Tax complexity in 3D...

No escape from the budget as yet. Unfortunately we accountants have a myriad of notes issued by the Treasury and HMRC to pore through and pick out the information that was not contained in the Chancellor’s speech to the House of Commons and as ever I have been swamped with “Budget Briefing Notes” from all the accounting firms that I deal with.

Maybe it’s because I am not a politician and don’t understand these things but it does seem strange to me that having warmed people up nicely to accept a reduction in the 50p tax rate, George Osborne then hit them with a totally unexpected “Granny Tax”. I would like to think that if I ever contemplated such a left field announcement in my role as a Finance Director, my more “customer focused” colleagues would make sure that such a situation would never happen (the white coats would be optional).

One of the main features of Budget (and Autumn) statements of recent times is the way that tax changes are announced which will impact on the next tax year but one. For example the increased personal allowance may be good news but it won’t be happening until 2013/14 as will the reduced top rate of tax.

Therefore not only do we have an extremely complex tax code to deal with, which apparently runs to over 14,000 pages (compared to just under 5,000 in 1997), it now appears that we have to cope with the fact that the extra dimension of time has been added. Try explaining that to – well almost anyone.

By the way 5 million people will be higher rate tax (40p) payers by 2014 according to the Institute of Fiscal Studies due to the whittling down of the higher rate tax threshold that is effectively paying for the increased tax free personal allowance. That is a lot of highly paid people assuming that you think that £42k a year is highly paid.

And if you think that the UK only has three rates of income tax (20%, 40% and 50% soon to be 45%) then think again. There are a number of people who will face a variety of tax rates as their tax credits or child benefits or personal tax free allowances are withdrawn based on any increase in income they might receive. Apparently if you have eight children and fall foul of the child benefit clawback provisions you could face a marginal tax rate of 101%! I think that might be seen as a disincentive to better yourself or work harder but then what do I know.

I am increasingly of the view that we now have more and more extra-terrestrial politicians i.e. not of this world, who have no idea what real life is actually like out there. It wouldn’t surprise me if they try and add VAT to sausage rolls that are sold at a temperature above that of an ambient room. Oh hang on…..

A budget for...

The respected financial correspondent for the Independent newspaper, Hamish McRae, recently reviewed the 2007 Budget document five years on and concluded that it turned out to be almost complete rubbish.

No surprise there you might say. Yet given the hype that surrounded George Osbourne’s Budget statement this week, it seems that everybody is looking for it to achieve miracles, or at least support their own agendas for growth. It almost certainly won’t but that’s Budgets for you.

It may be a bit unfair to focus on the supposed failings of this week’s Budget or indeed that of 2007 delivered by Gordon Brown. There have probably been very few ground breaking Budgets in UK history (Lloyd George’s People’s Budget in 1909 and er..oh I’ll think of the rest later)  But that in itself does beg the question as to what the Budget should actually be for, and whether it should assume so much importance. Still it is what it is and therefore we do need to look at what is in it for Enterprise Britain.

I have to admit that a month ago I would have laid odds on the 50p tax rate staying put for the foreseeable future, as I suspect would George Osborne. However the climate for change on this issue moved appreciably over last few weeks, and he was able to do what he has been aching to do since becoming Chancellor i.e. reduce it. Shows what can be done quickly when there’s a will eh George?

Having said that if he does believe that the 50p rate is holding the economy back and not raising much revenue why wait a year to reduce it? All that will do is cause the affected higher rate income tax payers to defer income for a year which will have a negative impact on both tax revenues and consumption growth in the economy. Still hopefully it will prompt those who were saying that a 50p rate stopped them investing to change their plans accordingly.

The continuing downward move on Corporation Tax should be positive although it is only benefitting larger businesses at present. There is little to help smaller businesses in respect of Corporation Tax or employer’s NI which given these businesses are meant to be the key engine of growth seems strange. The R&D tax credit proposal looks interesting though and worthy of further study.

Additional encouragement for SME shareholdings for investors (EIS) and employees (EMI) is good news. However some action on fuel duty increases and business rates would have been nice. As regards the new National Loan Guarantee Scheme (NLGS), time will tell if it is going to be any more effective than previous schemes in channelling bank finance where it is desperately needed.

Ultimately the Budget will only be as good as the action that follows it. Same as in business really. Many business budgets are numbers exercises and do not contain the concrete actions that are necessary to make them effective. Thus they are often filed away and forgotten until the next budget process starts.

It would be nice to think that the 2012 Budget will be different and will be seen as a key staging post in a new economic growth spurt. The proof of the pudding no doubt will be in what Hamish McRae says about it in 2017….

A symbol of what…

My my, things do move quickly. Last week when the letter condemning the 50% tax rate as hampering growth was published in the DailyTelegraph the odds on anything happening in the forthcoming budget were remote to say the least. This week it has emerged that it is now apparently subject to complex negotiations within the coalition. Watch this space as they say.

I have to admit I am slightly sceptical as to whether the 50% tax rate is having a material impact on growth. I have always believed that real entrepreneurs prefer to re-invest their profits in their businesses rather than extract large salaries and dividends, at least in the growth phase. For them it is the thrill of building and selling a business that makes them want to invest, and the tax rate that really matters to them is Capital Gains Tax one not the Income Tax one. Equally external investors tend not to be big fans of highly paid executives much preferring them to seek reward through value creation and capital growth.

Still the 500 odd businessmen that signed the letter are adamant that it is having an impact . Tales of delayed or cancelled investments abound. One made the point that in paying more than 50% of his income to the government he questioned who he was really working for. (Clearly he is too young, as am I, to remember the days of a top rate of 83% allied to an investment income surcharge of 15%. Now that was a real disincentive.)

Another argument against the 50% rate was that it was not raising any revenue because people are apparently finding ways of avoiding paying it. Well there’s a surprise. High earning people will find a way of avoiding the 50% tax rate just as they would if the highest rate was 40% or 30%. They do it because they can and want to.

Maybe that is the clinching argument for a “mansion tax”. People can move. Property can’t. Still I am sure that there are accountants already beavering away to find a way to avoid such a tax.

To me the complex tax credit system, the proposed removal of child benefit from higher rate taxpaying families, and the pernicious 60% effective tax rate that results from the withdrawal of personal allowance for incomes between £100k and £113k are far bigger tax disincentives to effort and enterprise. The people who suffer these tax traps find it much more difficult to avoid them, and often just don’t bother to put in extra effort for little or no extra reward.

The sad thing in all this debate over the 50% rate is that it is a sideshow to the real issues affecting growth. The bank finance logjam. The problems of raising relatively small amounts of equity. The growth of corporate cash mountains and their reluctance to invest or adhere to fair payment terms. The lack of confident consumers with money in their pockets and a degree of job security. These are the issues that should be occupying the minds of our policymakers.

I think it is fair to say that the 50% tax rate is a symbolic gesture rather than a significant revenue raiser. But maybe we should consider what it really is a symbol of. For the left it is a symbol of the politics of fairness and wealth redistribution. For the right it is a symbol of the politics of envy and penalising success. For the real economy it is a symbol of how easily we can be sidetracked from dealing with the real issues within the economy that are holding back growth.