The Chancellor is performing a high-wire balancing act when it comes to taxation – both for individuals and for businesses, says ACCA (the Association of Chartered Certified Accountants) in response to today’s Budget.
Chas Roy-Chowdhury, head of taxation at ACCA, says: “This high-wire act is being performed well by the Chancellor, but there could be a shaky future ahead. This shakiness comes from the fact that the Chancellor is giving with one hand and taking with the other - and that’s a tricky balancing act to maintain.”
ACCA says that despite being previously announced last year, the tax changes due on the 6 April 2011 give a mixed message. Chas Roy-Chowdhury says: “While the tax personal allowance – the point where income tax is paid – has increased by £1,000 to £7,475 on 6 April this year, and will rise again next year by £630 to £8105, the 40p tax rate band will now catch more in its net from the 6 April too. But next year’s increase in the tax personal allowance will benefit all tax payers earning below £115,000. This still makes for a confusing tax system.”
“However, it’s good that we’re looking at a simplification of some taxes and the whole taxation paper chase. But there will be a lot of complexity introduced as well as the simplifications from future changes and aspects of the NI and income tax merger. The fuel stabiliser, for example, is highly complex but will still be a real help to businesses. The corporation tax changes and the introduction of enterprise zones are welcome too.”
Chas Roy-Chowdhury comments on specific issues below:
NI and Income Tax
“Abolishing 43 reliefs is a good move. But tax in the UK remains complicated - and there could be more complexity to come. Plans to consult on the merger of Income Tax and National Insurance systems are welcomed, but ACCA’s initial sense is that this move, if it goes ahead, could prove to be a headache.
“Merging tax systems and processes is never easy – so this will be challenge for HM Revenue & Customs (HMRC). Any changes to this system need to be fiscally neutral – otherwise some people could end up paying more tax. We must ensure that groups such as pensioners are not caught by this change.
“If the two taxes are merged, it would become a lot clearer to taxpayers just how they are paying. The basic rate would then move over 30 per cent while the top rate of tax would be 52 per cent, giving the Treasury a presentational issue – the rates won’t be palatable. People can already see these amounts being deducted from their payslip of course, but it may not register with some that they’re taking home under half of their headline salary. The 30 per cent and 50 per cent levels are psychologically important, and may lead to taxes being cut to bring tax rates below them.”
Understanding the 50p tax rate
“It’s disappointing that the Government does not know how much the 50p tax rate brings into the Treasury’s coffers. Saddling HMRC to find out the truth about how much the 50p tax rate brings in will be another burden for them to deal with when they’re downscaling staff. The 50p rate is temporary, and it’s not gone yet.”
Tackling Tax Avoidance
“If the Coalition intends to chase down abusive tax avoidance, then it needs a solid infrastructure to deal with it. Their new strategy paper on tax avoidance will make it clear how this is going to be done. Given the state of the economy this extra £1 billion per year will be welcomed. As a portion of the tax take, it will be needed to fund the growing benefits and allowances bills - such as unemployment benefit.
“The Chancellor kept referring to tax avoidance and evasion as if they were the same thing – they are not. Evasion is illegal, whereas avoidance can just mean sensible tax planning. So this is phraseology by Government is very unhelpful.
“Non-doms being given a tax incentive to repatriate profits through investment in UK businesses could be a good move too. The 12 year £50k levy is reasonable and a statutory definition of residency is welcome.”
Corporation Tax changes make UK more attractive for business
“Reducing this rate by two per cent from April 2011, and then decreasing by one per cent for each of the spending review years, lifts a burden of taxation on companies – this is a smart move. It makes for a more competitive UK, a better place to do business.
“But growth rates are limiting the Chancellor’s room for manoeuvre. The lowering of the headline rate of Corporation Tax isn’t the only change that’s going to be happening here. There are going to be amendments to the Controlled Foreign Companies rules and changes to the rules for branch profits too, which will help make the UK more attractive as an HQ base for foreign companies. The current tax regime has made the UK unattractive for some but by creating a business friendly tax environment, the Treasury may be able to actually increase tax revenue by encouraging more companies to set up in the UK.”