Properly planned changes to the tax system? That'll be the day.

I was pleased to read in the Evening Standard that David Cameron has promised that:

“We are going to do a novel thing in this Government. We are going to plan properly, proper meetings, proper processes, proper Budgets.”

I'm recording this here for posterity. In context the statement is a reaction to the furore about prospective changes to the CGT regime (about which I have commented previously on this blog).

If the coalition Government is serious about doing things properly it would mark a sea-change in approach as compared with the previous regime under Brown and then Darling.

So often tax changes announced in the Budgets in each of the last 13 years were ill thought through, ill-advised or simply headline grabbers that would add needless complications to the tax system. I have referenced some of the more recent and obvious examples on this blog over the last 3 years - see below.

Will the coalition government be able to avoid replicating this approach? I really hope so. I especially look forward to the Tories' promise being fulfilled to establish an Office of Tax Simplification.

Will it happen or is it simply words? Time will tell.

Previous relevant posts:

• Making Taxes Simpler
• Bank Payroll Tax - designed to create a pre-election distraction?
• Budget tax changes can't help self employed until 2012
• Why are capital gains taxed at less than half the main rate of income tax?
• VAT changes will HURT small businesses
• The tax simplification project is abandoned - not that it got very far
• "Policy by panic"
• Tax credits time bomb threatens to explode

CGT is NOT double taxation. It's just misunderstood.

Let's just clear up a key misconception about CGT. Some people argue that it amounts to double taxation. "I've paid tax on my earnings, it's double tax if I have to pay CGT when I invest my savings."

Er, no. That's not how it works. You only pay Capital GAINS Tax on GAINS you make. That is, on increases in the value of your investments - and only when you realise those gains by disposing of your investments. There's no double taxation involved.

If you earn £1,000 and have £600 left after (top rate) tax you can either spend the £600, save it or invest it. If you save it in a bank account you will receive interest and pay tax on the interest. Your £600 is unaffected by this.

If you invest the £600 in shares, for example, these will increase or fall in value. If you have invested in a second property, this will, hopefully increase in value. Again it's only when you realise that increased value that CGT becomes payable and only by reference to the increase.

Let's go back to the example of the shares acquired for £600. If, when you sell the shares in the future, they are worth, say £800, you will have made a capital gain of £200 (£800-£600). CGT is only payable by reference to that gain of £200 (hence Capital GAINS Tax). Again, the £600 you earned, after tax, is unaffected.

So, tell me, how does this constitute double taxation?

Secret way to give immediate effect to CGT rate rise

When will the much trailled CGT changes take effect?

Until recently I was of the view that a rate change couldn't be introduced part way through the tax year (eg: on 22 June when the new Chancellor presents his 'emergency' budget). I don't imagine HMRC's software, or that of the commercial suppliers, could be reprogrammed to address such a change of tax rate part way through the year.

I remain doubtful that changes will be backdated to the start of this tax year on 6 April. And yet, if the changes only come into effect next year what's the point in making so much fuss now?

There is a relatively simple way however that an effective change in the rate of CGT could take effect from 22 June. It need be no more complicated than the introduction of entrepreneurs' relief which gives an effective rate of 10%.

This relief was introduced in a hurry in response to the outrage that followed Mr Darling's surprise move of reducing the headline rate of CGT from 40% to 18% just two years ago. One consequence of this change was the abolition of taper relief. As a result the effective rate on qualifying gains was to be increased from 10% to 18%. To calm the objections Mr Darling agreed that the first £1m of entrepreneurial gains would only be subject to an effective rate of 10%. (Now £2m since 6 April 2010).

The point is that there is no 10% rate of CGT.

Gains which are subject to an effective rate of 10% are computed by charging 18% tax on 5/9ths of the gain itself.

Assume a gain of £30,000. 18% tax thereon would be £5,400. Instead the tax is charged on £30,000 x 5/9ths. That's 18% of £16,666. This gives a CGT charge of £3,000 which is an effective rate of 10% on the £30,000 gain.

In the same way the Chancellor could announce that, with effect from 22 June, CGT will be charged at 18% on a multiple of everyone's gains.

For example, after computing the gain on disposal of an asset, assume you had a gain of £50,000. CGT at 18% thereon is currently £9,000. If however that 18% tax was charged on 2 x £50,000, that would give a tax charge of £18,000. This would be an effective rate of 36% which is "similar or close to [the 40% rate] applied to income" as promised in the coalition agreement.

