ONE pre-election promise which attracted controversy, and even some degree of incredulity, from the tax community before the election was the triple lock of major taxes. Since the Summer Budget, thousands of words have been written on whether it’s been broken or not by the changes to dividend taxes and national insurance allowances.
But what, really, would the value be of the triple lock? For individuals of course it represents a promise to freeze the headline rates of tax in the big three components of the government tax take from their nominal income. Guaranteeing a steady state of income should give households the confidence to plan and invest for the term of the parliament, providing a demand side boost for consumer spending and retail housing.
But if we dig a little deeper, and look at the tax system as a whole, what would it mean for the broader economy to have such a large element of the government’s funding fixed? Taxes as a whole have to cover spending, more or less. If spending requirements go up, the shortfall is going to be looked for through the tax system.
We could borrow of course, but that’s not a free option; it has a cost in the future which might outweigh the benefits and is politically toxic given chancellor George Osborne’s commitment to paying the deficit down. But say the government needs an extra £10bn, that money has to come from somewhere. Spread across the £300bn or so which IHT, VAT and NICs bring in that would involve a 3% hike in the take, or less than a penny in the pound on the main rates. Finding £10bn from corporation tax would involve more than doubling the take – and simply doubling the rate of tax wouldn’t do it; corporate taxable income is far too mobile for it to stay in the firing line of that sort of rate for long.
Of course, if the pain were spread across all the other taxes which aren’t subject to the lock (stamp duty, aggregates levy, inheritance tax, capital gains tax etc) then the proportional increase wouldn’t seem so great – but it would still hit businesses proportionally harder.
The triple lock has no power over “tax expenditures”, the carve outs and derogations that reduce taxes for policy reasons. One sociologist recently estimated that the system of capital allowances which recognise the economic cost of investing in plant is worth around £22bn per year. No sane commentator would ever suggest abolishing the capital allowance system wholesale, but comparatively simple changes to rates of allowance, or which classes of assets qualify for them, could make a difference for the chancellor without affecting the triple lock.
Now business knows that these areas have always been “fair game” for change at the budget – in fact, the Annual Investment Allowance, the most significant bit of the capital allowances system for the vast majority of UK businesses, has changed at every budget since it was introduced – but the idea that they’ll have to bear the whole burden of any revenue raising that the chancellor wants to undertake would introduce a significant extra degree of risk.
Just how they respond to that risk will depend from business to business. Larger concerns may well try to move affected operations offshore; smaller ones may try to plan ahead and protect themselves, building up a buffer of cash reserves one way or another in case of sudden cash raids by the taxman. In any event, the levels of cash injected back into the UK economy as productive business investment are likely to fall.
Even if the triple lock has the desired effect of encouraging households to spend, it may well not be UK business that’s in a position to respond. Whatever your views on the use of the tax system as a policy tool, implementing measures when the ultimate beneficiaries are overseas businesses, would certainly seem to be not simply brave or even courageous, but an utterly revolutionary move on the minister’s part.
Jason Piper is tax and business law manager at ACCA
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