The 2014 Budget is now less than a week away, and with increasing messages of improvement in the British economy and the General Election looming next year, will the Chancellor jump early to offer tax cuts. We think there is a strong chance he will indeed want to make such a big political statement.
This got us thinking. If we were Chancellor, what tax policies would we adopt in the forthcoming budget ? We think some fundamental changes need to be made.
There is little doubt that the UK tax system is too complex. This might be seen as a good thing for tax advisors, but it does make it difficult for our clients to plan their affairs with certainty. There is, for example, 6 different income tax rates that an individual will pass through – even ignoring NIC – as their income increases. There has to be a better way, and a straightforward fix to this is to get rid of the Personal Allowance restriction that applies on income over £100,000 and to abolish the 45% tax rate. The personal allowance restriction in particular makes no sense, and these would be easily funded by our next suggestion. Get rid of NIC.
Or more accurately, merge NIC with income tax. The administrative cost of maintaining and collecting NIC under a separate code is significant. We doubt that many really see NIC as anything other than a tax, and so whilst there might be a short term furore at what might seem to be an increase in headline income tax, the public at large will soon come to terms with the merging of these two taxes. This will undoubtedly simplify the tax regime.
The complexity of the tax regime though runs much deeper, and this is one of the reasons that has lead to much of the tax planning and avoidance that has received press attention recently. There has been a raft of new regulation that has changed the landscape on tax avoidance – the General Anti-Abuse Rule being the most significant. But it seems to us that the Treasury is now getting carried away with themselves, seeking to introduce retrospective “accelerated tax payments” legislation, requiring taxpayers to pay tax ignoring tax planning they have implemented. There has been widespread condemnation of the proposals, due to the lack of any right of appeal to HMRC’s position. We agree that, if introduced, whilst it will produce a short-term cash benefit for the Treasury, it will have serious medium-term ramifications as many taxpayers reorganise their affairs to fund this unexpected immediate liability. A much neater solution for the longer term is to have a greater focus on getting earlier agreement on the thousands of cases still to be resolved. We would permit Her Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... greater flexibility in allowing cases to be agreed without litigation, by negotiation with taxpayers.
Business investment is the future
As we continue to look to grow our way back to prosperity, we have to ensure that the growth is in the right areas of our economy – and not debt fuelled or based on a volatile housing market. This means that investment in and by businesses is critical. Investment could be further encouraged through widening tax reliefs for individuals – by increasing the EIS investment limits and allowing relief at marginal rates of tax, and businesses – increasing the Annual Allowance threshold and offering repayable tax credits for new business startups.
On reflection, our tax policy is perhaps no different from most Chancellors of the modern day – simplification, fairness and encouragement of investment. The difference is though, without the political braveness to actually implement more fundamental changes, these principles will take years to implement.
Response by the opposition
In preparing the above article, we undertook a straw poll around the office of what people would do, with some interesting results, given our focus is to minimise our client’s tax exposure. These included:
- Increase corporation tax – our rate is lower than most developed countries,
- Increase the basic rate of income tax – we are, in any case, “all in it together”,
- Abolish the construction industry scheme – it’s burdensome for little tax benefit, and
- Defer implementation of draft legislation in respect of mixed membership LLPs and the ‘disguised employment’ proposals for certain members of LLPs. In order to allow for a more focused redraft of the legislation in order to meet its intended objectives, rather than the current ‘blanket’ catch all approach.
- Introduce one flat rate of tax for everything – companies, individuals, income and capital gains.