I had been wondering about the wording of that pledge anyway. Why "similar or close to"? Why not "the same as" (as was the case for short term gains until 2008)? Maybe the secret is now out.
What do you think?

Previous posts that address the rate of CGT:

• Coalition CGT plans could cause problems for all
• Prediction: CGT rate will increase to 50% this year
• Why are capital gains taxed at less than half the main rate of income tax?
• PBR - CGT reforms. It's not all bad news

A lower rate for Corporation tax in Northern Ireland?

The new Northern Ireland secretary, Owen Paterson, says he would back an inquiry into whether the province should have lower rate of corporation tax than applies in the rest of the UK. How odd.

Ever since corporation tax was introduced to the UK in 1965, the rate has been consistent across all the regions. I don't recall every hearing previously of any suggestion that this should change.

I am aware that Politicians and business leaders in Northern Ireland have been lobbying for a dramatic cut in corporation tax. They point across the border to the Irish Republic, whose corporation tax is only 12% — among the lowest in the western industrial world.

Companies and political parties in the north claim that Northern Ireland operates at a severe disadvantage when trying to attract multinational capital in competition with the republic. Of course this is no different to the rest of the UK. Is the enquiry intended to be a genuine intent to consider all of the issues? Or is the outcome already clear - as may seem obvious to anyone who understands our corporation tax system? Or am I being too limited in my thinking?

Let's assume it were possible to determine a simple way to determine the extent to which corporate tax profits earned in NI were subject to a lower rate than in the rest of the UK. Three simple challenges occur to me immediately:

• What would stop existing companies from seeking to relocating there or simply establishing subsidiary companies or branches there to benefit from the lower rate?
• How about the additional administrative burden of requiring 'transfer pricing' adjustments as between the different parts of a group based on the mainland and in NI?
• And, despite the best efforts of HMRC, companies will shift profit out of the rest of the UK and into Northern Ireland and pay less tax overall as a result.Who will pick up the increased burden?
  

And then, what next? A lower rate for companies based in Scotland? And then for those in Wales? The Cornish Nationalists would have something to say about such a policy too.

Maybe the North of England would be next, then the Midlands? Indeed, everywhere other than London and the South-East?

I tend to think that the outcome of the inquiry, were it to be undertaken, is already quite obvious and inevitable. There can be no differential corporation tax rate as between different parts of the UK. I would imagine the Treasury knows this too.

What about you?

Ministers for Tax raising and Tax policy

The Treasury have published a list of headline ministerial responsibilities for key ministers in George Osborne's new team.

On the tax side, the breakdown of roles is a little different from that which applied under the previous regime. The majority of key responsibilities are to be shared by two ministers:

Exchequer Secretary to the Treasury: David Gauke MP

• Strategic oversight of the UK tax system including direct, indirect, business and personal taxation;
• Corporate and small business taxation, with input from the Commercial Secretary;
• Departmental Minister for HM Revenue and Customs and the Valuation Office Agency;
• Lead Minister on European and international tax issues;
• Overall responsibility for the Finance Bill.

Economic Secretary to the Treasury: Justine Greening MP

• Environmental issues including taxation of transport, international Climate Change issues and Energy Issues;
• North Sea oil taxation;
• Tax credits and child poverty and assisting the Chief Secretary on welfare reform;
• Charities and the voluntary sector;
• Excise duties and gambling, including excise fraud and law enforcement;
• Stamp duty land tax;
• EU Budget;
• Ministerial responsibility for the Royal Mint and Departmental Minister for HM Treasury Group;
• Working with the Exchequer Secretary on the Finance Bill.
  

The Financial Secretary to the Treasury, Mark Hoban, will instead focus on financial services, banking, the City and financial markets in the UK and abroad. He will be responsible for the FSA, personal savings and pensions policy, and the aftermath of Equitable Life.

Emergency Budget will be at 12.30pm on Tuesday 22 June

The Chancellor has announced that, what he refers to as, an 'emergency Budget' will be held on Tuesday 22 June.

The Treasury Press Office has since confirmed the Budget statement will be made at 3.30pm** on 22nd June.

I don't remember the last time we were given anything like 5 weeks notice of a Budget date - let alone an 'emergency' one!

** [edited 14 June 2010] MPs are to be asked to agree to an earlier sitting of the House of Commons next Tuesday, so the Budget can be held at the earlier time of 12.30 hrs.

