Back to the 1990s? There has been much talk that Labour’s promise of a 50p tax rate is a re-run of their 1970s policies. However there is a closer precedent. In 1992 Labour under John Smith and Neil Kinnock promised a substantial rise in both income tax and national insurance giving individuals and companies time to plan.
So what should companies do and what can they learn from the 1992 experience. In 1992 many companies declared dividends early and individuals accelerated income where they could. There was a similar pattern before the increase to the 50p rate in 2010. The difference was that in 2010 there was an increase in the top rate of tax whereas in 1992 there was no change of government and no increase in the top rate of tax.
One area which companies and individuals should however look at is pensions and other reliefs even if the 50p rate is not reinstated there is likely to be focus on tax reliefs that wealthier tax payers enjoy. Top of the agenda would be tax relief on pension contributions. The maximum relief is due to fall to £40,000 and the lifetime allowance to £1.25m. I would expect this to fall further whoever’s in power and individuals should maximise their pension contributions whilst they can.
For 15 years, 1995-2010, there was a political truce after Labour’s defeat in the 1992 election which was generally attributed to their promise of higher taxes. Tony Blair promised not to raise the basic or higher rate of tax and the issue lost most of it’s electoral potency.
Since the Labour government raised the top rate to 50p in the last days of its administration of 2010 tax has not been barred from the headlines and it is the politics of this that have come to dominate taxation policy.
In 1992 when Labour pledged to increase taxes on the highest paid many people feared that they would increase taxes for everyone. There is a similar danger this time around. The Conservatives have not ruled our reducing the top rate back to 40% and given the strong pressure on the back benches it is very likely that a Conservative majority government would seek to do this whilst probably reducing tax reliefs available to higher rate taxpayers. The Lib Dems are committed to 45p and would probably only agree to a change in exchange for other taxes being raised on wealth or property.
Given the narrowing of the 2 main parties in the opinion polls it is difficult to predict the future. However the Tories might be pleased with the focus on tax for 3 reasons:-
1. It helps consolidate support amongst their own natural supporters.
2. Combined with Labour’s pledge to raise corporation tax it makes Labour look hostile to business and cuts their sources of funding.
3. It may indirectly damage UKIP. One of UKIPs strong messages is that all the other parties are basically the same. The Labour pledges to raise taxes undermine this and may persuade many of those who will support UKIP in the European elections to return to the Conservative party for the general election.
One WAG said that economists only made predictions in order to make astrologers look good !
When you look at the difference between the OBRs (Office for Budget Responsibility) predictions in March and the same body’s predictions in November one might be forgiven for deciding that the best way of reading the economy is to look at the constellation of the stars.
Before bidding for Russell Grant’s job, I think there are some important pointers for the future, five years from the Autumn Statement.
First raising taxes has become more and more difficult. The old favourites of business rates, petrol taxes and freezing personal allowances have become politically impossible. There are now no easy targets apart from non-residents to pick on. All the easy low hanging fruit such as rounding up VAT to 20% have been exhausted and policies such as raising employers national insurance contributions would prove massively counterproductive. Indeed the NIC relief to all companies and the targeted relief for employing young people indicate a determination to reduce taxes on employment.
So if there is still fiscal tightening of at least £12 billion to be achieved, the question is how will this squeeze be effected ?
We know what the Conservatives are planning a further squeeze on public spending particularly on welfare coupled with a new offensive on tax evasion and avoidance. Politically the Conservatives believe that attacking welfare benefits coupled with tax avoidance tools for the rich send out a balanced message. Whether they achieve their goals would be open to some question but companies and individuals who indulge in “aggressive” tax planning must expect greater scrutiny from HMRC.
The Lib-Dems seem to have adopted a similar path with the exception of a desire to hit the wealthiest with a mansion tax and curbing reliefs on pension contributions.
No-one knows Labours policies apart from agreeing on the mansion tax. Under New Labour the party was very cautious about increasing tax rates until the end of its turn of office. There are indications that it is looking to raise taxes substantially ( notably corporation tax and higher rate income tax) but until they publish any policies this really does remain for the stars.
The publication of an analysis by the Treasury of an effect of the reduction of Corporation Tax (CT) rates has provided substantial ammunition to those who are in favour of further tax cuts. The study shows that the overall revenue lost to the Government by cutting CT will be substantially reduced by the growth in the economy and inward investment. This is not the first report commissioned by the Government to look at the effect of high taxes and the reduction of rates.
When the 50p rate was reduced to 5p HMRC published a report showing that the increase in tax from the introduction of the additional rate was minimal.
The adoption of this analysis which indicates that higher tax rates do not bring in substantially higher revenue and cause economic damage may change the terms of the political debate. Previously Governments shied away from unfunded tax cuts because they felt that it would increase their deficit and reduce their economic credibility. If however it is shown that up to 75% of revenues are recouped through greater economic growth and tax receipts, then tax cuts become more defensible and cheaper to deliver. I would expect this argument to be deployed more to justify future tax rate reductions.
In particular the January 2015 tax receipts will be scrutinised very carefully as these will be paid under self assessment for the first tax year since the 50p rate was reduced to 45p (2013/14 liabilities are payable by 31st January 2015). If the receipts are high in that month, one can expect the Government to use it as justification that lower tax rates can often generate higher tax revenues.
