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people who will face a variety of tax rates as their tax credits or child benefits or personal tax free allowances are withdrawn based on any increase in income they might receive.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…..

Taxing Times.....

Nobody likes paying tax. There it is. A bald statement. Oh people will tell opinion pollsters that they would happily pay more tax to improve services that they value, but in reality anybody fighting an election based on a message that more tax is a good thing is not likely to be holding the keys to No.10 Downing Street any time soon.

Yet like it or not, and regardless of who wins the next election, we are all likely to end up paying a lot more tax. National Insurance is due to go up in April 2011. It is highly likely that VAT will increase. There is also talk that Capital Gains Tax (CGT) will have to go up as well due to the disparity between the new higher rates of tax and the current 18% level of CGT. This will no doubt fall disproportionately on entrepreneurs, and provoke an outcry similar to that which followed the curtailment of the 10% taper relief for business assets a couple of years ago.

The Tax Advice industry is currently in overdrive finding ways of mitigating the impact on their clients of the new 50% rate which is being introduced from April 2010. And yet the retrospective nature of a recent court case relating to the reclassification of a long time “non dom” has caused many advisors to wonder whether even giving solid advice based on how tax law is currently being applied will be of any use if the Revenue decides that its own interpretation at the time was wrong and seeks to go back and correct matters.

It would appear that even with frighteningly detailed tax legislation in place, court cases will turn on specific facts, and the current HMRC view of those facts, and there is no guarantee that this view will be consistent.

HMRC are effectively operating as if there is a general anti avoidance provision in place, having cleverly blurred the boundaries between legitimate and legal tax avoidance and illegal tax evasion. Not only are they challenging the more imaginative schemes that have been specifically devised to avoid tax, but they are also looking to attack what was hitherto regarded as sensible tax planning.

Added to all this is the argument that the Directors’ Duties under the Companies Act 2006 require them to minimise their tax liabilities where possible which will make taxation issues even more of a burden for company directors and owners to deal with.

The UK already has a horrendously complex tax code with pitfalls galore even for those who do their very best to comply. Throw in the impact of uncertainty generated by HMRC’s attacks on tax avoidance, which could then potentially be applied retrospectively, and you are setting the scene for an era in which the tax lawyers are likely to be the main winners.

Taxing times indeed……