Thursday, 25 March 2010

Budget 2010

OVERALL COMMENT

The Budget contained no great surprises from the tax point of view before the upcoming general election and a series of “stealth taxes” were contained in it, including freezing of personal allowances, income tax bands, capital gains annual exemption and inheritance tax thresholds. However, we must wait for the post-election Budget, or more likely next year, for the really hard-hitting changes.

BUDGET HIGHLIGHTS
  • Business taxes
    • Companies: No changes in corporation tax rates.
    • Capital gains: No increase in capital gain tax rates. Entrepreneurs’ relief doubles to 2 million pounds (this is the threshold for paying CGT at full rates on business assets gains)from 6 April 2010.
    • Capital expenditure: Annual investment allowance on capital expenditure for plant and machinery for small businesses increases to £100,000 from £50,000 incurred on/after 1 April 2010 (companies) and 6 April 2010 (unincorporated).
    • Business rates: small rate business relief exemption for 1 year from October 2010 on properties with rateable values up to £6,000. Partial relief for properties with rateable values up to £12,000.
    • VAT: No VAT rate increase.
    • Small businesses: £200 million will be given to a capital growth fund to invest in small developing businesses.
  • Personal taxes:
    • Income tax: bands frozen. Introduction of 50% income tax rate on income more than £150,000 from April 2010.
    • Personal allowances (threshold for paying income tax) frozen. Personal allowances phased out in stages for people earning over £100,000.
    • High earners: high earners will lose higher rate tax relief on their pension contributions from April 2011.
    • Workers: Minimum national wage to increase by 2.2% to £5.93 per hour from next October.
    • Pensioners: basic state pension is rising by £2.40 (2.5%) to £97.65 per week from April.
    • The number of hours pensioners will need to work to qualify for working tax credit reduced to 16 from 30.
    • Savers: From 6 April 2010, the amount of money that can be put in ISA without being taxed will go up from £7,200 to £10,100 for all savers regardless of age.
    • Attack on the rich: Mansion tax introduced. Stamp duty land tax on residential properties worth more than £1m rises to 5% from April 2011 and will remain permanently!
    • Stamp duty land tax: exemption for 2 years (25/3/10-25/3/12) for first-time buyers for houses costing up to £250,000. This doubles the current lower threshold.
    • Inheritance tax: nil-rate band (the threshold at which inheritance tax kicks in at 40%) frozen for the next 4 years at £325,000.
  • Tax avoidance:
    • Tax avoidance schemes: Strengthening of disclosure rules for tax planning schemes. Changes to definitions of scheme 'promoters', to promoters' duties, to intermediaries' responsibilities and the time at which a duty to disclose a scheme arises.
    • Employers: From April 2011, the taxman will have the powers to demand “security” from businesses which habitually fail to meet their PAYE and NIC bills.
    • Offshore: Penalty 200% for those who evade tax offshore!
    • Clampdown on companies’ double taxation reliefs.
    • As part of HMRC’s ongoing clampdown on offshore centres, imminent signature of a tax information exchange agreement with Belize, Grenada and Dominica, the Caribbean tax havens, announced. However, the information exchange is not automatic and HMRC would need to request specific information on a specific taxpayer. This makes the agreements of limited use.
    • A disclosure facility with Liechtenstein, another tax haven, is expected to raise more than £500 million.
    • Close companies cannot take deduction for writing-off loans to participators in that company.
  • Consumers’ taxes:
    • Duty on beer, wine and spirits 2% (equal to 2 pence on a pint of beer, 10 pence up per bottle of wine. Increase in spirits equal to 36 pence on a bottle.
    • Tax on cider increased by 10% - 5 pence on a litre of cider.
    • Fuel: up 3 pence to be staggered over the rest of the year.
    • New “showroom” tax means buyers of more polluting cars will pay up to £515 extra.
    • Tobacco duty up by 1% above inflation, then 2%. Cigarettes up 15 pence per packet of twenty.
    • Households will have to pay 50 pence per month tax on their telephone landlines to hep pay for rural areas to receive broadband internet.
  • Families:
    • Child tax credit will increase by £4 per week for every child aged under two from April 2012.
    • Kinship payments: Grandparents and relatives will get up to £56 a week for looking after children during “family difficulty times”.

Tuesday, 9 March 2010

Anomaly (or perversity) of the tax system?

In all my years of experience as a practicing accountant, I cannot recall of a bigger anomaly in the tax system than using market values to pay capital gain in cases where none should be due.

I am not referring here to the situation where an individual disposes a capital asset that has appreciated in value for a consideration. Provided that money changes hands at market values, I can understand the logic behind charging CGT on the gain (as computed by the difference between original cost and market value on the sale). I have no serious problem with that, other than the fact that it would be fairer if the gain is adjusted downwards by the effect of the inflation since purchase(inflation is a fact of life and eats into profits and gains). Regretfully, that concession was also gone a couple of years ago...

My biggest objection is taxing an individual on a ghost gain (a book gain!) when there is no consideration, i.e. in the case of gifts. In my opinion this comes close to amounting as a rip-off (big brother poking his hand into people's pockets to take money when none was actually made!!)

Take for example the unfortunate parents who have been letting a second house for a number of years and when the time comes, they affectionately want to pass it on to their offspring to help him/her out to start out in life. Here is where the anomaly comes in: since the house has appreciated in value over the years, they will not be able to help their child unless they fork out a respectful amount of tax to the taxman based on the gain made - from which of course the poor parents will not enjoy any benefits in any way. Pay tax out of an unrealised profit,that is. How more cruel could it get?

Amazingly, this anomaly does not occur in other taxes e.g. stamp duty land tax (tax is paid only due where consideration).

I think there should be some rectification in the law to ensure that the gain is taxed only where a disposal for a consideration at market value occurs, i.e. when the child eventually sells the house to a third party and the gain is realised.

For the time being, the regime is fairer for capital gains on disposal of assets used in a trading business, like goodwill, shares etc. These gains can be deferred where disposal is to connected persons (limited companies, relatives) or where the gain is re-invested into another asset and taxed only where eventually the asset is old to a third party or the asset sold is not replaced. In other words, there is some kind of "hold-over" or "gift" relief. The effect is the same, no matter what the name is: tax on the gain is postponed. These concessions exist to encourage continuation of business and enterpeneurial spirit.

Someone could ask: Shouldn't help to family members be among government priorities and a good enough reason to enjoy some kind of relief for gifting non-trading assets, for passing a house or a plot to a child by parents to help them out (especially in a age where it has become harder and harder for young people to buy their own home because of the sky-rocketing house prices?)

Am I missing something here? Any more thoughts?