The highlight of my year is almost upon us. Forget Christmas, birthdays, anniversaries; Wednesday 21 March is Budget Day! I do happily admit to being sad, and indeed in the current economic climate you might wish to add masochistic to the charge sheet.
There have undoubtedly been better times to be Chancellor of the Exchequer from an economic perspective, with room for manouvre definitely tightly constrained at the moment. George Osborne has made it clear there will be no tax giveaways in the 2012 Budget, with any tax reductions recouped elsewhere. There is, as ever, no shortage of lobbyists clamouring for favourable treatment for their particular interest group, whether that be 50% income tax payers, airlines, corporation tax payers, Her Majesty’s Opposition or Chambers of Commerce and the CBI. But it is most unlikely that we will see any fundamental change to some of the more bizarre aspects of our tax system, which some might say are well overdue a review. I will highlight a few for your amusement and delectation:
1. The tax year
Apart from choosing a date at random, the uninitiated in the mysteries of the 18th century UK agricultural economy, Lady Day and the switch from the Julian to the Gregorian calendar might wonder how on earth we finished up with a tax year that ends on 5th April. Given that the rest of the world is fairly united in using the calendar year as its tax year, is it too much to hope that this anachronism will be swept away at some point?
2. Corporation tax v income tax
I have yet to encounter a Chancellor who appears to understand that many small businesses in this country operate as sole trades, partnerships and LLPs and not limited companies. Attempts to stimulate the business sector by tax cuts always focus on corporation tax and not income tax, as if business in this country are all incorporated. They are not, and I suspect the majority are not, and such lazy thinking should not be permitted to continue.
3. Small company profit extraction
In an ideal world, it seems to me, the tax system should be neutral in the decision as to whether to operate a business through a company or not. In our far from ideal tax system, the incentives for profitable businesses to operate through a limited company are significant, including tax-free dividend income for basic rate taxpayers, an exemption from the minimum wage legislation for company officers without service contracts, and the ability to get credit for benefits purposes for national insurance you have not actually paid. I don’t think you would start from that point if you were designing an equitable tax system?
4. Capital gains tax main residence exemption
It is a fundamental principle of the CGT legislation that you can only have one tax exempt main residence at any one time – except of course when you can have two, or even possibly more.
If you have lived in a property as your main residence at any time, the last 3 years of ownership are deemed to be a period for which you occupied the property, whether or not you actually did so, and without prejudice to exemption for your actual main residence during that period. It was this piece of legislation that was at the centre of the ‘flipping’ scandal concerning Hazel Blears and others in the last Parliament, although the MPs concerned seem to have been primarily guilty of obtaining good tax planning advice.
Also, if you let a property which has been your main residence, you get an additional exemption of up to £40,000 (each for couples) for the privilege. And if you can’t manage to juggle your actual pattern of residence between two properties that you occupy residentially at the same time to make the ‘right’ one your main residence, don’t worry, you can elect to make the exemption run at odds with the facts.
In a country where many are homeless, and many more cann0t afford to raise the deposit to buy a property, however modest, should the tax system really be discriminating so dramatically in favour of those who can afford to own multiple properties?
5. Company cars
Among strong competition, this is my favourite bizarre piece of tax legislation, as it runs so directly counter to the avowed intention of that legislation.
It used to be the case that the level of car benefit decreased as business mileage in the vehicle increased, on the fairly reasonable basis that if you were driving more than 18,000 miles per year on business you clearly needed your car foryour employment (indeed you were spending a very large proportion of your life in it, given the traffic in this overcrowded nation). Now this link has been cut, and thus the advice to those who drive many business miles is to use their own car and claim their tax free 45p or 25p per mile from their employer for so doing. So far so good.
But the uncomfortable fact is that this means that the ideal candidate for a company car is someone who is driving n0 business miles and doing vast quanitities of private mileage. Is this what the legislation is intended to achieve? I don’t think so.
6. General anti-avoidance rule
Banks are not popular, in the way that only those responsible for the greatest economic meltdown for 80 years can be unpopular. Their response to this unpopularity appears to be:
i. Refuse to lend businesses any money
ii. Continue to pay obscenely large bonuses to senior executives
iii. Continue to pursue aggressive tax avoidance strategies
I am not quite sure which of these is intended to enhance their popularity, but as strategies they appear unlikely to succeed in this respect.
And then we have Vodafone plc, whose relatively amateurish attempts at tax avoidance were matched only by the even more incompetent handling of their tax affairs by a senior officer of HM Revenue & Customs.
Artificial tax avoidance is beyond the pale in the current economic climate, and a distinction needs to be drawn between this and legitimate tax mitigation strategies. Amazing as I would have thought it 5 years ago, the body of opinion in the UK tax profession appears to have swung in favour of a general anti-avoidance rule, which appears to be necessary to stop multi-national companies based in this country from engaging in cynical attempts to deny the Exchequer billions of pounds in much needed tax revenues. So why the delay in introducing such a rule?
So forget tinkering with the tax system, which all too often represents those who do not understand the practical consequences of what they propose seeking popularity for sticking plaster solutions that will make no practical difference to the massive problems that we face. Address some of the fundamental issues that face the system, and politicians may actually convince those of us in the tax profession that they know what they are doing, and it has been a long time since any of us have laboured under that particular illusion.
But I am not holding my breath …………