For the first time in a generation the government has raised the share scheme limit as George Osborne made the dramatic move of doubling the maximum monthly amount one can save from £250 to £500.
He also increased the Share Incentive Plan limits on partnership and free shares as well as the matching element. This is the first rise since SIP was created by Gordon Brown over 13 years ago.
As I predicted in my last blog, the Government finally listened to the proponents of share schemes and much credit goes to bodies such as IFS/Proshare, ESOP centre and other bodies which have lobbied for this on a consistent basis.
HMRC figures show that the share scheme market has stagnated over the past five years as the value of the reliefs in real terms has been eroded by inflation. Whilst all political parties have publicly supported the principle of wider share ownership, it is to the credit of the coalition that they have acted to demonstrate their support.
The dramatic increase in relief available may prove to be a tipping point which makes the adoption of these share schemes the normal remuneration policy and that those that do not adopt them will be the exception. Coupled with the simplification measures in setting up share schemes I foresee a vast expansion in the number of employees participating.
The invention of the pre-budget report by Gordon Brown gives Chancellors two bites of the cherry each year at making headline announcements on Government spending policies and tax. With the election 17 months away and the agenda having been shifted to the cost of living there will undoubtedly be a focus on benefitting “hard-working families”. If as anticipated the growing economy means that there will be an undershoot of £15 billion in Government borrowing then we can expect some “eye-catching announcements”.
There is cross party agreement on the desirability of raising the personal allowance. One can expect that it will be raised beyond £10,000 before the end of this Parliament and potentially towards £12,000 and then linked either to the minimum wage or more ambitiously to the living wage.
After years of squeezing the middle by reducing the real value of the threshold at which individuals pay higher rate tax we may see some movement on this.
Corporation Tax is already planned to move down to 20% by 2015, the Chancellor might wish to spike the Scottish Nationalists’ guns by announcing the intention to reduce CT even further.
There may be some reform to stamp duty as it has become an even more important revenue earner. Capital Gains Tax may well be imposed on non-residents making gains on UK property.
The Government is already committed to spending an extra billion on the extension of free school meals and the re-introduction of the married couples allowance further spending increases would seem unlikely apart from perhaps a further emergency injection to help troubled A&E departments.
Overall we cannot expect too much intellectual coherence in the announcements as the Government moves towards election mode in May 2015.
Last night at the IFS/Proshare Annual Awards dinner David Gauke gave the clearest hint yet that the Government was considering raising the limits on approved plans.
The SAYE limit of £250 has been the same for over 20 years and the SIP limits have remained the same since plans started in 2001. If the Government does lift the thresholds, this could have a major effect on the popularity of share schemes on the UK. The raising of the limits would attract many more companies to put in tax approved plans which give higher net rewards to employees. Coupled with the simplification recommendations which the Office of Tax Simplification (OTS) proposed and the government implemented, this could make share plans the norm amongst British companies.
The Government is to be commended for maintaining tax advantaged share plans in a time of fiscal austerity when many countries in continental Europe were abolishing them. However to achieve greater share ownership amongst ordinary employees, the Government should seize the opportunity to increase the contributions that employees can make.
Reports from accountancy firms from the largest to the smallest indicate increased activity from HMRC. After several years of lower activity and investigations, the new army of 900 inspectors is ready to challenge more companies and their compliance arrangements.
Egged on by the press and Parliament, HMRC are looking to close part of the tax gap estimated at £34billion through increased investigations on selected companies.
The danger is that a number of companies have become complacent and therefore lax over their compliance will find they will have an unwelcome tax bill the next time the Revenue come knocking. For those who don’t have a low risk rating it is a question of when not if HMRC launch an investigation on you.
With 18 months to the election the starting gun has already been fired on outlining the different parties’ policies on tax.
As often happens the first casualty has been consensus on tax. Until the Labour party conference it had been assumed that all sides supported the reduction in corporation tax to 20% by April 2015. Ed Millibands’ pledge to reverse the final cut would seem to usher in a period of uncertainty regarding CT rates.
The pledge to freeze business rates for small businesses may well be matched by the Conservatives in future budgets.
It is also not clear whether the 45p rate of tax would increase to 50p if Labour won the next election. Although Labour had fiercely opposed the “tax cut for millionaires”, they have been very cagey about whether they would actually revert back to the 50p rate of tax. The first self-assessment deadline covering the 45p rate occurs on 31st January 2015. Expect there to be considerable attention as to whether the tax take increases in the first year of the 45p rate.
The Conservative Party Conference unveiled both the limited return of the Married Couples Allowance (MCA) and the pledge to create a surplus in the National Budget Accounts by 2020. The problem with the MCA is that it will create an even greater cliff effect on higher rate taxpayers when combined with the withdrawal of child benefit. The commitment to a budget surplus would on the face of it seem to rule out further substantial tax cuts until 2020 but it is likely that Osborne is banking on the recovery closing most of the gap in the Public finances.
The final area politically concerns the position of the Lib Dems as the potential Coalition partners after the next election. The action to close the deficit that was agreed in 2010 was 80% covered by Public spending cuts and 20% through tax rises. The tax rises were quickly enacted (such as the VAT and stamp duty rises). The public spending cuts were phased in over a much longer period and represent most of the further fiscal tightening up until 2018. It will be interesting to see whether the next government keeps to the same spending plans or looks to close the gap through further tax rises.