THIS WEEK’s Autumn Statement took place against a unique political and tax policy backdrop. We know the election date; we know that, by the time of the March Budget, the politicians’ minds will be entirely focussed upon election day (assuming that there are not so already); and, that the March Budget will not lead to significant new measures being enacted before parliament is dissolved.
Accordingly, this was the last event for the existing coalition government to introduce tax reforms. Before providing my perspective upon some of the measures,
I would like to dispel a commonly-stated fallacy concerning tax reform. This is the often-stated falsehood that the scale of the government deficit in the aftermath of the credit quake makes meaningful tax reforms impossible.
Nothing could be further from the truth. By way of example, the excellent reform announced in the Autumn Statement to allow an individual to maintain the investments left to them by their deceased spouse with an ISA tax wrapper, costs between £5m and £10m per annum which is as close, in tax policy terms, to negligible as you get but, nevertheless, represents a valuable relief for mainly modest savers enabling them to preserve this relief.
Turning now to Wednesday’s announcements.
The Institute of Directors has called for the tax bands to be ‘triple-locked’ to the highest of retail price inflation, earnings growth and 2.5% per annum. Why should fiscal drag have drawn two millions taxpayers into higher rate tax? This includes those paid less than twice median earnings whom are now within the 40% tax bracket.
Many will be aware that the single-tier state pension is already triple-locked on this basis. The chancellor did not announce this but he did announce that, for 2015/16, the higher tax threshold will rise in line with the consumer prices index from £41,865 to £42,385 (comprising a £10,600 personal allowance and a £31,785 basic rate tax band). We predict that at least one party will include a longer term response to the damaging effects of fiscal drag upon middle income earners in its election manifesto.
Turning to capital taxes, I am disappointed that the chancellor has not taken advantage of the coalition government’s final Autumn Statement to launch a review of capital taxation including, as one of the options, the merger of capital gains tax and inheritance tax at a low, flat rate, thereby removing the need for many of the complex targeted reliefs from these taxes. The Office of Tax Simplification makes many excellent proposals but substantial tax simplification will only be delivered by abolishing taxes or merging taxes.
Previous chancellors, albeit against a more benign fiscal backdrop, have achieved this and I remain hopeful that this is the agendas of all the parties for the consultation and legislation early in the next Parliament. It should be noted that CGT and IHT collected under £7.5bn in 2013/14 (in comparison to income tax collected over £155bn and both national insurance and VAT collected over £100 billion), so significant reform is most certainly affordable.
We have campaigned for many years for the removal of the frankly ridiculous stamp duty land tax slab/precipice system and it is excellent news that it is to end. We do, however, have concerns that the proposed top rate of 12% applying to the proceeds exceeding £1.5m will reduce the number of transactions at the top end of the market and thereby be counter-productive as fewer transactions will take place and the SDLT which would have been collected is lost entirely. In my opinion, the top rate should be no more than 10% and the top threshold be at least £2.5m assuming that the Chancellor wishes to optimise receipts. Nevertheless, the reforms to the system are sound and, hopefully, the rates and thresholds will be improved in a later Budget.
There is very little information on the proposed diverted profits tax which, very unfortunately and quite inappropriately, many are calling the ‘Google Tax’. The UK has already enacted well thought out General Anti-Abuse Rules and an extensive range of Targeted Anti-Avoidance Regulations and I am increasingly concerned that we are in danger of throwing out the baby with the bathwater if no future Autumn Statement or Budget can be free from a raft of new measures in this area. We need to be careful that the priority for the UK to maintain (and enhance) its position as having the most attractive tax regime of the major industrialised countries for inbound foreign direct investment is not eroded.
In my view, it would have been better to revise existing legislation to combat perceived defects but otherwise to await the outcomes of the OECD/G20 ‘Base Erosion, Profits Shifting’ initiative although I do not expect that to solve the issues arising from taxing profits in an increasingly globalised and digital business world.
Overall, I think the chancellor announced sensible tax reforms in the Autumn Statement and I have a feeling that the next parliament will present a window for more radical tax reforms than almost all economic and tax commentators are currently predicting.
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