Suggestions for the Budget 2013: Simplifying the tax system and stimulating growth
Stephen Herring shares his thoughts on reforms the Chancellor could make to simplify the tax system and stimulate growth.
With the Chancellor’s Budget almost upon us, many businesses and indeed individuals across the country are speculating about what George Osborne will announce and how this will directly impact upon them.
I believe there are several key areas where the Chancellor could introduce reforms to simplify the tax system and stimulate growth. These reforms would ease the burden upon both businesses and individuals, thereby increasing government popularity as the General Election looms on the horizon but at the same time ensuring that the Government can broadly meet its goal of reducing the structural fiscal deficit.
Larger listed companies ought to be delighted that the Coalition Government is in the process of enacting favourable reforms to the taxation of finance companies, registered patents and holding companies which, together with the proposed reduction in the main corporation tax rate to 21 per cent with effect from 1 April 2014, will provide an internationally competitive tax regime. This should both protect existing and encourage new foreign direct investment in the UK.
Medium-sized companies however, feel that favourable tax reforms have passed them by as they have more than ‘paid for’ the lower corporation tax rate by a more protracted tax write off for their investment in plant, machinery, fixtures and fittings. Smaller companies are disappointed that the Chancellor has not matched reductions in the main corporation tax rate by equivalent reductions in the small companies corporation tax rate.
Both medium and smaller businesses will look at the 2013 Budget for tax reliefs focused upon entrepreneurial, owner-managed companies. One approach that I would argue for could be to consult upon allowing these companies to elect for their taxable profits to be assessed on their shareholders rather than the company paying corporation tax and the shareholders being taxed upon dividends received and capital gains. The cost to the Exchequer would be manageable and this option has been available to companies in the USA for many years.
Turning to the ongoing personal taxation debate within the Coalition Government, this concerns the linkage between a more comprehensive annual mansion tax not solely focused upon non-residents, and the pressing need for some authentic tax reforms focused upon middle income groups. Clearly the fiscal cost of a package of reforms cannot contravene the Coalition Government’s determination to eliminate the structural fiscal deficit, but personal tax simplification and reform ought to remain achievable targets. The Chancellor would, of course, please his backbenchers if he could increase the basic rate tax band. The existing 40 per cent income tax rate bites those earning well below twice median earnings; either the rate is too high or the basic rate band is too narrow.
In my opinion, similar popular measures could include reducing the inheritance tax rate (a tax increasingly unpopular in London and moderately affluent suburbs throughout the country) and reducing capital gains tax from 28 per cent to, say, 20 per cent. This may well generate a higher tax take as, at the present level individuals are understandably reluctant to sell an asset and pass 28 per cent of the gain to the Exchequer.
The 2014 Budget may be a more likely occasion to grasp these nettles but a Chancellor will always want some popular announcements on personal taxation to make on Budget Day and the £10,000 plus personal allowance for 2014/15 is already assumed to be in the bag.
A final perspective is the Coalition Government’s simplification agenda. What happened to it? In the longer term two reforms are needed. Firstly, a personal tax system with lower tax rates but fewer reliefs. Secondly, a system of business taxation to replace an increasingly unsatisfactory and opaque corporation tax system which is only capable of collecting a steadily decreasing percentage of the total tax take unless, of course, HM Government no longer wants to ensure that the UK remains internationally tax competitive. This would result in foreign direct investment flowing away from the UK and towards our European or, more likely, our global competitors.
From a political standpoint, the Chancellor must also be seen to be combating tax avoidance as the public perception is that tax avoidance is increasingly succeeding. There is, in fact, no evidence to support this; indeed, case law decisions in recent years concerning tax avoidance have overwhelmingly been decided by the courts in HMRC’s favour rather than the taxpayers’ favour.
Nevertheless, this public perception still remains and many wish to fan these flames. I believe, in the longer term, the only satisfactory route through these conflicting pressures is to move to a flatter tax system applied to a broader tax base with much lower tax rates but fewer tax reliefs. Whether we will see progress towards this in the consultations announced in the 2013 Budget remains to be seen but the Chancellor will be keen to be seen as a tax reformer to dispel the aftermath of the own goals scored in last year’s Budget on pasty tax, VAT on caravans, tax relief for charities and the like. Time might be running out.
Stephen Herring is the Senior Tax Partner at BDO LLP. He is also one of the eight members of HM Treasury’s Tax Professional Forum since September 2010 and has been working as a tax adviser for over 25 years.Tagged in: budget
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