Bel is thinking

On the news that the Government faces a revolt on the 10p tax issue, a ‘Treasury source’ attempts to explain that compensation for those hardest hit may not be that straightforward.

Saith he:

“The Chancellor hasn’t any money,” … “There is no secret stash up his sleeve.”

Isn’t that part of the problem? The idea that the money belongs to the Chancellor in the first place, and if ‘his’ stash is running out, then ‘he’ can’t help.

Only when they grasp that the money belongs to the taxpayer will we begin to see any real change. For starters, if they recognised that basic fact (i.e that our money is our own), they wouldn’t take so much of it from the poor, and then force them to jump through hoops in order to get it back in the form of ‘credits’.

In my last post, I wrote about the hardships that the proposed abolition of taper relief would cause to small businesses. I am therefore somewhat happy to read today that Gordon Brown is considering a U-turn.

Under the revised plans, when a business owner comes to dispose of his business, capital gains of up to £100,000 would be exempt, with the rest taxed at 18 per cent. Also, the taxpayer can only claim this relief once in his lifetime. This looks suspiciously like the old retirement relief rules, which were abolished by Gordon Brown sometime ago. This won’t be the first time Gordon Brown has abolished something, only to revive it in another form. It gives the impression that this Government lacks a coherent policy on tax. And as is the case where such uncertainty exists, it is the taxpayer who suffers the most.

Still, I am glad that some measure of relief is being given to small businesses. But what about employees who have shares in their company share schemes? With effect from 6 April 2008, the effective 10 per cent rate will be withdrawn for them, and they will pay capital gains tax at a rate of 18 per cent. I would like to see another U-turn by Gordon Brown to afford some relief to this group of taxpayers.

An extract from a comment, which I thought merited wider publicity, on my post about taper relief:

I have owned my business for over 25 years and if I wished to sell now my capital gains tax, allowing for indexation and taper relief, would work out at £59,000 - if I do not sell until after the 6th of April next year my capital gains tax payable will increase to £144,000.

So after all these years of working at my business and just before wanting to retire this government robs me of over £80,000 from my retirement fund. This is robbery - our tax planning strategy has just been ripped to shreds.

Also many people here in the west country who own hotels and similar small businesses are likely to see a stampede of people trying to sell their businesses before the 5th of April 2008 - this is not a healthy situation.

So much for certainty in the tax system. The way things are going, even simple tax planning will soon be out of the question.

As taxpayers we seem to be in this situation where we do not even have a basic idea of what we may or may not do to order our tax affairs.

I do a lot of tax consultancy, and I cannot even begin to tell you how often I have had to unravel simple tax planning arrangements made for clients because of ham-fisted attempts by the Government to crack down on complicated tax avoidance. Many times, in attempting to clobber a targeted group, the Government has enacted legislation that has had unintended effects on taxpayers who were not even within its sights in the first place. Many times, tax legislation has been rushed through, only to be repealed soon after, as the consequences (always predicted by tax experts, and ignored by the Government) later became apparent.

I hope, for the sake of the commenter above, and many others in his position, that the Treasury revisits the issue of the abolition of taper relief. The point of the proposed legislation was to increase the tax paid by private equity barons, who, it was accepted, were paying comparatively little tax. The sad thing is that, in its clumsy, bumbling way, the Government has come up with a ’solution’ that increases significantly the tax burden on other people.

The Chancellor has just announced that spouses and civil partners may now transfer their tax-free allowances between themselves. The idea, I suppose, is that this would enable their heirs to receive more than the basic inheritance tax allowance.

Correct me if I’m wrong, but can the same effect not be achieved by couples structuring their wills to ensure this? And even after one of the couple have died, I would have thought it was still possible effectively to amend the will to achieve this result, by using a post-death variation.

If it is already possible to do all this, what exactly is the value of this new tax relief?

I would appreciate any enlightenment.

UPDATE. 8.23pm. Seems like my initial suspicion about this ‘tax relief’ has been proved right. Fraser Nelson of the Spectator is reporting that City accountants have raised the point that this so-called ‘tax relief’ can already be achieved by a couple structuring their wills properly. See also this article here.

These New Labour people just can’t stop spinning.

Just listening to Alistair Darling’s Pre-Budget Report. He has announced, with effect from April next year, the abolition of taper relief. Click here for the press notices (pdf).

The way taper relief works is that it reduces the chargeable gain when a capital asset is sold. This relief is available to everybody who sells, or otherwise disposes of, a chargeable asset. It is not a special relief claimed only by private equity barons.

