Partner Article

Mike Fleming gives his pre-budget predictions

Mike Fleming, CTA, TEP, Partner at Straughans Chartered Accountants and Tax Advisers and former Inland Revenue Tax Inspector takes a look into the crystal ball and shares his predictions for this week’s Budget:

• Osborne to confirm a further 1% cut in Corporation Tax

• Projected scrapping of the 50p tax rate should keep thriving businesses on home soil

• Why the ‘Mansion Tax’ deserves the contempt it has received from the media

• The ‘Tycoon Tax’ and its implications

• Changes to the way Capital Gains Tax (CGT) is charged

• How a General Anti-Avoidance Rule (GAAR) could affect businesses

• Advice to businesses on how to plan for changes in tax legislation

In a situation almost without precedent, with only a matter of hours to go before this year’s Budget there is still much that is undecided. Key issues relating to tax have created volatile divisions both within and between the coalition parties, sparking debates which continue to rage over propositions such as the abolition of the 50p tax rate, the ‘mansion tax’ , a ‘tycoon tax’ and the introduction of a ‘General Anti Avoidance Rule’ (GAAR).

With so much still to play for, it’s a challenge to predict what Wednesday’s Budget will bring, and critically, what it will mean for businesses across the UK. A cursory glance at the issues which have provoked the most heated debate does, however, reveal one thing: whatever the outcome, the likelihood is that businesses will be hit hard by changes ostensibly introduced to target the wealthy.

Planned cuts to Corporation Tax Encouraging for Business

It’s not all bad news. The Chancellor will announce a further 1% cut in corporation tax, part of a planned rate reduction of 1% per year. This plan has been lauded as a positive measure to support businesses across the country. However, I cannot help feeling that the effects of this small concession have been minimal, and that it is essentially a ‘goodwill gesture’ which could mean little in real terms for struggling businesses.

50p Tax Rate Scrap Expected

Another potential positive for businesses is the proposed scrapping of the 50p tax rate, which has long been contested on the grounds that it discourages competition. I imagine that this will be welcomed as a move to encourage investment in the UK economy and keep thriving businesses on home soil. Interestingly, there has been no mention in all this debate of the fact that an unfortunate few hard-working people in the UK are effectively paying income tax at 60%. This is due to an anomaly of the tax system which means that those with a net income of over £100,000 but below £112,950 lose their basic personal tax allowance at the rate of £1 in every £2, whereas those who earn £112,950 but under £150,000 fall into a bracket which is taxed at 40% only. If there was any fairness in the world HMRC would look to address this anomaly and fix a system which at the moment rewards the ultra-rich with proportionately lower tax rates while punishing those who have worked their way into senior positions, just pushing into a higher earning bracket only to be penalised for their success.

’Mansion Tax’ concept ridiculed by media

If, as we expect, the 50p tax rate is scrapped, the question arises as to how the government is going to recoup the lost revenue. There has been heated discussion over the Lib Dems’ recent proposition of a ‘mansion tax’. While there are some attractive aspects to this proposal – everyone likes the idea of a tax designed to catch sneaky bankers and non-doms who own sprawling homes in Kensington while managing all their financial affairs from Monaco – it is fundamentally flawed, as has been reflected by the media’s merciless dissection of the idea. The crux of the problem is that while the tax might well hit those it is intended to target, it would also create victims of people who are cash-poor but happen to live in properties of a high value, with families and the elderly especially at risk. Those who bought homes ‘to grow into’ before the property boom of the late nineties and early ‘noughties’ may feasibly have paid under £500,000 for properties which are now worth £2m. It seems unfair that they should be penalised for wanting to continue living in their own home, and a major misjudgement to presume that deductions about disposable income can be made from wealth in terms of property. This is aside from the fact that a mansion tax would levy an extra charge on an asset which has already been taxed: we already pay income tax and VAT in addition to stamp duty, not to mention inheritance tax and CGT. Additionally the concept is rife with contradictions such as the fact that it would be possible to own multiple properties under the £2m threshold and not be liable while an individual owning just one property at £2.1m would be taxed. In short I think the inherent flaws of the ‘mansion tax’ idea mean that we can be confident that it won’t be introduced.

The ’Tycoon Tax’ and its implications

Reeling from the media backlash against the ‘mansion tax’ concept, the Lib Dems’ second proposition to target millionaires and scrape back some much-needed revenue was a so-called ‘Tycoon Tax’ - an enforced base-rate of 20% income tax. An appealing proposition in some ways, this ‘catch-all’ measure would in effect do little to target non-doms, who are often the worst offenders in terms of tax avoidance. It’s also important to be wary of what blanket increases to income tax of this sort may presage for the future. In Denmark, where at 51% income tax is the highest in the world, the static population testifies to the fact that no-one wants to emigrate there. Do we really want to mimic the tax system of a country which is stifling economic growth and driving business abroad?

Changes to the way Capital Gains Tax (CGT) is charged

Partners in business and individuals alike could stand to get stung by the increase of the Capital Gains Tax (CGT) main rate from 28% to a taxpayers marginal rate , which could be as high as 50% (or even 60% on some of the gain if you are in the £100k plus bracket). Entrepreneurs can fortunately claim entrepreneurs’ relief, which means they pay CGT at the significantly reduced rate of 10%, but due to the complexity of the legislation surrounding Entrepreneurs Relief, my fear is that some individuals may unwittingly arrange their affairs so they fail to qualify, leaving themselves liable to CGT charges at their marginal rate. This could potentially cost them 5 times the amount they would have paid if they had claimed the relief – when previously the highest charge anyone could expect to pay was 28%.

Beware the GAAR…

The other key way in which the government plans to tackle tax avoiders, especially the super-rich, is through the introduction of a ‘General Anti-Avoidance Rule’ or GAAR. The Revenue’s claim that a GAAR would deter abusive avoidance, reduce legal uncertainty and create a more level playing field for business ignores the danger that it could operate with all the subtlety of a sledgehammer. If not properly managed, such a ‘catch all’ rule could create as many casualties as it would capture tax avoiders. A clumsily imposed GAAR could prove particularly detrimental for SMEs, and could end up hinging on semantics – lawyers’ interpretations of what is ‘reasonable’ – rather than sifting out the terminally tax-shy from honest businesses engaged in legitimate tax planning.

Advice to Businesses

Coping with these and many of the other potential changes predicted for the Budget could prove onerous for businesses. In order to remain robust in the face of so much change I believe it’s more important than ever for businesses to engage in rigorous forward planning when it comes to tax. I would imagine that the majority of businesses in the UK use an accountant on some level - whether as an integral part of daily decision-making or on an annual basis when the time comes to file their tax return. The question I would like to ask is not ‘do you have an accountant?’ but rather ‘how are you using your accountant?’. As the legislation surrounding tax becomes increasingly labyrinthine (despite the existence of a so-called ‘office of tax simplification’) it’s critical that you engage with your accountant to develop a strategy to adapt to accommodate new developments in legislation so you can continue to maximise profit and growth in what continue to be challenging times.

This was posted in Bdaily's Members' News section by Mike Fleming .