The Fizz! Blog

Income tax and party politics

Just after last year's budget I did a presentation to a local networking group - "What the budget means to you".  In it I expressed the view that, because of the abolition of the 10% tax rate on earnings from 2008, the only clear losers from the budget were the low paid, and that it was pretty sickening.  In making this point I'm not claiming that I was being amazingly perceptive; it was commonly observed within the industry that childless people earning £18,000 or less would suffer.

Last week, a year after the announcement, just as the change came into force, Labour MPs began to complain about it.  I can see only three possible explanations for it taking a full twelve months for them to rock the boat.

1. They didn't understand the change when it was announced.  This isn't really plausible, unless they are living in a bubble.  As I say, every professional adviser and well-informed layperson saw it immediately.

2. They want to be able to claim to their constituents that they opposed the change, whilst at the same time not jeapordising it - clearly, it wasn't going to be reversed a week before it came into force, blasting a massive hole in the anticipated tax take for the next year.

3. Last year, as a Labour MP you weren't allowed to question Gordon Brown.  Increasingly, you are.

Whichever one it is, none of them reflect well on the politicians involved - they all represent either incompetence or cynical party politics, when the focus ought to be on ensuring a fair deal for all taxpayers.

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A u-turn I forgot about

One of the consequences of reducing the basic rate of income tax to 20% (from 22%) from 6 April was a loss of income to charities.  Before, in order for a charity to get £1 in its coffers, you gave them 78p and the government topped it up with another 22p - in other words the government gave it 28% on top of your donation.  After, in order for a charity to a charity to get £1 in its coffers, you would give them 80p and the government would top it up with another 20p - in other words, the government would just give it 25% on top of your donation.

In practice, of course, we weren't all going to suddently start increasing our charitable donations from 78p to 80p (or whatever).  We'll carry on paying £x a month or a year, resulting in a loss of income to charities.

There was a fair amount of negative publicity about this (presumably unintended) consequence of the decrease in basic rate tax.  As a result, in the budget the Chancellor announced that the government would carry on topping charities' coffers up at 28% for the next three years, to soften the impact.

Of course, they waited until three weeks before the change was due to come in before announcing this.  I was reminded of this today when looking at a leaflet from the National Trust that assures me that, if I tick the Gift Aid box, each £1 I donate to them will be worth £1.25.  It won't now - it'll be worth £1.28.  But the National Trust, being responsible and thinking ahead, have now presumably got millions of leaflets that are factually inaccurate to get rid of.

More significantly, no doubt some charities have had the foresight to ask their donors to up their contributions to make up for the reduction in the tax break.  Now that the tax break has been temporarily restored, are they to contact all those donors again to ask if they'd like to reduce their contributions to their previous level?

Once again, this is what happens if you make up taxation policy as you go along.

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Made an error on your VAT return?

If so, there was a change that was hidden away in the Budget that's actually quite useful.

For the last 10 years at least, if you realise you've made a mistake on your VAT return, then you've been able to just correct it on your next return, as long as the error was of £2,000 or less.  Any more than that and you have to fill in a special form.

Now, that threshold has been increased to £10,000, (or 1% of turnover, up to a maximum of £50,000, if that's greater - but if your turnover is less than £1million then £10,000 is the right figure) which means that many more errors can just be amended on the next return without jumping through hoops.

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ISA allowances increasing

From 6 April, the annual ISA allowance is increasing to £7,200, with £3,600 allowed in a cash ISA.  The previous equivalents were £7,000 and £3,000.  If, like me, you have a standing order into your cash ISA of £250 a month, from 6 April you can change it to £300 a month.

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Research and Development - changes next month

As announced in the Budget, from 1 April the tax incentives for R&D expenditure become more attractive.  They were pretty generous before, and there's now an even better opportunity for companies engaged in R&D to get a really desirable tax break.  What counts as R&D is not black and white, and the taxman will often query a claim.  However, at Fizz we have lots and lots of experience of successful claims of the credit, and successful negotiation if claims are enquired into, so if you'd like to know more about how you could benefit, give us a call.

Also, there's a significant deadline at the end of this month for backdating claims - if this applies to you, get your skates on!

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"Income shifting" legislation postponed

I've written at length before about the massive flaws in the the government's plan to crack down on what it's called "Income Shifting" - basically "husband and wife" businesses, where one spouse generates most of the income but the dividends are split with a spouse or partner so as to use their tax allowances.

Following the almost universally negative reaction to the plans, the Chancellor announced in the Budget yesterday that the introduction of the legislation has been postponed until 2009.  It remains to be seen whether it will be implemented in its current form.  At least for the next year, it's still legitimate to set up your business so that the allowances of both spouses are used.

As an aside, there have been two massive u-turns on small business tax recently - this, and the recent change of heart on CGT with the introduction of entrepreneurs' relief, following a similar outcry about the Chancellor's initial plans.  It's hard enough for professional advisers to advise their clients accurately with the goalposts constantly shifting like this.  How the unrepresented taxpayer is expected to get things right is beyond me.

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How the government supports Small and Medium Enterprises

I was with a client all day yesterday, and I only actually heard about a minute of the Chancellor's budget speech.  This was the bit I heard:

A competitive and simplified tax regime is essential.

That is why we cut the main rate of corporation tax in 1997 and again in 1999.

And from next month the main corporation tax rate falls again from 30 per cent to 28 per cent.

Mr Deputy Speaker, the UK is one of the best places in the world to do business. We are committed to consultation with business to maintain a stable business tax system that remains responsive to business’ needs and internationally competitive.

Underlining our commitment to maximising the economic recovery of the UK's oil and gas reserves, I can also confirm reforms to the North Sea fiscal regime to help incentivise investment and support production.

But today I also want to do more to support Small and Medium Enterprises now and in the longer term.

13 million people work in Small and Medium Enterprises. And there are over 750,000 more firms than in 1997.

The new Capital Gains Tax rate will come in next month including the entrepreneurs’ relief I announced in January.

And that will benefit over 80,000 businesses and investors in the next year alone – 90 per cent will continue to pay Capital Gains Tax at 10 per cent – one of the lowest rates in the world.

This Budget continues a programme of tax simplification. I am today announcing further steps to help small companies simplify their tax calculations.

Mr Deputy Speaker, especially at this time we need to do more to help Small and Medium Enterprises get access to the finance they need.

To help them in current conditions, I can therefore announce that funds available through the Small Firms Loan Guarantee scheme will be increased by £60 million for the coming year.

And I am from next month extending the scheme to small and medium firms.

Can you spot what's missing here?  The Chancellor tells us about the reduction in corporation tax for large companies to 28%, as already announced in the Pre-Budget Report, and he tells us how important SMEs are.  But there's no mention at all of the increase in corporation tax for small companies to 21% from 1 April.  The claim that the Chancellor wants to supports SMEs is undermined somewhat by that tax increase - it dwarfs any extra funds made available under the Small Firms Loan Guarantee Scheme.  As ever, the good news gets repeated, the bad news gets buried or twisted.

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