The amount of taper relief available depends on whether the asset being sold can be classed as a ‘business asset’, and also, on how long the asset has been held. A business asset held for at least two years would attract the most generous taper relief rate. In such a case, only 25 per cent of the gain would be charged to tax. In the case of a taxpayer paying tax at the 40 per cent rate, this works out at an ‘effective rate’ of 10 per cent on the gain.

So, in summary, if you are a higher rate taxpayer, holding a business asset, and you have held it for at least two years, you end up paying capital gains tax on sale of only 10 per cent.

However, the Chancellor has just announced that taper relief will be abolished, and will be replaced by an 18 per cent tax rate.

This seems to equate to a tax rise on anybody who has held a business asset for at least two years. Including small business owners who are disposing of some of their capital assets.

So, in attempting to clobber private equity barons, New Labour has attacked every businessman in the land, some of whom can hardly afford it.

The Treasury is publishing consultation on the abolition of taper relief. I will be following closely to see the extent of the proposed abolition. If the detailed proposals bear out what we have been led to believe from the press notice, then small businesses should worry.

Another week, another story of BBC dishonesty.

This time, it turns out they have (again) been deceiving viewers of phone-in shows.

So that’s what we pay the compulsory TV licence for, is it?

Daily the BBC continue to dig their own grave. No one else makes the case for the abolition of the licence fee in such a compelling manner.

I decided to look up William Hague’s ‘foreign land’ speech which he gave at the Conservative Spring Forum in Harrogate in 2001. Remember it provoked much outrage at the time, with some even alleging racism. Here is the relevant extract:

Just imagine four more years of Labour. Try to picture what our country would look like. Let me take you on a journey to a foreign land - to Britain after a second term of Tony Blair. The Royal Mint melting down pound coins as the euro notes start to circulate. Our currency gone forever.

The Chancellor returning from Brussels carrying instructions to raise taxes still further. Control over our own economy given away. The jail doors opening as thousands more serious criminals walk out early to offend again. Police morale at a new low. The price gauge on the petrol pump spinning ever faster as fuel taxes rise still further. Letters arriving on doorsteps cancelling yet another round of hospital operations under a Government that is all spin and no delivery.

That’s Labour’s Britain four years from now.

Six years later, and apart from the currency point, every other prophecy has come true. Remind me, why all the outrage about the speech back then?

Gordon Brown’s misery deepens. On Wednesday, he was prancing around with a sharp knife, pretending to be a taxcutter. The ploy backfired, and he ended up slitting his own throat instead. Almost everybody saw through his illusory tax cut, and by his own actions, he has now freed the timid Conservative Party to start talking about tax cuts.

Today brings even worse news for him. A Yougov poll for the Daily Telegraph conducted after the Budget gives the Conservatives an eight-point lead. In addition:

• 36 per cent of respondents are not looking forward at all to Gordon Brown as Prime Minister, with a further 18 per cent not much looking forward to that happy day;
• 46 per cent think there is a black hole in the public finances, or there soon will be;
• 33 per cent think Gordon Brown should have cut income tax more, and announced smaller spending increases; and
• 75 per cent do not think that the next Labour Government will cut taxes.

So what next? Will Labour panic and start looking seriously for an alternative candidate? Most likely not. Most Labour backbenchers are as cowardly as Gordon Brown. They lack the courage to take their political destiny into their hands, despairing quietly and floating supinely towards their own doom.

And what about David Cameron? He should not rejoice too loudly. He should take another look at the Yougov poll. Only 23 per cent think his Government would cut taxes. What is he going to do about that? Taxpayers are labouring under the heaviest tax burden for many years, and he cannot continue to pretend that he is unaware of this.

If David Cameron wants to be taken seriously as a potential Prime Minister, he must begin to address this issue. I would like to hear about proper tax cuts, not cuts that are ‘offset’ by abolishing tax reliefs elsewhere, as George Osborne promised us earlier this week when he talked about a corporation tax cut. And no more mealy-mouthed talk of ’sharing the proceeds of growth’. Let us instead hear talk of ‘relieving the burden of taxation’.

As promised, a little more on the Budget. I know this topic has been covered in other places, but having spent yesterday conducting briefings on the Budget, I came up with an interesting exercise.

There is both good news and bad news for the taxpayer in the Budget. I thought it would be interesting to separate both, so that we can see when each takes effect. It seems to me that most of the good news takes effect later, while the bad news takes effect sooner. If this is the case, we will know exactly how Gordon Brown plans to fund the so-called tax cuts he has announced.

