A tricky balancing act on tax reform

CONFERENCE season is upon us and the next few weeks will be the first time the parties have had since May to slow down and take stock of this brave new post-coalition political world. Given the breakneck speed at which the coalition has been implementing its policies so far, the conference pause is also a useful time for others to assess their progress.

One area that is certainly worth looking at is tax policy. The coalition has announced several new taxes and tax changes in the last few months – but the record has been mixed.

MIXED SUCCESSES

There have been positive moves: the creation of the Office of Tax Simplification (OTS) is one of the most noticeable. An independent body that advises the government on tax has long been a glaring absence from the UK’s tax system, and the OTS should be capable of filling at least part of the hole.

Given that the OTS is a new body it hasn’t really had the time to make much of an impact. But, if the OTS can ensure tax policy becomes more consistent and that “simplification” doesn’t just mean scrapping tax breaks then it should be considered a success in the longer term. If it does what it is supposed to, the OTS could be one of the coalition’s longest-lasting legacies.

There are also many strong, progressive tax measures proposed by the coalition – including the rise in the personal income allowance, tax credit changes, and freezes in council tax rises. Alongside these positive changes, business-owners will also welcome the cut in small firms’ corporation tax, extensions to the enterprise finance guarantee (EFG) and entrepreneurs’ relief on capital gains tax (CGT). A permanent extension of the EFG would be even better.

However, many of the coalition’s positive tax moves lose their lustre when looked at in context. For example, while small businesses (SMEs) and those lower down the income scale will appreciate the changes outlined above, the rise in VAT to 20 per cent will balance some of these out. Meanwhile, small firms will also find themselves dealing with rises in insurance premium taxes and the regionalisation of national insurance contributions, a move that will heap even more administrative work on already over-burdened SMEs.

The cut in the headline rate of corporation tax is another case where there is more to it than meets the eye. While cutting the rate to 24 per cent is a step in the right direction for attracting business to Britain, headline rates are but one tool amongst a whole range of tools that can be used to adjust the overall tax environment. Fixating on the headline rate can lead to other factors affecting business decisions – including the total tax cost (i.e. VAT) or the treatment of cross-border transactions – being neglected. Cutting corporation tax then is a positive, competitive move, but it’s one that could distract from others.

WRONG TURNS

While some of the coalition’s tax changes are at least in part laudable, others have few redeeming features. The attempt to recognise the “value” of marriage through the tax system, for example, may be well-intentioned but will cost an awful lot of money when the country is in austerity mode and will add unnecessary complexity to the tax system. Besides, there’s no evidence to suggest that money the coalition plans to offer couples will encourage them to get, or stay, married.

The changes to capital gains tax (CGT) are a cause for concern too. Long-term capital assets need long-term certainty and the changes announced in the last budget (raising the rate to 28 per cent for higher earners) come only two years after the last changes, creating an atmosphere of uncertainty among wealth-creators. The Chancellor might view the change as “permanent”, but after 2015, there’s the possibility that a new government could change the rate again. The new rate also puts the UK out of line with many of its peers in the developed world, which have either a lower or zero CGT rate.

Tight public finances and a desire to cut the deficit may well be the reason behind some of the changes, but the coalition needs to be very careful with how revenue-raising taxes are handled. As a regressive charge, VAT should certainly not be raised above its new 20 per cent rate; even if this is helpful for the public purse, further rises would be counter-productive to the image of the UK as a competitive tax jurisdiction. Likewise, any proposed bank levy – of which we have yet to hear the details – must be implemented with international coordination or it could undermine the UK’s position as a financial centre. And there is a real danger that a balance sheet levy will incentivise banks to find ways to hide assets, increasing not decreasing risk in the financial system.

ALL CHANGE?

So our new government’s tax record has been patchy; who said a coalition would be different? Ideally, some of the more damaging changes such as the rise in VAT and CGT would be reversed as soon as public finances allow. But there are welcome changes – including the effort to simplify the tax system – that may balance many of their unhelpful counterparts. The key test, as ever, will be in the implementation of these measures and their effect in the long-term.

Chas Roy-Chowdhury is head of tax at the Association of Chartered Certified Accountants (ACCA).

FOCUS | WHAT IS THE OFFICE OF TAX SIMPLIFICATION

Launched on 20 July by the coalition government, the Office of Tax Simplication (OTS) is designed to be an independent body tasked with advising on how best to simplify the UK’s tax system.

Two reviews were set up on the OTS’s creation: one on tax reliefs and one on small businesses. An effective OTS would help reduce the complexity of legislation; simplify the drafting and language of existing legislation; review the existing legislation from a structural perspective; engage in pre-legislative scrutiny, leading to more considered legislation – specifically, the requirement for an annual Finance Bill should be removed.