BUDGET UPS PRESSURE ON TAX COLLECTION (26/05/09)
Given time to digest its contents, reaction from the papers, commentators and financial experts to the Chancellor Alistair Darling’s second Budget was, on the whole, negative.
Forecasts of rapid economic recovery, with growth at an annual rate of 3.5% from 2011, were described by the Treasury Committee itself as “too optimistic”, particularly with regards to the speed at which the economy would recover.
This view is backed by the International Monetary Fund which says the economy will continue to contract in 2010.
The background to the Budget
• The Government has to hold a General Election before June 2010
• The public sector deficit is huge - £175 billion more is being spent on services and social security benefits than is coming in through taxes. To put the deficit into perspective, the revenue from Income Tax, as a whole, is forecast to be £140 billion in 2009/10.
• Mr Darling would like to stimulate the economy before the next election to improve his re-election chances, as every Chancellor does.
In essence, what we have just had is a “holding” Budget, which will be followed by whatever the Chancellor can afford to give away before the election. But it is the huge public sector deficit that will need to be addressed after the election which is causing most concern and uncertainty. There will be some pain for all of us from the combination of:
• Increased taxation: Labour has traditionally adopted a “tax and spend” policy, and the 50% rate of tax sets down a marker for their future plans. Even traditional supporters like The Guardian newspaper have described this as a policy of “soaking the rich now, and the rest of us after Election Day”.
• Public Sector spending cuts: favoured by the Conservatives, but tough to implement after a long period of expanding public services. Which services, or benefits, should be cut? Some very unpopular choices will have to be made.
The devil’s in the detail
Although there was not a huge amount of substance in the Budget, in this article we focus on two main changes that will affect, either directly or indirectly, most of our clients.
The 50%+ rate of tax
The new 50% rate kicks in on 6 April 2010 for those with income over £150,000, but in reality the effective rate is more than 50% due to:
• National Insurance – 1% for employees / the self employed on all income over £43,875, due to increase to 1.5% from 6 April 2011. In addition employers currently make NI contributions at 12.8% on the whole of their employees’ income, which is also due to increase to 13.3% in 2011.
• Personal allowances are to be withdrawn for those earning more than £100,000 from 6 April 2010, at a loss of £1 of allowance for every £2 of income. This creates a marginal tax rate of 60% on income between £100,000 and £112,950.
• Tax relief on pension contributions is to be restricted to 20% for those with income over £150,000 from 6 April 2011. The rules are very detailed and complex, even hitting employees in final salary schemes where benefits are improved. Provisions have already been introduced to prevent people from bringing forward contributions or increasing levels to avoid the restrictions.
Readers of a certain age may remember the 98% rate of tax in the last years of the 1970s Labour Government. Although we are nowhere near that level, in the 1970s tax avoidance was more profitable and important to many entrepreneurs and their accountants than actually growing a business, due to more than 50% of an individual’s income being paid over in tax! The black economy mushroomed, and high earning music and sports stars, together with many entrepreneurs, left the UK for tax haven countries.
The situation has come full circle, and could pave the way for changes in big money sports like football. Arsenal manager Arsene Wenger was asked just after the Budget whether English football relied too heavily on imported talent: “Don’t worry, that time will soon be over because with the new taxation system and with the collapse of sterling... the domination of the Premier League [over foreign leagues] will end.”
It’s not just “the rich” for whom the increased tax rates present a problem. So many businesses, large and small, feed off the leisure industry as a whole; sports and music in particular. If these industries decline, many businesses will suffer, as will Government tax revenues.
With tax receipts down, the Chancellor has to make sure that whatever tax is due is actually quantified and collected! There has been a recent change in emphasis to allow people to approach HMRC and come to an agreement to pay over a given period, balanced with a much tougher collection regime, backed up by enhanced penalties for deliberate understatements.
The Pre-Budget Report introduced the Business Payments Support Service, where arrangements can be made over the telephone to defer tax payments for up to 12 months. This has proved to be a very valuable initiative, and has saved a number of businesses from closure. The scheme has been extended in the Budget to allow anticipated losses to be taken into account in negotiating payments.
Another scheme was announced in the Budget (effective April 2011) to introduce Managed Payment Plans, which will allow tax payments to be spread over an extended period, either side of the due date, without interest or penalties. This will be particularly useful for smaller businesses.
However, for those who don’t comply:
• Publication of names & details of taxpayers who deliberately understate more than £25,000 of tax. This now applies to civil settlements, as well as criminal convictions, and has huge implications when negotiating with HMRC. Commentators have questioned how it will integrate with the Human Rights Act.
• Enhanced tax information required for 5 years for those who deliberately understate over £5,000 of tax.
• New 5% surcharges for late payments of Corporation Tax and Inheritance Tax.
• Penalties of between 2% and 5% on monthly instalments of PAYE/NI paid late during the tax year.
• Finance Directors of large companies to have responsibility for accuracy of systems and tax returns.
• A “Spotlight” to be published on tax avoidance schemes which HMRC think don’t work, and which they intend to pursue through the Courts, to deter people from using them.
• An extension to the Disclosure of Tax Avoidance Scheme rules, with increased penalties for covering schemes up. The numbers of schemes disclosed to HMRC has fallen substantially in recent years.
And finally, a “New Disclosure Opportunity” (NDO) for holders of offshore bank accounts and other income to run until March 2010: further details are awaited.
The message is clear – if you cannot pay your tax, contact HMRC and agree a payment plan as early as possible. We have acted for a large number of clients in these negotiations, and can help you agree terms.
We have been analysing all the Chancellor’s proposals ever since the Budget speech. With careful, early planning the impact can be lessened – if there are any areas on which we can assist please contact us.
Our initial Budget coverage was posted on our website within 20 minutes of the Chancellor’s speech, and the full Budget Booklet and 2009/10 Tax Tables ready to download by 8.00 am the next morning. These are available on our website at www.burgesshodgson.co.uk, and a paper copy of the Tax Tables is enclosed. Please contact us if you would like further copies.
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