Leader of the Commons Sir George Young has put down a motion that the day's business begins three hours early for a Tuesday, at 11.30 hrs.

This would mean that after an hour of ministerial questions Chancellor George Osborne would deliver his first Budget.

Mr Osborne had been expected to start speaking at 15.30 hrs.

Coalition CGT plans could cause problems for all

Back in March I predicted that the CGT rate will increase to 50% this year. I may be wrong. It may not be until next year.

The Coalition agreement declares the two parties:

"agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities".

Annual CGT exemption
The Liberal Democrat manifesto envisaged cutting the personal capital gains tax allowance to £2,000pa. There is no mention of this in the joint statement but reports suggest a reduction in the figure from £10,000 to just £5,000 or maybe £2,500 pa. If it's too low it will cause compliance headaches for anyone selling relatively low value assets who does not currently file an annual self assessment tax return.

Entrepreneurial business activities
Everyone is speculating as to what this phrase might mean:

• Will it cover much the same as the (max £2m) gains that currently qualify for the entrepreneurial CGT rate of 10%?
• Might this relief be extended to cover employee share option and share ownership schemes? This would strike a difference from the previous regime which only favoured entrepreneurs. I think it's optimistic but I agree that there is logic in providing a similar relief to the workers in entrepreneurial businesses.

Non-business capital gains
This would affect second homes, stock market investments and other short-term or speculative gains. What short memories some commentators seem to have. These were taxed at the marginal income tax rate (generally 40%) until 6 April 2008. The rate dropped to 18% only two years ago.

From 6 April 1998 inflationary gains were excluded through a taper relief which also gave a measure of relief for anything other than the most short-term gains. So longer term gains on non-business assets were often only taxed at an effective rate of 24%. It's reasonable to expect the re-introduction of a similar distinction between longer and shorter term gains.

Start date of new regime
Will it take place mid way through the current tax year or only be introduced with effect from 6 April 2011? If I were a betting man I would say the latter. Incidentally if the increase is deferred until 6 April 2011 there would be no additional CGT paid until 31 January 2013.

What are your views on the prospects of changes to the CGT regime?

Will you be able to trust previously non-dom MPs and Lords?

With all the fuss over non-dom peers, it's likely that only inheritance tax advisers have been thinking about excluded property trusts.

As Kevin Slevin explains in his recent article (Parliament: Are they 'Pulling the wool over our eyes' again?) these trusts are very valuable. They have also been a standard tool in the armoury of tax advisers to non-doms for many years. Simply stated, the non dom establishes a non-resident settlement (trust) before their domicile status changes. Typically this would be to limit the impact of the rule that treats a non-dom as domiciled here if they have been resident here for 17 out of the last 20 income tax years of assessment.

All of the offshore assets held in the offshore excluded property trust effectively escape the inheritance tax net. The relevant provisions are contained in s48 IHTA 1984 and were not amended as part of the FA 2008 changes to the tax treatment of non-doms.

There may be good practical reasons for allowing assets held by trusts created by a non-dom to be excluded from IHT. But, as Kevin points out, these provisions, as they stand, allow well-advised MPs and Lords to, effectively circumvent the IHT implications of any rule requiring them to be or to be treated as domiciled here. Can they be trusted not to make such arrangements immediately before choosing to stand for election or before taking their seat in the Lords?

What do you think?

Non Dom MPs, Lords and Inheritance Tax

Remembering back to before the election, there was a lot of fuss about non-dom MPs and members of the House of Lords. The suggestion being that only people who are fully UK resident and domiciled be allowed to sit in the Commons and the Lords.

Like most people I had fallen into the trap of assuming that the normal rules would (or should) apply when considering where MPs and Lords are resident and domiciled.

I am indebted to Kevin Slevin who has identified a much easier solution in an article in Taxation magazine. It warrants (even) wider publicity. Kevin suggests that new provisions be added to relevant tax law to make clear that:

• all elected MPs are treated for all tax purposes as resident in the UK; and
• that anyone also be regarded as domiciled here throughout any income tax year in which they first become or continue to be an elected member of Parliament.

These rules would also apply to anyone who is or becomes entitled to sit in the House of Lords.

Such provisions would be easy to draft and would have no wider implications. Most of all they would also remove any debate as to an individual's current status and any need for discussions as to future intentions.

Kevin's article also touches on a related aspect of the rules of domicile and MPs/Lords. I'll blog about it separately. The full article is here: Parliament: Are they 'Pulling the wool over our eyes' again?