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WE PROMISED YOU a report on how well the Chancellor had met the expectations and wishes of the accountancy firms that we surveyed shortly before the Budget (Taxation, 16 March 2006, page 604). It is appearing a little later than intended, but that has permitted a more measured review of the figures.
The survey asked the top 30 accountancy firms for their views, and received answers from half of them, representing a fair cross-section of the differing firm sizes in the top 30. We asked them what they thought WOULD happen in the Budget, and then what they WANTED to happen — starting in both cases from indexed figures.
Could do better
On income tax there was unanimity that there would actually be no change, but four firms thought there should be a reduction and two an increase (the other eight who expressed a view thinking he would be right to leave it alone). Certainly the Chancellor did nothing that could be seen as a significant give away, unless (as he, but virtually no-one else, does) you treat tax credits as a reduction in a tax liability rather than as a welfare benefit. Increasing the amount that can be paid by the employer for childcare each week by £5 to £55 will cost a mere £10 million in 2006/07, estimated to rise to £25 million by 2008/09 (so much for Andrew Hubbard of Tenon's hope for 'no tinkering at the edges for the sake of a headline').
By contrast, removing the exemption for loaned computers is estimated to save £50 million in 2006/07, £100 million in 2007/08 and £150 million in 2008/09, as the existing schemes unwind. Add on the £70 million from the backdated anti-avoidance rules for employer related securities, and it can be seen that there is a small but significant increase in the income tax take for 2006/07. So that's a mark of about five out of ten for the Chancellor.
CGT was expected to stay the same by all but two of the fifteen respondents, who thought it would rise, and the pattern for what respondents believed the Chancellor should actually do was very similar. On the whole he met their expectations — the changes to CGT to counter avoidance are expected to raise nothing in 2006/07, and a modest £40 million in the following year. Say eight out of ten.
Again, very few firms thought that IHT would change at all, and all of them wanted it to either stay the same or (the majority view) reduce. Instead there is, if anything, an increase. There is no change for 2006/07 on an indexed basis, and the increased threshold only gives a tax reduction in 2008/09 — just £10 million. However, 'aligning the inheritance tax treatment for trusts' (which is what they call it) has no effect for 2006/07 but will produce increased revenues of £15 million for each of the next two years. There is also the possibility of IHT on alternatively secured pension funds when the pensioner dies, although the amounts are likely to be small as people change behaviour to compensate.
Show your workings
In exams they always say 'show your workings'. The Chancellor has shown none of his workings here — very little detail of how the new trust rules will work in practice, and no consultation with the profession beforehand, despite having just concluded a significant consultation on the income tax and CGT treatment of trusts.
Trust practitioners are rightly very annoyed at having this sprung on them, particularly since it will effectively be retrospective, affecting decisions made in good faith on the basis of principles that have been in place more or less since Capital Transfer Tax was introduced over thirty years ago. So although what the Chancellor has done does not go against what was requested, that is only because no-one thought it necessary to say that he shouldn't completely overturn the IHT treatment of trusts. Three out of ten, and I'm being generous.
Answer all parts
National Insurance was one of the taxes where expectation and desire were furthest apart. A significant minority, two-fifths of the respondents, expected NI to increase, whilst the rest expected it to stay the same. However, almost as many thought that what the Chancellor should do was to decrease it, and none actually thought that he ought to increase it.
As it turned out, he actually did very little to NI, but he signalled a change in future. Para 5.87 of the Budget report says that:
'There is a case for building on previous work to align, for low paid workers, income tax and National Insurance systems in order to improve outcomes for the low paid and to reduce burdens on employers, especially smaller employers. ... The Government will conduct a review in time for consultation after the Pre-Budget Report.'
However, there is also an obvious anomaly higher up the system, in that there is a band where most employees without significant other income find that they are still basic rate taxpayers but have now exceeded the limit for paying full National Insurance contributions, and therefore pay at only 1%. It may well be that the quid pro quo for doing something at the bottom end will be an extension of the liability to full rate at the top. But six out of ten for this Budget.
VAT caused little excitement amongst our readers, but it loomed large in the Chancellor's figures. Countering Missing Trader Fraud is aimed to raise a significant £100 million in 2006/07, but a whopping half a billion in 2007/08. No-one would criticise an attack on blatant tax evasion such as this, but it remains to be seen whether the changes will successfully target the evaders without harming genuine businesses. Seven out of ten. Stamp Duty also failed to produce the decrease that many of our readers would have liked — six out of ten.
Compare and contrast
The views on corporation tax were, as mentioned in the previous article, the most diverse. Some firms thought that there was a clear need to respond to the competitive nature of the world tax system, and to produce significant reductions in corporation tax.
The Chancellor obviously did not agree, and apart from removing the zero rate (as previously announced), he left other bands and rates the same. For 2007/08 and 2008/09 the removal of the zero rate will mean increased receipts of up to half a billion pounds. By contrast the increase to 50% in the first year allowance for small companies' capital allowances will cost at most £50 million in 2007/08, and overall will be revenue neutral since it simply advances allowances which would be due anyway.
The other major failure is that the reform of corporation tax does not seem to be moving forward, contrary to the hopes of several respondents to our survey. If the UK is not going to compete on the basis of a low tax regime, it should at least be competing on a simpler system. Two out of ten.
By far the most significant request from our respondees was for a reduction in red tape. Sure enough the Chancellor announced targets and percentages for reductions in form-filling. But at the same time he confirmed a massive extension to the tax disclosure regime, and the removal of the home computer exemption is likely to lead to a significant amount of work in trying to identify completely unimportant levels of private use for business laptops that need to be reported on P11Ds. So I'm going to deduct five marks for poor presentation and give him a D overall. A disappointing report, given Gordon's obvious abilities; he must try harder if he's going to progress.
