what
happened last time we changed capital gains tax.”

He added: “I hesitate to call it badly thought out because I wasn’t sure it
was thought out at all – even badly. It needs taking time, we are in complex
times.”

George Bull already believes that the manifesto statement on NICs is a poor
start in attempting to make forthcoming changes clear.

Chancellor George Osborne is not without help though. There are people he can
turn to in the cabinet who can offer advice. The question is, will he? Will
Osborne particularly want to ask the advice of Vince Cable who, before signing
up to coalition, had vociferously opposed tackling the deficit this year because
of fears that it could derail the economy. Installed in the cabinet and running
the department for business, Cable is in a good position to lever influence on
economic policy.

So too is David Laws, the Lib Dem and former investment banker, who now
occupies the position of chief secretary of the Treasury.

John Whiting said: “The analogy of driving the car: Osborne’s obviously in
there with his hands on the wheel. You can’t help feeling that David Laws is
immediately behind him tapping him on the shoulder saying, ‘that way, that way’.

“And, by the way… Vince Cable is in the passenger seat with, at times, a hand
on the wheel saying, ‘Hang on George, let me help you a bit’.”

George Bull added: “The problem with the availability of that advice is that
it can be offered when you don’t want it. Osborne is going to have to… learn the
issues and master his brief. But, most of all, he has to become his own man as
chancellor of the exchequer.”

Further reading:

Advisers warn of taxing times
ahead with Lib-Con coalition

Break with the past? So start
making sense

Cable cabinet role fuels
audit debate