In setting out the measures, I have concentrated on those tax measures that are bound to affect directly how much tax we pay. However, I have not bothered with VAT and all the environmental taxes, etc. Life is too short, and besides, I expect there will be plenty of commentary on them elsewhere. I have also ignored changes aimed at correcting errors in the law, as well as press releases announcing consultation.

I will divide the post into measures taking effect before April 2008, and those taking effect after April 2008.

Measures taking effect BEFORE April 2008

• Increase in small companies corporation tax rate from 19 per cent to 20 per cent. Bad news.
• Withdrawal of balancing allowances on industrial and agricultural buildings, for contracts made after 21 March. Bad news.
• Withdrawal of balancing charges on industrial and agricultural buildings, for contracts made after 21 March. Good news.
• Tax relief for renovation of business premises in designated disadvantaged areas. Good news.
• Temporary extension of 50 per cent rate for first year allowances. Good news.
• Anti-avoidance measures to restrict capital loss and gain buying (takes effect 21 March). Bad news.
• Measures to restrict the buying of tax losses from loss-making corporate members of the Lloyd’s insurance market, who are ceasing underwriting activities. Bad news.
• Anti-avoidance measures to counteract attempts to circumvent the tax rules on the sale of lessor companies (takes effect 21 March). Bad news.
• Tightening the qualifying conditions (for tax relief) for venture capital trusts, enterprise investment schemes, and corporate venturing schemes (takes effect on 6 April 2007). Bad news.
• Relaxation of other qualifying conditions (for tax relief) for venture capital trusts, enterprise investment schemes, and corporate venturing schemes (takes effect on 6 April 2007). Good news.
• Stamp duty land tax relief for zero-carbon homes that satisfy very stringent conditions (1 October 2007). Good news, if you can jump through all the hoops to qualify.
• Targeted anti-avoidance rule for capital gains tax (takes effect from 6 December 2006). Bad news.
• Anti-avoidance measures targeting life insurance policies and commission arrangements (takes effect 21 March 2007). Bad news.
• Anti-avoidance measures targeting employee benefit trusts (takes effect 21 March 2007). Bad news.
• Relief from the 40 per cent trust rate for service charges and sinking funds in the public sector (takes effect on 6 April 2007). Good news.
• Small increase to the amount of benefit you can receive from a charity without your gift being disqualified from gift aid (takes effect 6 April 2007). Good news for charities.
• Tax charge for charities which hold large lotteries without a licence (takes effect 6 April 2007). Bad news.
• Anti-avoidance measures targeted at managed service companies. Bad news.
• Exemption for carbon trading business by investment managers trading on behalf of non-resident companies and individuals. Good news.
• Removal of tax charge from army officers’ Operational Allowance, and payments under the Armed Forces Redundancy Scheme 2006 (takes effect April 2006). Good news if you are an Army Officer.

Measures taking effect AFTER April 2008

• Reduction in income tax basic rate from 22 per cent to 20 per cent. Good news.
• Abolition of the 10 per cent tax rate. Bad news. 
• Reduction of mainstream corporation tax from 30 per cent to 28 per cent. Good news.
• Reduction from 25 per cent to 20 per cent in rate of writing-down allowances one can claim for expenditure on capital items. Bad news.
• Increase from 6 per cent to 10 per cent in rate of writing-down allowances one can claim for expenditure on long-life capital items. Good news.
• Writing down allowance of 10 per cent for fixtures integral to a building.
• Payable tax credits for capital losses on certain green technologies. Good news.
• Increase in research and development tax credit. Good news.
• Small increase in subscription limits for ISAs. Good news.
• Extension of non-repayable dividend tax credits to holders of shares in non-UK companies in prescribed circumstances. Good news.
• Removal of benefit in kind charge where an employee makes private use of a property abroad which has been bought through a company. Good news.
• Tax discount for company car drivers who drive a car capable of running on E85 fuel. Good news.

So judge for yourself. Seems to me that the extra tax revenue the Chancellor will get from the pre-April 2008 changes will more than pay for any tax cut. In particular, the anti-avoidance measures targeting businesses will yield a lot of tax revenue. One other point to make is that the Good News items in the pre-6 April 2008 list are of very narrow application. They apply to charities, soldiers, buyers of zero-carbon homes, and such small groups of people. So good news for them, but not for everybody else.

Just got in after a hectic day which I spent giving briefings and analysis on the finer points of today’s budget. Interesting (and depressing) how the Chancellor always manages to hide all the bad stuff in the press releases. This year, we had 81 Budget Notes, some of them containing the hidden tax news. The Chancellor has been very sneaky, as usual.

Off to bed now. Will post some more on the Budget tomorrow, if I’m not sick of it by then.